Brokerage firm flags further increase in milk price soon

Dairy companies may need to again raise prices of milk in the second half of the current financial year, analysts at ICICI Securities said in a report on Wednesday.

Dairy companies have raised milk prices by 8-10% in the past eight months due to a sustained rise in procurement prices. Wholesale milk prices have increased both month-on-month and year-on-year.

“We note high global SMP prices (and rupee depreciation), delayed onset of flush season as well as inflation in cattle feed prices are chief reasons for the higher milk prices. We model continued increase in milk procurement prices normalization of the consumption,” they said in a research note on Wednesday.

The brokerage said that EBITDA margins of dairy companies could contract 75-125bps in FY23.

“We believe dairy companies need to raise prices again in H2FY23, and focus on increasing the share of Indian value-added products to protect their (the companies’) profitability. However, with higher inflation and likely better volumes (higher sales to hotels and restaurants), revenue growth is likely to remain strong,” they said.

In August, Amul had said given the rise in input costs, its member unions from where it procures milk have increased farmers’ price in the range of 8-9% y-o-y. Mother Dairy too said farm prices of raw milk moved up 10-11% in a five-month period. Both took price hikes during the month.

Meanwhile, analysts at the brokerage said pan-India wholesale milk prices have risen 8.1% year-on-year in September so far.

Milk prices in south India are up 6.1% year-on-year. Pan-India wholesale prices rose marginally by 1.2% month-on-month. “We believe the rise in wholesale prices is attributable to inflation in animal feed prices, and increasing consumption and late onset of flush season,” they said.

Meanwhile, higher crop prices are inflating animal feed prices, they added. As a result, further price hikes are “inevitable”.

“All the dairy companies under our coverage have taken some price hikes (8-10%) in past eight months to protect their profitability. However, rising milk procurement prices still remain a key concern. We expect all dairy companies to take further price hikes in H2FY23E,” they said.