Valuation of Shares for Hatsun Agro Private Limited

Share capital details & Types of Share

Hatsun Agro private limited (HAPL) as on March 2008 had a total authorized share capital worth Rs.30Cr
where each of the equity shares worth Rs.10 and preference shares worth Rs.100 each. But the face
value of HAPL share was Rs.10 only till 24th July 2008. After which the company announced a 5 for 1
stock split. The present face value after 24th July 2008 is Rs.2 which is being traded only in Bombay stock
exchange (531531).
As per the annual report 2008 of HAPL, the authorized capital was 1Cr equity shares and the present
authorized equity capital is 5Cr after the stock split.
The issued and subscribed equity share capital are approximately 6Cr and the paid up share capital is
also 6 Cr where 13000 equity shares were partly paid and was forfeited. 33,944,090 are the number of
equity shares being listed after the stock split excluding the 13000 shares forfeited. Also the company
has a 5Cr paid up preference share capital. Table 1 is a summary of the share capital details of HAPL.
Table 1 : Share Capital Details (As per 2008 Annual Report)

Share Capital
Authorized
10,000,000 equity shares of Rs.10/- each
2,000,000 Preference shares of Rs.100/- each
Issued and Subscribed
6,801,818 equity shares of Rs.10/- each
508,000 - 8% Non-Convertible Cumulative
Redeemable Preference Shares of Rs.100/- each held by Mr.Kirti Shah

March 2008
(In 000s)
100,000
200,000
300,000
68,018
50,800
118,818

Paid-up
6,788,818 equity shares of Rs.10/- each fully paid-up
508,000 - 8% Non-Convertible Cumulative
Redeemable Preference Shares of Rs.100/- each
13,000 equity shares partly paid-up, forfeited

67,888
50,800
33
118,721

As of now, the two major types of shares HAPL has issued are
1. Equity shares of face value Rs.2
2. Preference shares of Rs.100 which are 8% Non convertible and cumulative and Redeemable.
Here the preference shares have a redeemable option. They are redeemable at par in three equal
half yearly installments of Rs. 16,933. The first installment is falling due on 5th October, 2009.

The share holding pattern of HAPL can be summarized as mentioned Table 2. There is no mutual fund or
any other Institutional investor holding in the company over the years.
Table 2 Share Holding Pattern

All in %
Total Shares
Promoters
Indian
Individuals & HUF
Non-promoters
Institutions
Non-institutions
Corporate Bodies
Individuals
Others

Mar 2008
100
68.77
68.77
68.77
31.23
0
31.23
3.92
22.28
5.03

Dec 2008
100
72.81
72.81
72.81
27.19
0
27.19
0.81
20.48
5.9

As it can be seen this company has less than 75% promoter share holding, where the promoter holding
has increased from 68% to 72 % recently after the financial year 2008. The promoter share holding has
increased over a period of time in the last six months especially before the stock split on July. The shares
were acquired from mainly corporate bodies and individuals. Hence the promoters have purchased the
shares from the market over last six months. This is a good sign for the company, as the promoters are
the people who are in the management of this company. Hence this indicates the promoters expect a
high growth in the company and also want to increase their control by making it above 75%.

Valuation of Shares
To value the shares of the company the dividend growth model can be used. The present dividend
announced by the company and the discounted value of expected future divided will provide the
intrinsic value of the share.
Hatsun Agro Private limited in the last 4 years except in FY 2005 has been consistently been able to pay
dividends at an increasing rate. The year 2005 was an extraordinary year for the company as there was a
drastic fall in profits due to increase in the input costs and entry level export pricing of milk products.
During this year HAPL entered into international markets. There was an overall increase in the
expenditure profile due to the creation of additional infrastructure.
Also in the year 2005 there was a fall in the profit margin for the company. Milk procurement faced
challenges due to intensified competition in milk procurement and severe droughts in South India. This
resulted in shortage of milk and exorbitant increase in milk procurement prices. Selling price of fat
related milk products prices declined by 19% during the period. Hence the year 2005 can be ignored for
calculation of growth rate as it is a special case.
But from FY2006 to FY2008 HAPL has announced consistent dividends and last year the company
announced a 25% interim dividend as well as a 35% final dividend.

Table 3 Dividends and EPS of HAPL

Year
2008
2007
2006
2005

Total Dividend
(%)
60
20
20
0

Interim Dividend
(%)
25
-

Final Dividend
(%)
35
20
20
-

Dividend Paid
(Rs)
6
2
2
-

Earnings Per
Share (Rs)
24.82
11.07
5.96
1.08

To calculate a growth rate of the company the retention ratio and return on retained earnings of the last
three years is used. The return on retained earnings can be assumed to be the return on equity, which is
return on complete equity rather than the retained earnings alone.
The retention /plough back ratio can be calculated by first finding the dividend payout ratio which is a
ratio of dividend paid to earnings per share.
Table 4 Growth Rate

Year
2008
2007
2006

Retention Ratio

Return on Equity

(%)

(%)
75.83
81.93
66.44

35.4
21.7
13.9

Growth Rate
(%)
26.84%
17.78%
9.23%

The average of the growth rate over the last three years for the company is around 18%. This high
growth rate is assumed to be for the company for the next three years.
1. This is can be assumed, since the capital expenditure of the company has almost doubled in the
last year to Rs.52Cr.
2. HAPL has recently entered into international markets in exporting milk and milk products.
But for after the next three years the growth rate cannot sustain this huge growth rates. It would be fall
down to around 2 to 3% in this low profit margin segment. This assumption is a worst case scenario.
1. This is mainly due to the reason that, the company is in dairy segment where it can get only a
very low profit margin. The profit margin for HAPL had been around 1%. Through sales volume
only it has to grow, in this industry.
2. The dairy industry in India is growing at a CAGR of 4% compared to the world dairy industry
CAGR of 1.1%.1
3. The world milk output is expected to grow at a rate of 1.9% over next 8 years and mainly the
output growth would come from BRIC (Brazil, Russia, India and China) countries.2
4. There will be strong competition in this type of market over a period and hence the company
cannot grow at very high growth rates.

1
2

http://www.blonnet.com/2006/05/01/stories/2006050100590500.htm - Stress on quality at India Dairy Congress

Ibid

The long term growth rate (g) after three years can be assumed to be 2%. The expected rate of return
(R) from this stock is 14.5%.
For the first three years assuming g to be 18% the dividends expected would be
Year
g=18% , R=14.5%
Expected Dividend
Present Value

2008
D0
6

2009
D0 (1+g)
7.08
6.18

2010
D0 (1+g)2
8.35
6.37

2011
D0 (1+g)3
9.86
6.57

After 2011, assumed g for perpetuity will be 2%

Year
g=2%, R=14.5%
Expected Dividend
Present Value

2011
D4
9.86

2012
D4 (1+g)
10.05

Remaining Years
D4 (1+g)/R-g
80.45
46.8

Hence the total of present value added or divided paid (2009) and the present value of expected divided
in future will be the intrinsic value of the company.
Intrinsic value of the firm, sum of all the present values comes to be Rs.65.92. The current market price
of the company as on 30 Jan 2009 is Rs.52.5. Hence the intrinsic value of the company estimated using
the differential dividend growth model is above the market price which clearly gives a signal of BUY for
this stock. The value is more than the market price. This Stock over long term would be a good value
creator, and hence this can be a good investment stock at the given price.
The market price could be low may be because of the assumed growth rate and expected rate of return
by the investors.

References
1.
2.
3.
4.

Annual Reports of Hatsun Agro Private Limited

Indiainfoline.com
CMIE Prowess
Money.Rediff.com