More than doubling over the last one year, the stock of milk and ice cream maker Hatsun Agro Products has delivered big gains on the BSE in a bad environment for mid- and small-cap stocks. Companies in the food and FMCG space have been in demand over this period owing to their relatively resilient sales and profit growth accompanied by pricing power. However, Hatsun Agro has witnessed a high degree of volatility in its profits over the past two years. Even as sales expanded by 12.5 per cent for 2009-10 to Rs 1,141 crore, the company's profits sharply fell from Rs 12 crore to Rs 2.7 crore.

A deficit monsoon which set off an upward spiral in feed prices and a sharp increase in procurement prices for liquid milk in south Indian states, the company's key markets, saw the company's margins dip. Depreciation and interest costs from a new plant further reduced net margins. The moderation in input costs and better realisations have, however, aided a rebound in the company's fortunes in 2010-11, with sales rising 19 per cent while profits bounced back to Rs 18.7 crore.

Unlike leading FMCG companies Hatsun carries significant debt on its balance sheet. Though the debt to equity ratio has slipped over the past one year, it remained at over 3:1 by March. At current prices the stock appears quite pricey, trading at about 35 times its 2010-11 earnings.

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