Dairy sector: Better margins expected after entry of private players, says India Ratings and Research report

Better margins are expected after the entry of a number of private players in the dairy products space, even though dairy sector is dominated by dairy cooperatives and milk unions, it said.

By: ENS Economic Bureau | New Delhi | Published: June 15, 2018 5:40:02 am
Maharashtra: To corner out-of-state players, dairies decide to slash milk price India Ratings expects the milk production to grow by 6.29 per cent to increase to 186 million tonnes in 2018-19.

Changing dietary patterns, increasing disposable income and rapid urbanisation are driving the demand for value added dairy products (VADP), resulting in a faster growth of milk and other dairy products than other essentials in the consumption basket of households in 2015-16 and 2016-17 and the trend is likely to continue this year, India Ratings and Research said in a report.

India Ratings expects the milk production to grow by 6.29 per cent to increase to 186 million tonnes in 2018-19. Also, the size of the liquid milk industry is expected to expand to Rs 7.45 trillion during the same period, it said. With the increasing production, the per capita availability is set to inch up to 383 grams a day in FY19, it said.

The contribution of the dairy sector in the economy is set to increase due to a combination of various supportive factors such as sturdy growth in produce, controlled input costs, changing consumer preferences and increasing spending capacity, the report said. “The market size of liquid milk and manufactured dairy products is expected to increase to Rs 7,452.8 billion and Rs 194.4 billion in FY19, respectively, from Rs 5,495.9 billion and Rs 149.7 billion in FY16,” it said.

Better margins are expected after the entry of a number of private players in the dairy products space, even though dairy sector is dominated by dairy cooperatives and milk unions, it said. A number of private players have also entered into this space lately.

While dairy co-operatives and milk unions focus on supporting and maximising farmers’ income, rather than their own profit, they therefore operate on thin margins with the average margins during 2012-2017 at 1.7 per cent. Private players, on the other hand, realised a topline growth of 10 per cent and margins of 7 per cent to 10per cent, it said. Also, the product mix of private is tilted towards the value added dairy products leading to better margins as compared to dairy co-operatives whose product mix is still dominated by raw milk, the Fitch-group ratings agency said.

“Although these products are highly price elastic, per capita consumption of fresh dairy products grew by 5-6 per cent over 2014-2017. In the household consumption, basket milk and its derivatives grew at a faster pace than other essentials in FY15 and FY16, and this trend is likely to continue,” the report said.

As milk unions and dairy co-operatives are working towards expanding their footprints regionally and in the value added dairy products space, a significant amount of capex is either undertaken or is in the pipeline to increase the existing/new processing and VADP producing capacities, set up chilling facilities, enhance the shelf life of packaged products, improve the productivity of milch cattle and enhance the market footprint by expanding the retail outlets. “Such capex pushed the debt burden of the dairy co-operatives/milk unions in FY17 and is likely to lead to even higher debt burden between 2x to 5x of CBBID (current balance before interest and depreciation) in the medium term,” the report said.

However, they may enjoy some benefit on the interest cost as lending to this sector falls under priority sector. Also, extension of the Kissan Credit Card scheme to the dairy farmers may mitigate some of the liquidity related pressures faced by dairy co-operatives and milk unions, the report said.

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