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Rising procurement prices to curb profitability; credit quality outlook remains ‘Stable’

Revenue of the organised dairy sector in India is set for the second straight fiscal of double-digit growth – at 11-12%, a notch below last fiscal’s 13% growth.

This will be driven by healthy demand for value-added products (VAP; 28% of overall sales), even as sales of liquid milk stays steady and the full-year benefit of retail price hikes implemented last fiscal is realised. Within VAP, strong recovery is expected in the demand for cold VAP such as ice-cream, curd and flavoured milk1. Operating profitability, however, would moderate to ~5% this fiscal, because of a rise in procurement prices, as well as transportation and packaging costs.

The improved operating performance, along with adequately managed balance sheets and better control over working capital will support a revival in the capex plans of dairies, 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.

Says Aditya Jhaver, Director, CRISIL Ratings, “We expect demand for ice-cream, curd and flavoured milk items to peak this summer due to inordinately hot temperatures. The last two summers were affected by Covid-19. That, 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.”

On the other hand, 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. Dairies had hiked milk prices by Rs 2 per litre each in June 2021 and February 2022, which should result in 4-5% on-year growth in average realisation this fiscal.

With demand continuing to outpace supply, even during the flush season this year, procurement prices would continue to grow at ~5%. That, and the impact of inflation on transportation and packaging costs, will moderate operating profitability of CRISIL-rated dairies to ~5% this fiscal from an estimated 5.3% last fiscal. And incremental hikes in retail prices will cushion operating profitability.

Strong domestic demand for VAP and liquid milk will limit exports of skimmed milk powder (SMP) and prune inventory.

Says Tanvi Shah, Associate Director, CRISIL Ratings, “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’. We expect key debt metrics such as TOL/TNW2 and interest coverage to remain comfortable at 2-4-2.5 times and ~7.5 times, respectively, this fiscal, compared with 2.7 times and 7.7 times, respectively, last fiscal.”

1 Sectoral sales comprise of 65% share from milk, 28% from VAP and rest from SMP. Also, within VAP, ghee and paneer comprise ~60%, cold VAP about 20%, and remaining from others
2 Interest coverage continues to be supported by interest subvention of up to 4% on working capital loans to dairy cooperatives. This scheme has been extended till March 31, 2026. 2 TOL/TNW defined as Total Outside Liabilities to Total Net Worth ratio

Source : Crisil Press Release May 26th 2022