Indian dairy industry to grow at a healthy pace in FY2023: ICRA

August 25, 2022

The organised dairy industry is expected to experience a healthy revenue growth in FY2023 aided by healthy demand from institutional segments, consumers’ growing preference for branded packaged dairy products, rising urban income, and rising per capita consumption of value-added dairy products (VADPs). As per ICRA analysis, the demand for liquid milk from the institutional segment—both the hotels, restaurants and catering (HoReCa) and the B2B segments—increased significantly post 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 – collectively aided the demand recovery in FY2022, contributing to a double-digit volume growth in FY2022.

Speaking on this issue, Ms. Sheetal Sharad, Vice-President and Sector Head, ICRA, said: “VADPs, which form around 34-36% of the organised Indian dairy industry revenues, witnessed a YoY growth of 18-20% in FY2022 for ICRA sample set of four large private dairy companies. This was driven by demand recovery across both the retail and the institutional segments. Due to the early onset of the summer season and the limited impact of the third wave of the pandemic, growth in the VADP segment was higher than ICRA’s estimate of 13-15%. However, the recent levy of 5% GST on pre-packed curd, lassi, buttermilk and paneer may have a modest impact on sales volumes.”

While demand has improved substantially, raw milk production remains moderate, thus keeping the procurement prices high. Rising cattle feed prices and transportation costs further forced dairy companies to increase milk procurement prices in FY2022 to support farmers. Furthermore, rising labour and packaging costs have impacted the cost structure of players and remained an industry-wide concern. Hence, most of the dairy companies increased retail prices twice during FY2022 and recently too. However, the same was taken with a significant lag and hence was inadequate to compensate the increase in procurement price of raw milk and other operational costs, resulting in a decline in profit margins of dairy companies in FY2022. Accordingly, the overall operating profit margin (OPM) of the ICRA sample set in FY2022 was lower than FY2021 by 200-300 bps due to the lag between retail price hikes and procurement price hikes.

Since February 2022, global SMP prices also witnessed a significant increase owing to healthy recovery in global demand with easing of Covid-19 restrictions, and disruptions in supply from Ukraine, a leading exporter of dairy products, due to the Russia-Ukraine conflict. This resulted in the Indian dairy companies selling SMP as well as VADPs at better prices in the export markets, leading to a correction in the industry’s SMP inventory levels. Improving domestic demand has also enabled the dairy companies to further liquidate their SMP stock, reducing working capital requirements.

In early Q1 FY2023, the dairy companies continued to witness an uptick in milk procurement prices due to continued high demand and the inflationary environment in addition to the impact of geo-political development. While retail price hikes announced in Q4 FY2022 and YTD FY2023 should partially compensate the input cost increase, a further hike in retail prices cannot be ruled out. However, ICRA expects the OPM to witness some moderation in H1 FY2023. Further, ICRA expects the industry’s credit metrics to remain stable in FY2023, as moderate debt-funded capital expenditure will be offset by lower working capital debt, owing to a decline in SMP inventories.” 

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