Indian Dairy on the Global Investment Map ANGSHUMAN BHATTACHARYA Partner, Ernst & Young Parthenon March 12, 2019 Growing incomes in India have unleashed demand for value added products. The large untapped potential in marketing, distribution and higher margin products is attracting unprecedented interest from investors. The country needs a second wave of consolidation which moves from being “subsistence oriented” to being “industry oriented”. The success factors are fast changing from an efficient, lean, low margin, morning distribution and low innovation play to a packaged, innovation and investment led, specialised, branded and chilled distribution play. The dairy sector in India is one of the largest revenue and employment generating segments within the food sector. More recently, the dairy sector has been witnessing unprecedented interest from financial and strategic investors. The large untapped domestic market opportunity, potential to add value for higher margin products, deeper distribution penetration, evolving role of modern retail and India’s strong position as the largest raw milk pool are some of the theses driving investor interest. Table. Select Private Equity/Strategic investment activity in the Indian dairy sector. Target Company Acquirer Year Vikram Dairy Heritage Foods India 2007 Prakash Dairy CavinKare 2008 Britannia New Zealand Foods Britannia Industries 2009 Vigo Bio-Tech Dairy Anil Hospitality 2009 Tirumala Milk Products Carlyle 2010 Wockhardt Limited Danone 2011 Cocoberry Retail Pvt Ltd CX Partners 2011 Parag Milk IDFC PE 2012 Prabhat Dairy Rabo Equity 2012 Dodla Dairy Cargill Ventures 2012 CavinKare ChrysCapital 2013 Prabhat Dairy Rabo Equity 2013 Shikhar Dairy Samridhi Fund 2013 Indocon Agro & Allied Activities Pvt Ltd Nestle India 2013 Jyothi Dairy Hatsun Agro 2013 Tirumala Dairy Lactalis 2014 Source: VC Circle, A&M Analysis. MILK SUPPLY AND DEMAND IN INDIA Production of milk has grown from 78 million tonnes to 138 million tonnes at 4.1% CAGR between 2000 and 2014 with a target of 146 million tonnes in 2015. Imports have been limited and sporadic in this period, leading one to believe that demand has grown at 4.1% as well. However, data from growth of cooperatives and private sector dairies over this period indicates that liquid milk in volume terms has grown at 6-8% for large metros, 10-14% for tier 1 and tier 2 cities and most value added products have grown at over 20% across categories. Packaged curd, cheese, paneer, infant foods have seen very strong double digit growth between 2008 and 2014. While there are arguments stating that India’s dairy sector is self-suffi cient, shelf stock outs in ghee, butter, ice creams, traditional sweets in non-festive seasons and also milk prove the fact that reported demand is an inaccurate representation of the ability to supply. Moreover, compared to developed countries, India has an inadequate chilled products distribution network with only a fraction of stores with refrigerators or visicoolers. The true potential of chilled products like cheese, chocolate, curd and paneer would have been distinctly higher if requisite infrastructure were to be in place. Some part of this imbalance could also be attributed to efficient milk solids utilisation use, but at this moment such efforts are far from deliberate. Clearly, there is a supply demand imbalance playing out in the form of price increases and dropping consumption levels for lower income, price sensitive consumers. Table. Market size and volume of milk and milk products, 2008-2020. Category Market Size (INR million) CAGR (%) Volume (’000 tonnes per annum) CAGR (%) 2008 2014 2020 2008-14 2008 2014 2020 2008-14 Polypack milk 128,620 310,312 549,735 16 9,350 14,111 18,918 7 Milk powder (B2B) 39,080 75,790 134,268 12 478 877 1,175 11 Dairy Whitener 2,390 4,704 7,466 12 20 25 29 4 Ghee 25,670 47,530 88,909 11 289 386 548 5 Butter 8,120 21,083 35,358 17 42 52 66 4 Yoghurt 8,960 39,360 129,765 28 232 795 1,935 23 Baby foods 13,240 26,555 61,425 12 48 61 87 4 Flavoured milk 4,300 19,264 44,565 28 78 235 543 20 Yoghurt Drinks 290 1,360 4,480 32 5 16 41 20 UHT milk 4,140 21,952 92,117 32 140 367 991 17 Cheese (Retail) 2,530 8,174 20,960 22 12 24 52 12 Cheese (Institutional) 870 3,325 9,936 25 5 14 32 18 Paneer 1,480 3,473 10,386 15 19