A report by Crisil Ratings says that price hikes will stem from higher procurement costs of raw milk amid increased production expenses and slower milk supply growth
Milk prices are expected to go up by 4 to 5 per cent this fiscal year, led by high procurement costs of raw milk. A report has stated that companies are expected to pass on the increased cost to consumers in stages, with sharper hikes expected in value-added categories. Overall, average retail prices are expected to increase 5 to 6 per cent across milk product segments this fiscal.
Revenue growth of the organised dairy sector is expected to accelerate by 200 to 400 basis points this fiscal, over a healthy print of around 11 per cent growth estimated for the last fiscal. This uptick will be supported by a sustained volume growth of 8 to 10 per cent and staggered price increases, the report by Crisil Ratings highlighted.
The report noted that the volume growth will be driven by the non-discretionary nature of milk and traditional dairy products such as butter and ghee and growing demand for value-added offerings. Price hikes will stem from higher procurement costs of raw milk amid increased production expenses and slower milk supply growth.
Crisil Ratings added that players are expected to sustain their capex momentum in line with the average of the past four years. That said, healthy accruals, strong balance sheets and stable working capital cycles will support credit profiles.
“The manifestation of El Nino conditions, resulting in a harsh summer and a below-average monsoon, will impact cattle yields this fiscal. Coupled with rising fodder costs, this will slow down growth in the production of raw milk to 4 per cent on-year, compared with the compound annual growth rate of around 5 per cent between fiscals 2020 and 2025,” stated Shounak Chakravarty, Director, Crisil Ratings.
Value-added Categories To Drive Growth
Despite the price increases, growth is expected to remain robust, led by portfolio expansion in value-added products. Dairy companies are expected to increase their offerings in value-added categories, capitalising on rising demand for protein-rich and probiotic offerings attributed to improved health consciousness.
The report pointed out that although these products currently account for less than 5 per cent of the market, growth momentum is expected to be strong at over 20 per cent going forward. Additionally, increasing awareness regarding product quality is driving a shift from unbranded to branded products, thereby supporting the overall growth of organised players.
“Healthy growth prospects, along with higher accruals from increasing scale, are expected to sustain capex intensity in line with the past four-year average. Despite the debt-funded capex, credit profiles are expected to remain stable, supported by healthy cash generation and strong balance sheets,” said Rucha Narkar, Associate Director, Crisil Ratings.
The industry’s operating margin, however, will remain rangebound at around 4 per cent this fiscal, similar to last fiscal, the report mentioned. The report added that the extent of weather-related disruptions to milk supply and timely completion as well as ramp-up of new commissioned facilities will bear watching.
