Dairy Industry: Organized Dairy Industry Expected to See Healthy Revenue Growth in FY23: ICRA

The organized dairy industry is expected to experience healthy revenue growth in fiscal year 2023, aided by healthy demand from institutional segments, growing consumer preference for branded packaged dairy products, rising urban income and the increase in per capita consumption of value-added dairy products (VADP), the rating agency said on Thursday.

According to ICRA analysis, demand for liquid milk from the institutional segment – ​​both hotel, restaurant and catering (HoReCa) and B2B segments – increased significantly after the second wave of Covid-19, in line with expectations. . The resurgence of leisure travel, the expansion of the restaurant industry and the increase in the number of social gatherings – have collectively contributed to the recovery in demand in fiscal year 2022, contributing to growth at double digit volume in fiscal 2022.

Speaking on the issue, Ms. Sheetal Sharad, Vice President and Sector Head, ICRA said, “VADPs, which account for around 34-36% of Indian organized dairy industry revenue, have been growing year on year. 18-20% in FY 2022. for the ICRA sample of four large private dairy companies. This development is explained by the recovery of demand in the retail and institutional segments. early start of the summer season and the limited impact of the third wave of the pandemic, the growth of the VADP segment was higher than the ICRA estimate of 13-15%.However, the recent drawdown of 5% of GST on pre-packaged curds, lassi, buttermilk and paneer could have a modest impact on sales volumes.”

While demand has improved significantly, production of raw milk remains moderate, keeping purchase prices high. Rising feed prices and transportation costs have further forced dairy companies to raise milk procurement prices in fiscal 2022 to support farmers. Additionally, rising labor and packaging costs impacted players’ cost structure and remained an industry-wide concern. As a result, most dairy companies raised retail prices twice in fiscal 2022 and recently as well. However, the same was taken with a significant delay and was therefore insufficient to offset the increase in the raw milk purchase price and other operational costs, leading to lower profit margins for dairy companies during the fiscal year 2022. As a result, the overall operating profit margin (OPM) of the ICRA sample set in fiscal year 2022 was lower than in fiscal year 2021 by 200 to 300 basis points due to the lag between retail price increases and purchase price increases.

Since February 2022, global skimmed milk powder prices have also seen a significant increase due to a healthy recovery in global demand with the easing of Covid-19 related restrictions and supply disruptions from Ukraine, one of the main exporters of dairy products, because of the Russian-Ukrainian conflict. This has led Indian dairy companies to sell SMP as well as VADP at better prices in export markets, leading to a correction in industry SMP inventory levels. Improved domestic demand has also allowed dairy companies to continue to liquidate their SMP stock, reducing working capital requirements.

At the beginning of the first quarter of fiscal 2023, dairy companies continued to witness an increase in milk purchase prices due to continued high demand and the inflationary environment, in addition to the impact geopolitical development. While the retail price increases announced in the fourth quarter of fiscal 2022 and since the beginning of fiscal 2023 should partially offset the increase in the cost of inputs, a further increase in retail prices cannot be ruled out. However, ICRA expects OPM to see some moderation in the first half of fiscal 2023. In addition, ICRA expects industry credit metrics to remain stable. in fiscal 2023, as moderate debt-financed capital spending will be offset by lower working capital debt, due to lower SMP inventory.