Example based on Valuation of Shares

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 24^th July 2008. After which the company announced a 5 for 1 stock split. The present face value after 24^th 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)

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

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

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

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.

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

After 2011, assumed g for perpetuity will be 2%

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.