Rating Rationale
December 19, 2018 | Mumbai
Hatsun Agro Product Limited
Long-term rating upgraded to 'CRISIL A+/Stable' ; short-term rating reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.1180 Crore
Long Term Rating CRISIL A+/Stable (Upgraded from 'CRISIL A/Stable')
Short Term Rating CRISIL A1 (Reaffirmed)
Rs.150 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facilities of Hatsun Agro Product Limited (Hatsun) to 'CRISIL A+/Stable' from 'CRISIL A/Stable' while reaffirmed the short-term rating and commercial paper at 'CRISIL A1'.

The upgrade reflects improvement in Hatsun's financial risk profile, marked by comfortable capital structure and robust debt protection metrics. Total outside liabilities to tangible networth (TOLTNW) ratio improved significantly to 1.57 times as on September 30, 2018, vis-' -vis 4.93 times as on March 31, 2018, driven by infusion of funds in the form of rights issue and subsequent part repayment of outstanding debt in the first half of fiscal 2019. Additionally, Hatsun has moderated its yearly capital expenditure (capex) guidance to Rs 300-350 crore each in the next two fiscals, which will be majorly funded through internal cash accrual. Therefore, the capital structure is likely to remain comfortable, with TOLTNW ratio below 1.5 times over the medium term. With reduction in overall debt, the cushion between cash accrual and maturing debt should significantly improve.

Revenue is expected to grow over the medium term due to expansion into other geographies such as Maharashtra and Odisha. Commissioning of its plant at Dharapuram (Tamil Nadu), in the next few months, to significantly increase the processing capacities, ensuring support to growing demand. Operating margin during the first half of fiscal 2019 benefited from commissioning of the packaging unit and higher fixed cost absorption. With tight control on key costs, the margin is expected at 9.5-10% over the medium term.

The ratings also continue to factor in Hatsun's leading market position in the dairy sector supported by strong brand, particularly in South India; healthy operating efficiency backed by established procurement and distribution networks; and a diversified product portfolio. The ratings also consider a strong financial risk profile with comfortable capital structure and robust debt protection metrics. These strengths are partially offset exposure to risks related to entry into new geographies and susceptibility to changes in environmental conditions.

Key Rating Drivers & Detailed Description
* Established market position supported by strong brand, particularly in South India
Hatsun is the largest private sector dairy company in India, with a portfolio of established brands, superior brand equity, well-spread distribution and procurement networks, and an aggressive marketing strategy. Strong market position in the milk segment is cemented by widespread presence in South India, with majority of the processing units located across Tamil Nadu.

* Healthy operating efficiency backed by established procurement and distribution network
Hatsun owns over 9,700 procurement centres covering over 13,000 villages, with chilling and dairy units across its key operating markets. This enables it to reach out to over 3 lakh farmers.

* Strong financial risk profile
The TOLTNW ratio was 1.57 times as on September 30, 2018 and is likely to remain below 1.5 times over the medium term. The total size of Hatsun's rights issue was for Rs 527.83 crore, of which the company received 80% of the amount on application in July 2018 and the balance is to be received in fiscal 2020 (as final call within 18 months from application). Subsequently, networth increased to Rs 805.1 crore as on September 30, 2018, from Rs 354.1 crore as on March 31, 2018. Debt protection metrics continue to be robust, with interest coverage and net cash accrual to total debt ratio of 5.45 times and 21%, respectively, in the first half of fiscal 2019.

* Exposure to risks related to entry into new geographies
Hatsun plans to widen its procurement network to Andhra Pradesh, Telangana, and Maharashtra; apart from penetrating further into Tamil Nadu and Karnataka. Since capital investment is planned across divisions, marketing costs and other manufacturing overheads could be high. Further, intense competition from established players operating in newer geographies may continue to constrain scalability, pricing power, and profitability.

