Price increase will keep decline in profitability of the dairy sector in check : CRISIL

23 Aug 2022 , 01:14 PM

Despite a higher-than-anticipated increase in procurement prices, transport costs, and packaging costs this fiscal year, the recent increase in retail milk prices by Rs2 per liter will keep the decline in profitability of the organized dairy sector to 50 basis points (bps) on year, according to CRISIL Ratings on Tuesday.

Despite lower profitability, players’ credit profiles will remain stable because of sound balance sheets and improved working capital management. This is confirmed by a CRISIL rating examination of 40 rated dairies, which together generate 60% of the revenue for the organized market.

Last year’s supply was impacted by delays in artificial insemination, cow breeding, and vaccination schedules. This year, it’s anticipated that these problems will be resolved, leading to a stronger milk supply during the flush season (which refers to the peak period of raw milk supply, which is generally from December to mid-March every year). The demand factors are still potent.

While demand for liquid milk remains strong, it has been expanding steadily for value-added products (VAP; accounting for 28% of organized sector revenue) like ghee, butter, cheese, curd, and ice cream.

Profitability in the VAP market is often higher, at 7-9%, due to its relative lack of price elasticity. In a post-pandemic environment, the HoReCa (hotel, restaurant, and café) segment has also made a remarkable return, supporting the dairy industry’s revenue increase. Following the increases in retail milk prices, volume growth, and a rise in average realizations of 6—6.5% this fiscal will result in 13—14% more revenue for organized dairy companies.

Strong domestic demand for VAP and liquid milk will restrict the export of skimmed milk powder (SMP) and prune inventories, which will help the working capital situation of dairies as SMP inventory makes up 70—75% of their working capital needs.