Indian dairy industry reels under input cost pressures; retail price hikes may continue: ICRA

• Increasing milk procurement prices and higher operating costs continued to exert cost pressures on industry
• ICRA expects dairy companies to continue retail price hikes to combat margin pressures

ICRA’s sample set of six Indian dairy companies is estimated to achieve revenue growth of 12-14% on a YoY basis in FY2023, backed by strong revival in demand, especially the HoReCa segment and increase in retail prices. However, operating profit margins are expected to contract by 120-160 bps on a YoY basis as the retail price hikes are expected to provide only a partial support to the input cost pressures. While credit metrics of dairy companies are likely to see some moderation, ICRA expects the industry to maintain a stable credit profile, supported by favourable demand outlook and moderate debt levels. Milk production yields in H1 FY2023 were hampered by the prevalence of the Lumpy Skin Disease (LSD), notably among cows in the northern states. Although  a successful immunisation programme helped contain the disease, ICRA expects a slight moderation in milk production growth to 4-5% in FY2023.

Providing additional information, Ms. Sheetal Sharad, Sector Head and Vice President, ICRA said: “Raw milk procurement prices increased in FY2022, led by healthy demand and constricted milk availability as a result of disruption in cattle insemination programmes earlier during the pandemic. Raw milk prices have continued to rise in the current fiscal too, owing to rising cattle feed and fodder prices for dairy farmers.  While erratic monsoons in various parts of the country impacted fodder availability, rising prices of grains like maize, wheat and soyabean led to soaring cattle feed concentrate prices. Apart from that, the prevalence of LSD briefly limited milk availability. Furthermore, companies faced rising logistics, processing and packaging expenses. Given the healthy demand expectations over the festive and wedding seasons, ICRA anticipates raw milk prices to stay firm in H2 FY2023 as opposed to a typical correction in the flush season. Retail prices for dairy products have thus gone up in the current fiscal to make up for higher costs.”

For ICRA’s sample set, revenues from value added products (VADPs) witnessed a healthy YoY growth of 18-20% in FY2022. The early commencement of summer demand, relatively higher temperatures and the waning impact of the pandemic boosted growth. We anticipate the VADP segment to continue to grow at a similar 18-20% in FY2023 as well. The industry has been able to liquidate skimmed milk powder (SMP) inventory in FY2022 in line with expectations, aided by good demand recovery in the institutional and the HoReCa segments and recovery in domestic SMP prices. Revenues in the liquid milk segment are predicted to expand at a faster rate of 7-9% in FY2023, owing to growing per capita consumption and rising realisations. However, on the flip side, increased input costs for dairy companies continue to be a worry. Thus, more retail price hikes could follow in the backdrop of the current inflationary scenario.

Ms. Sharad adds: “Although credit metrics for dairy companies are projected to moderate in FY2023 due to margin pressures, regular raw milk supply with LSD under control and feed cost stabilisation for farmers and healthy demand outlook should help dairy companies’ credit profiles in the medium term. ICRA anticipates moderate capex with most private companies focusing on VADP capacity expansion and moderate SMP inventory levels, resulting in stable credit profile for the industry.”