Domestic milk production estimated to increase by 5-6% in FY2022: ICRA

November 9, 2021

Sutanuka Ghosal

ICRA on Tuesday said that domestic milk production is estimated to increase by 5-6% in FY2022, supported by a normal monsoon and early onset of the flush season in some regions.

In a report released by the rating agency it said that post the moderate impact of pandemic, the industry witnessed steady recovery in consumption across end-segments. This was further aided by improving pace of vaccination, fall in fresh Covid-19 cases, revival in economic activities; and demand from institutional and HoReCa segments which too has recovered sharply. Liquid milk sales continue to be supported by the in-elastic nature of demand while increasing consumption of value-added dairy products (VADP)s like ghee, butter, curd, cheese etc., support the overall dairy sales. With stable milk procurement and lower demand amidst pandemic during FY2021, industry players converted excess liquid milk to skimmed milk powder (SMP) thus resulting in elevated inventory levels and subdued SMP prices. The same is expected to be liquidated in the current year supported by revival in demand.

ICRA expects the industry wide demand to grow by 9-11% in FY2022 and maintains stable outlook over the long-term. Revival in economic activities, increasing per capita consumption of milk and milk products, changing dietary preferences due to rising urbanisation and continued Government support to the dairy industry shall drive demand.

Giving more insights, Ms. Sheetal Sharad, Vice President and Sector Head, ICRA, said, “Demand recovery was stunted by resurgence in Covid-19 cases in Q1 FY2022, and the impact was severe in institutional segments. However, there has been a healthy revival in demand in recent months with sharp fall in fresh Covid cases and resumption in business activities. Organised dairy segment which accounts for 26-30% of industry (by value) has seen faster growth compared to the unorganized segment and we expect the trend to continue. Growth in the liquid milk segment, which accounts for over half of the dairy industry, shall remain stable (6-7% in FY2022), while the majority of VADP categories is estimated to grow by 13-15%. However, demand recovery of few VADP categories such as frozen yogurt, ice-cream etc., shall be slow with consumer’s aversion for cold dairy products post pandemic.

With expected recovery in demand during festive season, SMP prices are likely to improve and lead to liquidation of stocks in FY2022. Raw milk procurement prices, which were subdued in FY2021 due to weak demand, have increased in the current fiscal supported by recovery in demand. Nevertheless, the higher procurement costs are not compensated by equivalent increase in selling prices which coupled with elevated fuel costs shall result in contraction of 150 bps margins for dairy players in FY2022.”

ICRA notes that growth over the medium term would continue to be driven by demand from stable liquid milk consumption growth and steady recovery in institutional demand for VADPs segment (especially from HoReCa segment). Most industry players continue to maintain high SMP inventory levels as the procurement remained high in H1 FY2022. This along with the soft SMP prices is expected to result in additional working capital debt requirements, though inventory levels are expected to decline from FY2023 onwards as demand-supply dynamics normalise. The ratings agency also expects private players to continue their capital expenditure on VADPs segment, given its better margins.

The industry will remain supported by Government’s continued support and favourable cost of funds leading to growing processing capabilities. Despite moderation in margins and increase in long term debt (to fund the capex) and working capital debt (mainly due to SMP stocks), coverage indicators for integrated players are expected to be comfortable. However, the financial risk profiles of pure play ice-cream manufacturers are expected to be under pressure in the near term given the slow pace of recovery.

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