Rating Rationale
June 29, 2018 | Mumbai
Hatsun Agro Product Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.1180 Crore (Enhanced from Rs.900 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
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 ratings on the bank facilities and commercial paper of Hatsun Agro Product Limited (Hatsun) continue to reflect the company'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. These strengths are partially offset by a leveraged capital structure, exposure to risks related to entry into new geographies, and susceptibility to risks inherent in the dairy industry, such as changes in government regulations and epidemic-related factors.

Revenue grew by just 2% to Rs 4287.37 crore in fiscal 2018 due to lower business to business sales of butter and skimmed milk powder. Nevertheless, growth in other product categories (ice creams, milk, and cattle feed) was steady. Operating profitability is supported by established procurement and distribution networks and wide product portfolio. However, margin declined to 8.88% in fiscal 2018 from 9.1% in the previous fiscal on account of extreme weather conditions in parts of South India resulting in higher procurement costs and greater spend towards marketing across new geographies.

Financial risk profile remained leveraged because of higher-than-expected capital expenditure (capex) for fiscal 2018. Hence, overall debt increased to Rs 1299 crore as on March 31, 2018, from Rs 920.23 crore earlier, resulting in deterioration in total outside liabilities to tangible networth (TOLTNW) ratio to 4.93 times as on March 31, 2018, from 3.79 times as on March 31, 2017. Hatsun has announced rights issue wherein the company is expected to raise up to Rs 527.83 crore. It would receive 80% of the proceeds from rights issue on application, while the balance would be called within 18 months. The rights issue proceeds are expected to be utilised to repay debt, leading to an expected improvement in capital structure by the end of fiscal 2019. Any delay in raising funds or higher-than-expected capex will remain a rating sensitive factor.

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 company's processing units located in various districts of Tamil Nadu.

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

* Leveraged capital structure: The TOLTNW ratio was high at 4.93 times as on March 31, 2018, on account large, debt-funded capex in the past two fiscals. However, capital structure is likely to improve post the rights issue, to be completed by mid-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 capex is planned across divisions, marketing costs and other manufacturing overheads could be on the higher side. The company may also face pricing pressure from established players operating in newer geographies.
Outlook: Stable

CRISIL believes Hatsun will continue to benefit from its dominant market position in the private dairy sector and its established brands, particularly in South India. The outlook may be revised to 'Positive' if there is significant improvement in its capital structure on account of higher cash accruals and equity infusion. The outlook may be revised to 'Negative' if TOLTNW ratio remains over 2 times due to larger-than-expected capex or significantly low profitability resulting in weak accrual.

About the Company

Hatsun was set up by Mr R G Chandramogan in 1986 in Chennai. The company processes over 30 lakh litres per day 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. 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 the Bombay Stock Exchange.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 4287 4190
Profit After Tax (PAT) Rs crore 90.84 133.97
PAT Margin % 2.1 3.2
Adjusted debt/adjusted networth Times 3.67 2.74
Interest coverage Times 4.32 5.53

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 Capex letter of credit NA NA NA 85.04 CRISIL A1
NA Cash credit NA NA NA 235 CRISIL A/Stable
NA Long term loan NA NA 31-Dec-2021 693.16 CRISIL A/Stable
NA Short Term Loan NA NA NA 124 CRISIL A1
NA Cash Term Loan NA NA 31-Dec-2021 40 CRISIL A/Stable
NA Proposed long term bank loan facility NA NA NA 2.8 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  06-06-18  CRISIL A1  16-05-17  CRISIL A1  23-12-16  CRISIL A1  01-12-15  CRISIL A1  -- 
                12-10-16  CRISIL A1       
Fund-based Bank Facilities  LT/ST  1094.96  CRISIL A/Stable/ CRISIL A1  06-06-18  CRISIL A/Stable  16-05-17  CRISIL A/Stable/ CRISIL A1  23-12-16  CRISIL A/Stable  01-12-15  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  85.04  CRISIL A1  06-06-18  CRISIL A1  16-05-17  CRISIL A1  23-12-16  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
Capex Letter of Credit 85.04 CRISIL A1 Capex Letter of Credit 85.04 CRISIL A1
Cash Credit 235 CRISIL A/Stable Cash Credit 100 CRISIL A/Stable
Cash Term Loan 40 CRISIL A/Stable Long Term Loan 572.33 CRISIL A/Stable
Long Term Loan 693.16 CRISIL A/Stable Proposed Long Term Bank Loan Facility 142.63 CRISIL A/Stable
Short Term Loan 124 CRISIL A1 -- 0 --
Proposed Long Term Bank Loan Facility 2.8 CRISIL A/Stable -- 0 --
Total 1180 -- Total 900 --
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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