Revenue in India’s organized dairy industry will rebound 12% year-on-year this fiscal year to ₹1.6 lakh crore, compared to a weak ten-year growth of 1% last financial year, supported by a strong recovery in demand in most value-added dairy products (VAP), steady sales of liquid milk and retail price increases over the fiscal year, Crisil said on Friday.
Continued demand for VAP (about one-third of organized sector sales share) and fluid milk (about two-thirds of share) is also expected to drive 5-6% growth in the next fiscal year, in line with the pre-existing trend. -pandemic, says the rating agency’s report on the sector.
Further potential retail price hikes provide an additional benefit, the report adds.
Operating profitability, however, will be reduced to the pre-pandemic level of 5-5.5% in the next two fiscal years – from the peak of 6% seen in fiscal 2021 – due to high prices. raw milk, as well as higher transport and packaging. costs, and despite dairies raising retail product prices by 3-4% across all categories this year, Crisil said.
Certainly, although milk availability has increased in the current harvest season, it is still not enough to meet the healthy demand for VAP, resulting in high raw milk prices.
That being said, better revenue growth and near-stable operating profits, along with well-managed balance sheets, will lead to a “stable” credit outlook for dairy players.
A CRISIL Ratings analysis of 57 rated dairies, which account for nearly two-thirds of organized segment revenue from ₹1 lakh crore, indicates as much.
Milk is consumed in two forms: liquid and VAP. Dairies process liquid milk into skimmed milk powder (SMP) for use during the lean season, when milk supplies are dwindling.
SMP can be converted back to liquid milk or VAP and has a shelf life of 12 to 18 months. Demand for VAPs such as ghee, butter, cheese, curd and SMP saw a strong recovery during the festive and wedding season in the third quarter of this fiscal year, and the reopening of commercial establishments on a pan-Indian basis.
Anuj Sethi, Senior Director, CRISIL Ratings, said: “VAP sales growth is expected to be 17-18% this fiscal year on a lower base than last fiscal year. This, in turn, will be driven by strong volume growth of 13-14%, as hotels, restaurants and cafes (HORECA segment, accounting for 20% of organized sector sales) opened up, and festive celebrations and wedding, as well as home consumption increased. The second and third waves of Covid-19 had no significant impact on most dairy segments, with food delivery services and restaurants continuing to operate despite local restrictions. »
That said, the first and second waves of Covid-19 had coincided with the peak summer ice cream season (14% of overall VAP sales) and had partially impacted demand.
On the other hand, the sales volume of liquid milk should remain stable at 6% during this financial year. This, combined with the retail price increases already taken, would result in sales growth of 10% this fiscal year.
According to Tanvi Shah, Associate Director, CRISIL Ratings, “Around 70-75% of dairies’ working capital requirements are for SMP inventory, which is expected to be at higher levels compared to the pre-pandemic period due of the steady supply of milk this hunting season. However, well-managed balance sheets and near-stable operating profits would lead to a stable credit outlook for dairy players. We expect key debt metrics such as leverage and interest coverage ratio2 to remain comfortable at 1.2x and 6.5x, respectively, in the near term.”
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