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As whole sale milk price simmer, dairy cos may take further hike

With the price of wholesale milk continuing to rise across the country, dairy companies will need to increase prices again in the second half of FY23, according to a report by ICICI Securities.

These companies will need to focus on increasing the share of Indian value-added products to protect their profitability, analysts at the brokerage said in an update on the dairy sector on Thursday.

“Dairy companies have also raised milk selling prices by 8-10% in the past ten months due to sustained rise in milk procurement prices. While we note the global skimmed milk powder prices are down year-on-year, weak flush season as well as inflation in cattle feed prices are chief reasons for the higher milk prices,” analysts said.

However, with higher inflation and likely better volumes, revenue growth is likely to remain strong.

To be sure, pan-India wholesale milk prices have increased 10.2% year-on-year in December 2022. Meanwhile, month-on-month, pan-India wholesale prices grew marginally by 0.6%. The rise in wholesale prices is attributable to inflation in animal feed prices, and increasing consumption, weak flush season and lumpy skin disease, they said.

“We note the prices of maize, and wheat continues to be 27.4% and 31% up year-on-year in November 2022, which will likely lead to higher feed prices. Hence, we expect farmers to pass on any further inflation in key raw materials via higher milk prices,” the analysts said.

Volatile raw material prices have had companies in a bind. Companies across consumer-focussed businesses have been compelled to pass on price hikes to end consumers.

Analysts at ICICI expect profitability of dairy companies to be down year-on-year in second half of FY23.

“All the dairy companies under our coverage reported year-on-year lower gross margin in H1FY23, despite some price hikes (8-10%) in past eight months. However, rising milk procurement prices still remain a key concern. We expect all dairy companies to report lower YoY margins in H2FY23 (expected) as well,” they said.

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