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India’s organised dairy sector is likely to witness two-digit growth at 11-12% this fiscal, though slightly below last financial year’s 13% growth, says rating agency CRISIL.
The double-digit growth is due to healthy demand for value-added products, which are 28% of the overall sales. Aditya Jhaver, Director, CRISIL Ratings, said, “We expect demand for ice-cream, curd and flavoured milk items to peak this summer due to inordinately hot temperatures.”
He added, “Along with stable demand growth for household consumption-driven products such as ghee and paneer, strong recovery in the HoReCa (hotels, restaurants and café) segment, and price hikes of last fiscal will drive 13-14% revenue growth in VAP this fiscal.”
Moreover, CRISIL said that liquid milk sales should sustain 9-10% revenue growth this fiscal, given the full-year benefit of two price hikes last fiscal, even as volumes remain steady. Dairy producers had increased price of milk by Rs 2 per litre each in June 2021 and February 2022, that should result in 4-5% year-on-year growth in average realisation this fiscal, the rating agency said.
Further, strong domestic demand for VAP and liquid milk will limit exports of skimmed milk powder (SMP) and prune inventory.
Cost Headwinds
The rating agency said that operating profitability would moderate to about 5% this fiscal, because of a rise in procurement prices, packaging and transportation costs.
CRISIL noted that as demand continued to outpace supply, even during the flush season this year, procurement prices would continue to grow at about 5%.
Additionally, the impact of inflation on transportation and packaging costs, will moderate operating profitability of CRISIL-rated dairies to about 5% this fiscal from an estimated 5.3% last fiscal. Nonetheless, incremental hikes in retail prices will cushion operating profitability.
Capex Plans
CRISIL in its report said that improved operating performance, along with adequately managed balance sheets and better control over working capital will support a revival in the capital expenditure plans of dairy companies, and yet keep their credit outlooks ‘stable’.
An analysis of 40 dairies rated by CRISIL Ratings, which account for ~60% of the organised sector revenue of close to Rs 1.05 lakh crore, indicates as much.
Tanvi Shah, Associate Director, CRISIL Ratings, said, “The dairies, including cooperatives, are reviving capex plans this fiscal after staying away for two years. While this will increase long-term debt, controlled working capital debt due to moderation in SMP inventory, and healthy operating performance will keep their credit outlook stable.”
CRISIL expects key debt metrics such as Total Outside Liabilities to Total Net Worth ratio and interest coverage ratio to remain comfortable at about 2.5 times and approximately 7.5 times, respectively, this fiscal, compared with 2.7 times and 7.7 times, respectively, last fiscal.
Stocks To Watch
Some of the publicly listed dairy producers in descending order of market capitalisation are: Hatsun Agro Products, Dodla Dairy, Heritage Foods, Vadilal Industries, Parag Milk Foods, Amrit Corp., Milkfood, Umang Dairies, Tasty Dairy Specialities, Modern Dairies, Suvidha Infraestate Corporation Limited, KMG Milk Food, Mahaan Foods, SC Agrotech and Virat Crane Industries