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Milk Price Hike To Improve Profitability Of Organised Dairies: Report

Milk Price Hike To Improve Profitability Of Organised Dairies: Report

Mumbai (Maharashtra):

The recent hike in retail milk price by Rs 2 per litre will limit the slide in the profitability of the organised dairy sector to 50 basis points (bps) on-year this fiscal, despite a higher than anticipated rise in procurement prices, and transport and packaging costs, CRISIL Ratings said in a report on Tuesday.

Despite lower profitability, comfortable balance sheets and better working capital management will keep the credit profiles of players stable, it said.

The report is based on a CRISIL Ratings analysis of 40 rated dairies that account for 60 per cent of the organised segment revenues.

“Milk procurement prices have shot up 8-10 per cent in the past six months because of lower-than-expected milk collection — on account of cattle diseases in some of the major milk-producing states — and high prices of cattle feed,” said Anand Kulkarni, Director, CRISIL Ratings.

“Additionally, the surge in crude price has translated into a significant increase in transport and packaging costs. This necessitated a second price hike in the past six months. We don’t anticipate any more price hikes as an expected improvement in milk collection and softening input prices will support profitability in the second half of the fiscal,” Kulkarni said.

Disruptions in artificial insemination, cattle breeding and vaccination schedules had affected supply last year. These issues are expected to be ironed out this year, resulting in better milk supply during the flush season (refers to the peak period of raw milk supply, which is generally from December to mid-March every year).

The drivers of demand remain strong. While demand for liquid milk continues to be robust, that for value-added products (VAP; accounting for 28 per cent of organised sector revenue) such as ghee, butter, cheese, curd, ice cream has been growing at a healthy pace. As the VAP segment is comparatively price inelastic, profitability is typically better, at 7-9 per cent.

Also, the HoReCa (hotel, restaurant and cafe) segment has made a strong recovery in a post-pandemic world, which will prop up revenue growth for the dairy industry.

Volume growth, along with increase in average realisations by 6-6.5 per cent this fiscal, following the hikes in retail milk prices will translate to 13-14 per cent higher revenue for organised dairy players.

The working capital position should also improve as strong domestic demand for VAP and liquid milk will limit exports of skimmed milk powder (SMP) and prune inventory, given that SMP inventory accounts for 70-75 per cent of the working capital requirement of dairies.

Saina S Kathawala, Associate Director, CRISIL Ratings, “Despite the decline in profitability to 4.7 per cent this fiscal, interest coverage of players will remain adequate at 7.3-7.4 times, compared with 7.7 times last fiscal. Leverage should remain comfortable with total outside liabilities to tangible net worth ratio expected at 2.5-2.6 times, compared with 2.7 times last fiscal.”

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)


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