Profitability to remain rangebound amid rising input costs; credit profiles seen stable

Revenue growth of the organised dairy sector is expected to accelerate by 200–400 basis points this fiscal, over a healthy print of ~11per cent growth estimated for last fiscal. This uptick will be supported by a sustained volume growth of 8–10 per cent and staggered price increases. Volume growth will be driven by the non-discretionary nature of milk and traditional dairy products such as butter and ghee and growing demand for value-added offerings. Price hikes will stem from higher procurement cost of raw milk amid increased production expenses and slower milk supply growth.

These hikes will help players sustain their operating profitability in the face of rising input costs. Given the strong growth momentum, players are expected to sustain their capex momentum in line with average of past 4 years. That said, healthy accruals, strong balance sheets and stable working capital cycles will support credit profiles. Our analysis of 37 dairies, accounting for ~60 per cent of the organised segment’s revenue, indicates as much.

Says Shounak Chakravarty, Director, Crisil Ratings, “The manifestation of El Niño conditions, resulting in a harsh summer and a below-average monsoon, will impact cattle yields this fiscal. Coupled with rising fodder costs, this will slow down growth in the production of raw milk to 4 per cent on-year, compared with the compound annual growth rate of ~5 per cent between fiscals 2020 and 2025. Consequently, milk prices will go up by 4-5 per cent. Companies are expected to pass on the increased cost to consumers in stages, with sharper hikes expected in value-added categories. Overall, average retail prices are expected to increase 5-6 per cent across milk product segments this fiscal.” Despite the price increases, growth is expected to remain robust, led by portfolio expansion in value-added products. Dairy companies are expected to increase their offerings in value-added categories, capitalising on rising demand for protein-rich and probiotic offerings attributed to improved health consciousness.

Although these products currently account for less than 5 per cent of the market, growth momentum is expected to be strong at over 20 per cent going forward. Additionally, increasing awareness regarding product quality is driving a shift from unbranded to branded products, thereby supporting the overall growth of organized players. The industry’s operating margin, however, will remain rangebound at ~4 per cent this fiscal, similar to last fiscal. Price hikes are expected to be taken such that players are compensated for increased costs related to procurement of raw milk.

Says Rucha Narkar, Associate Director, Crisil Ratings, “Healthy growth prospects, along with higher accruals from increasing scale, are expected to sustain capex intensity in line with the past four-year average. Despite the debt-funded capex, credit profiles are expected to remain stable, supported by healthy cash generation and strong balance sheets. Debt metrics are expected to improve, with debt-to-Ebitda1 declining to ~2.3x this fiscal from 2.5x last fiscal, while interest coverage is projected to remain strong at over 6x compared with 5.6x last fiscal”. Looking ahead, the extent of weather-related disruptions to milk supply and timely completion as well as ramp-up of new commissioned facilities will bear watching.