Subdued growth in dairy due to lack of price increases

Heritage Foods Chief Executive Officer Srideep N Kesavan discusses the current state of the dairy industry in the country and how the company is faring. He notes that while the industry is doing well overall, growth has been subdued due to a lack of price increases. Kesavan also discusses Heritage Foods’ performance and strategies for expansion. Excerpts:

Q

 How is the dairy sector doing now overall?

The dairy industry is doing really well right now. Estimates suggest that it will cross the ₹11-lakh crore mark in revenues this year. At least 50 per cent of it is organised. But this year’s industry growth is subdued compared to the previous years. For the growth to happen, you need two axes - one is the volume growth which is consumption growing and the second is the price per litre.

In line with the inflation, there is a 4-5 per cent price increase that happens usually. It’s been almost 18 months since we have had any price increase, at least in the Southern markets. This has been unusually a long period. From the consumer point of view, it is very good because there is price stability. But from the industry point of view, the industry is working with a single axis which is only volume expansion. That’s the reason why the revenue growth in the industry this year is slightly lower than in previous years.

Q

 You said that there was no increase in price in the last 18 months, but Amul and a few other players increased prices less than a year ago?

Mostly in the south of India – we haven’t had price increases in the last 18 months or so.

Q

Why is that?

We saw a very steep hike in prices a year before that. We had a price increase up to 9 per cent... That was a structural correction after a surge in the raw milk prices in 2022 and early 2023. They went up by up to 11 per cent. This had affected the industry’s profitability.  There was a delay in passing on the price increases to the consumer and eventually it ended with all the prices being passed on to the consumer by the mid 2023. It was actually a structural correction and after that prices remained stable. Some companies have passed this on to customers in certain markets in September-October last year.

Q

When can we expect a price increase. Who will bell the cat?

The cat will eventually get belled. The FMCG companies have started increasing prices because of increase in raw milk price. There are other costs such as employee costs, electricity, operating cost, and transport – all those costs are increasing. So, eventually this price has to be corrected. We are seeing price increases of four to six per cent happening in the FMCG sector as we speak now. It’s a matter of time before something like that happens in dairy also.

Q

How has been Heritage Foods’ performance? Where does it stand now?

I will talk about the company’s performance up to the first half of the current financial year. I cannot reveal anything about the current quarter. In the first half of the year, the performance was good. The biggest performance improvement is in the bottom-line performance. One of the primary reasons is the raw milk prices have been cooling off.

Till last March or April, the raw milk prices were increasing and from then onwards the raw milk prices started cooling off. We had increased the prices also by about 9-9.5 per cent by June of last year. With raw prices cooling off, that naturally resulted in the expansion of margins. The margins have significantly improved. The volume growth has also been very and encouraging in the first half. This was despite a good part of the summer was washed out by early rains, which impacted sales of value-added product such as buttermilk and flavored milk. Despite all of that we have been able to grow the business. We see a considerable growth in revenues from products such as paneer and curd.

Q

Heritage Foods is predominantly a Southern player, with the bulk of the revenues coming from the two Telugu States. What are the strategies that you are working on to de-risk or expand operations?

Yes. In terms of business contribution now non-south states contribute about 10 per cent, while the southern states contribute 90 per cent. Of this, Telugu states contribute 70 per cent and Karnataka and Tamil Nadu about 20 per centage. Non-Telugu states are growing in the high teens.

De-risking is happening on many fronts – one is geographical and other is expansion of the product bouquet. We are also looking at expanding the scope of consumption opportunities of certain products such as curd and paneer.

We are doing marketing campaigns in regional languages such as Telugu, Tamil and Kannada to tell consumers on how they can use curd and paneer in other recipes. This is showing results. What we are trying to do is to increase the quantity stored at home because the more quantity you store at home the more occasions naturally get created.

Premium milk segment is growing in some urban markets. What is your strategy to tap this opportunity?

It is still emerging. Besides premium milk, we are launching other products such as probiotic buttermilk and probiotic curd. We have just launched Sampoorna milk, a milk product which is a notch below the premium milk. We launched this in Mumbai, and we will roll it out in other markets in phases.

All of the premium variants put together would still be under ₹100 crore for us. It’s not uh it’s not impactful in a sense. It’s not a huge contributor to our revenue but it is growing very fast. We are also investing on increasing our ice cream production capacities.

We have announced an investment of ₹204 crore on a new ice cream facility. The new capex will quadruple our volumes capacity and can help scale up to ₹600 crore over the next 7-8 years.

Source : Dairynews7x7 Jan 4th 2025 Hindu Businessline