Dairy firms hope for an improvement in margins in September quarter

MUMBAI — Profit margins of dairy companies are expected to increase in the September quarter after a sharp contraction in the March and June quarters because of demand destruction following the Covid-19 outbreak.

Dairy companies reported a sharp contraction in their profit margins during the March quarter because of the rapid spread of coronavirus in India. Consumers were scared to pick up value-added dairy products to avoid coronavirus infection.

“Sales of all value-added products, including skimmed milk powder (SMP), cheese, paneer, and ghee, were badly affected during the March quarter because of uncertain market conditions. Sales of these products during the June quarter dipped further. But, the situation is likely to improve now and the September quarter expected to yield better profit margins,” said R S Sodhi, managing director, Gujarat Cooperative Milk Marketing Federation (GCMMF), the producer of the Amul brand of dairy products.

Meanwhile, dairy companies have adopted cost-control measures, cutting advertising and other expenses, to reduce burden.

Many private dairies have shut down their shops due to the shortage of workers and disruptions in transportation during the Covid-induced lockdown. That resulted in an increase in procurement by organised sector players like Parag and co-operative dairies across the country. Milk procurement prices have declined 12 per cent because of supply glut to Rs 25-26 a litre in Maharashtra, as against Rs 29 a litre before the Covid-19 outbreak.

In the March quarter, Parag Milk Foods, the producer of Govardhan brand dairy products, posted a 5.2 per cent contraction in its profit margins. Net profit margins of Modern Dairy declined to 0.07 per cent in the June quarter on a turnover of Rs 197.77 crore, as against 1.72 per cent profit margins on a turnover of Rs 147.20 crore in the corresponding quarter last year.

The partial relaxation in the opening of hotels, restaurants and catering services has improved sales sentiment of milk and value-added dairy products.

“In FY21, the value-added portfolio, comprising the core categories of cheese, ghee, and paneer, would grow about 10 per cent on average. However, SMP is expected to slide 25–30 percent. Milk procurement has improved 30 per cent YoY, even as milk prices have subsided. We expect milk prices to remain down 12 per cent in FY21 to around Rs 26–27 a litre. Gross margin is likely to expand from Q2FY21,” said Shradha Sheth, an analyst with Edelweiss Securities.

India is facing a huge supply glut of SMP — around 125,000 tonnes — due to reduced demand. Hence, many private players are selling SMP at Rs 180-190 a kg, against the production cost of Rs 260-270 a kg.

“We have urged the government to provide us with Rs 50 a kg export incentive to ship some quantities abroad to reduce our domestic inventory. At the current price of $2,500 a tonne, the export of SMP from India is not feasible,” said Sodhi.