* Susceptibility to changes in environmental conditions
Prices of key products, milk and skimmed milk powder, have fluctuated in the past, owing to droughts and supply constraints. Susceptibility to failure in milk production because of external factors such as cattle diseases also impact the business.
Outlook: Stable

CRISIL believes Hatsun will continue to benefit from a dominant market position in the private dairy sector and established brands, particularly in South India. The outlook may be revised to 'Positive' if the TOLTNW ratio is steady at below 1.25 times, while the business risk profile continues to strengthen. Conversely, the outlook may be revised to 'Negative' if TOLTNW ratio deteriorates to over 2 times due to larger-than-expected capex or significantly low profitability and cash accrual.

Liquidity is likely to remain adequate over the medium term. Cash accrual is projected at Rs 350-450 crore for the next two fiscals against yearly maturing debt of around Rs 190 crore. Average utilisation on the cash credit limit of Rs 280 crore, was 44% over the 12 months through September 2018. Cash and cash equivalent -- Rs 40.7 crore as on September 30, 2018 -- is expected to remain healthy over the medium term. Dividends are likely to remain similar to that seen in previous fiscals.

About the Company

Hatsun was incorporated by Mr R G Chandramogan in 1986. The Chennai-based company daily processes over 30 lakh litres of milk and milk products, with strong market presence in Tamil Nadu. It has 16 processing facilities across Tamil Nadu, Andhra Pradesh, Karnataka, and Telangana. Popular brands include Arokya milk; Arun ice creams; Hatsun curd, ghee, and butter; and an ice-cream chain under the Ibaco brand and Santosa Cattle Feed. The company has also entered into the ready-to-eat category, with a pizza chain under the Oyalo brand.

Hatsun is listed on the National Stock Exchange and BSE Ltd.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 4295 4200
Profit After Tax (PAT) Rs crore 90.84 135.39
PAT Margin % 2.1 3.2
Adjusted debt/adjusted networth Times 3.67 2.73
Interest coverage Times 4.27 5.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Cash credit NA NA NA 260 CRISIL A+/Stable
NA Long term loan NA NA 31-Dec-2021 726.87 CRISIL A+/Stable
NA Short Term Loan NA NA NA 179 CRISIL A1
NA Proposed long term bank loan facility NA NA NA 14.13 CRISIL A+/Stable
NA Commercial paper NA NA 7-365 days 150 CRISIL A1
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  150.00  CRISIL A1  29-06-18  CRISIL A1  16-05-17  CRISIL A1  23-12-16  CRISIL A1  01-12-15  CRISIL A1  -- 
        06-06-18  CRISIL A1      12-10-16  CRISIL A1       
Fund-based Bank Facilities  LT/ST  1180.00  CRISIL A+/Stable/ CRISIL A1  29-06-18  CRISIL A/Stable/ CRISIL A1  16-05-17  CRISIL A/Stable/ CRISIL A1  23-12-16  CRISIL A/Stable  01-12-15  CRISIL A/Stable  -- 
        06-06-18  CRISIL A/Stable      12-10-16  CRISIL A/Stable  24-11-15  CRISIL A/Stable   
                    20-11-15  CRISIL A/Stable   
Non Fund-based Bank Facilities  LT/ST    --  29-06-18  CRISIL A1  16-05-17  CRISIL A1  23-12-16  CRISIL A1    --  -- 
        06-06-18  CRISIL A1               
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 260 CRISIL A+/Stable Capex Letter of Credit 85.04 CRISIL A1
Long Term Loan 726.87 CRISIL A+/Stable Cash Credit 235 CRISIL A/Stable
Proposed Long Term Bank Loan Facility 14.13 CRISIL A+/Stable Cash Term Loan 40 CRISIL A/Stable
Short Term Loan 179 CRISIL A1 Long Term Loan 693.16 CRISIL A/Stable
-- 0 -- Proposed Long Term Bank Loan Facility 2.8 CRISIL A/Stable
-- 0 -- Short Term Loan 124 CRISIL A1
Total 1180 -- Total 1180 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt

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