Takeaways from Aavin's financials: (1) Its milk procurement has grown at CAGR of 6.1% vs 9.6% for Hatsun over FY11-19 indicating market share gains for Hatsun, (2) Hatsun has increased its realizations at rate higher than Aavin but still outperformed Aavin in volume growth over FY11-19, (3) Aavin has reported losses in 8 out of 12 years over FY08-19 whereas superior financials of Hatsun has allowed it to invest more in brand building and strengthen the moats, (4) Aavin has invested aggressively in animal feed business and volume CAGR of animal feed business is 45.3% over FY11-19. We believe this investment has helped Aavin to strengthen its relationship with the farmers and (5) Other dairies (Heritage and Parag) have limited presence in Tamil Nadu and are not material competitor to Hatsun or Aavin. Stock calls: retain BUY on Heritage, HOLD on Hatsun and Parag.
- Aavin, Tamil Nadu based Dairy co-operative: Aavin operates in Tamil Nadu as its major Dairy co-operative and has generated revenues of Rs60bn and procured milk 3.3mn liter per day in FY19. The products are largely sold under the brand Aavin and its sub brands. Aavin has introduced milk, curd (multiple variants), ghee, butter milk, paneer, ice cream (multiple variants) and sweets (mithai).
- Hatsun's milk procurement growing faster than Aavin: Aavin's milk procurement has increased at CAGR of 6.1% over FY11-19 whereas Hatsun's milk procurement increased at CAGR of 9.6% over same time. Considering milk production in Tamil Nadu has increased at CAGR of 2.6% over FY11-19, we note Hatsun has gained market share.
- Hatsun's revenues growing faster than Aavin: Hatsun reported revenue CAGR of 16.8% over FY08-19 compared to Aavin's revenue CAGR of 11.7%. Hatsun has not only outperformed in milk procurement, it has also reported higher realization CAGR compared to Aavin. We believe Hatsun was able to improve realizations at CAGR of 6.8% over FY11-19 due to (1) improving brand strength and (2) launch of premium products like Ibaco ice cream.
- Negligible profits/losses limit Aavin's ability to compete: Aavin has reported cumulative profit of just Rs176mn over FY08-19 whereas Hatsun reported cumulative profit of Rs6,419mn over FY08-19. We also note Aavin has reported losses in eight out of twelve years over FY08-19. Superior financials have helped Hatsun to better invest in brand building and also strengthen moats in the business.
- Other dairies in Tamil Nadu: Heritage has smaller presence in Tamil Nadu. We believe Tamil Nadu accounts for 7-9% of Heritage's revenues. Parag sells some value added products in Tamil Nadu but the revenue share of Tamil Nadu is less than 5%.
- Stock call: We maintain Heritage as our top pick in the dairy sector with a BUY rating. While we remain structurally positive on Hatsun, we need more comfort on valuations to turn bullish. Hence, we give a HOLD rating for Hatsun. Parag is likely to be impacted in the near term due to: (1) higher share of value-added products, and (2) higher B2B / HoReCa sales. Hence, we maintain our HOLD rating on Parag too.