Profitability plummets by 50-75 bps
The Covid-19 pandemic-driven lockdown has nearly halted the revenue growth of the Indian dairy industry because of weak sales of value-added products, VAP like ice cream, cheese, flavoured milk, curd and yoghurt among others, which are more profitable than liquid milk.
These products account for over a third of the organized dairy sector’s revenue and are expected to shrink by 2 to 3 per cent this fiscal, reducing operating profitability by as much as 50-75 basis points, (bps).
Based on analysis of 65 CRISIL-rated dairies that account for slightly more than two-thirds of the Rs 1.5 lakh crore revenue of the organized dairy segment, it has been revealed that a return to normalcy will happen in the second quarter.
It also highlighted that working capital needs of dairies will need to be increased drastically and liquidity of mid-sized ones (revenue below Rs 500 crore) will be tested as a result of surplus milk being converted to skimmed milk powder (SMP) and the unsold VAP inventory.
The nationwide lockdown prevented institutional sales of VAP to hotels and restaurants, which account for almost 20 percent of the organized dairy segment’s revenue. Moreover, logistical challenges and consumer’s reluctance in consuming cold products like ice creams, flavoured milk and yoghurt during the pandemic has adversely impacted sales in the first quarter, which is supposed to be a peak-demand season.
Sameer Charania, Director, CRISIL Ratings said , “Steady demand for milk and higher VAP prices (hiked 10% in the second half of last fiscal) will help partially offset lower VAP volume, and arrest any decline in the dairy sector’s revenue. Further softer input prices will provide some respite and limit the fall in operating profitability to 50-75 basis points.”
