NEW DELHI
India’s organised dairy product industry is set for a strong revival as strong demand for value-added products (VAP) and stable consumption of liquid milk expected to lead to a 14-16 per cent revenue growth for the sector this fiscal. With raw milk supply improving, there will be fewer price hikes and profitability will recover 20-50 basis points. Last fiscal, disruptions in raw milk supply had led to multiple hikes in retail milk prices, pushing up the topline 19 per cent but impacting profitability. Milk procurement prices had risen 14 per cent on account of several challenges such as significant increase in fodder cost, impact on yields due to cattle disease etc.
Given that demand from both, retail and institutional segments remains strong, Mohit Makhija, Senior Director believes the strong revenue growth in VAP seen over the past few years will continue. This fiscal, he expects the segment should grow 18-20 per cent and consequently, the share of VAP in overall revenue could rise to 40 per cent from 35 per cent four fiscals back, indicates a CRISIL Ratings analysis of 38 dairies, which account for 60 per cent of the organised segment revenue.
Amnish Aggarwal, Head of Research, Prabhudas Lilladher, expects dairy demand trends to remain largely unchanged, despite multiple price hikes taken by industry. “Cheese continues to see demand growth led by QSR. Ice cream sales have been hit badly in May/June, more so in the Hindi heartland. Dairy prices are unlikely to see any respite till the flush season sets in Oct/Nov,” says Aggarwal. Makhija believes liquid milk revenue will grow 8-10 per cent this fiscal backed by steady demand.
Milk price hikes will be much less intense this fiscal at around Rs 2 per litre compared with a cumulative Rs 5-7 per litre last fiscal. This will be primarily because of factors like improvement in raw milk supply on better availability of fodder and timely vaccination. Additionally, the full impact of previous price hikes will improve the profitability of organised dairies by 20-50 bps this fiscal to 5.5 per cent.
As a result of strong demand prospects, organised dairies have moved to incur capital expenditure (capex) in both, this fiscal and the next, especially for VAP, which will account for 60 per cent of the spend. The overall revenue growth of 14-16 per cent this fiscal will be driven by healthy volume growth of 9-10% and by higher realisations. The credit risk profiles are expected to remain stable as capex will be funded by a prudent mix of debt and equity. Working capital cycle is expected to be stable as healthy demand will limit build-up of skimmed milk powder inventories at the year end. Given the current healthy balance sheets, the credit profiles of organised dairies will remain strong,
Going ahead, it would be important to monitor supply-side variables and a healthy increase in milk collection will be critical for stability in retail milk prices, suggests the Crisil report.