Indian dairy industry to grow by 9-11 per cent in FY22: ICRA Report

The dairy industry is expected to grow by 9-11 per cent in 2021-22, driven by a revival in economic activities, increasing per capita consumption of milk and milk products, changing dietary preferences due to rising urbanisation, according to a report.

The industry-wide demand to grow by 9-11 per cent in the financial year 2021-22, Icra said in a report maintaining a stable outlook for the diary industry over the long term.

Revival in economic activities, increasing per capita consumption of milk and milk products, changing dietary preferences due to rising urbanisation, and continued government support to the dairy industry will drive demand, it added.

Domestic milk production is estimated to increase by 5-6 per cent in the financial year 2021-22, supported by a normal monsoon and early onset of the flush season in some regions, the report said.

Post the moderate impact of the pandemic, the industry witnessed a steady recovery in consumption across end segments, it added.

“Demand recovery was stunted by the resurgence in Covid-19 cases in the first quarter FY22, and the impact was severe in institutional segments. However, there has been a healthy revival in demand in recent months with a sharp fall in fresh Covid cases and resumption in business activities. Organised dairy segment, which accounts for 26-30 per cent of industry (by value) has seen faster growth compared to unorganised segment and we expect the trend to continue,” Icra Vice President and Sector Head Sheetal Sharad said.

She said that growth in the liquid milk segment, which accounts for over half of the dairy industry, is likely to remain stable (6-7 per cent in FY22), while the majority of value added dairy products (VADP) categories are estimated to grow by 13-15 per cent.

However, demand recovery of a few VADP categories such as frozen yogurt, ice-cream among others, will be slow with consumers’ aversion for cold dairy products post-pandemic, she noted.

“With the expected recovery in demand during the festive season, skimmed milk powder (SMP) prices are likely to improve and leading to the liquidation of stocks in FY22.

Raw milk procurement prices, which were subdued in FY21 due to weak demand, have increased in the current fiscal supported by a recovery in demand.

Nevertheless, the higher procurement costs are not compensated by an equivalent increase in selling prices, which coupled with elevated fuel costs will result in contraction of 150 bps margins for dairy players in FY22,” she added.

Icra report further stated that growth over the medium term would continue to be driven by demand from stable liquid milk consumption growth and steady recovery in institutional demand for the VADPs segment (especially from HoReCa segment).

Most industry players continue to maintain high SMP inventory levels as the procurement remained high in H1 FY22, the report said. This along with the soft SMP prices is expected to result in additional working capital debt requirements, though inventory levels are expected to decline from FY23 onwards as demand-supply dynamics normalise, it added.

The rating agency also expects private players to continue their capital expenditure on the VADPs segment, given its better margins.

Further, the industry will remain supported by the government’s continued support and favourable cost of funds leading to growing processing capabilities.

Despite moderation in margins and increase in long-term debt (to fund the capex) and working capital debt (mainly due to SMP stocks), coverage indicators for integrated players are expected to be comfortable, it said.

However, the financial risk profiles of pure-play ice-cream manufacturers are expected to be under pressure in the near term given the slow pace of recovery, it added.