Despite lower profitability, comfortable balance sheets and better working capital management will keep the credit profiles of players stable. A CRISIL Ratings analysis of 40 rated dairies that account for 60% of the organised segment revenue indicates as much.
Anand Kulkarni, Director, CRISIL Ratings said “Milk procurement prices have shot up 8-10% in the past six months because of lower-than-expected milk collection — on account of cattle diseases in some of the major milk-producing states — and high prices of cattle feed. Additionally, the surge in crude price has translated into a significant increase in transport and packaging costs. This necessitated a second price hike in the past six months. We don’t anticipate any more price hikes as an expected improvement in milk collection and softening input prices will support profitability in the second half of the fiscal.”
Disruptions in artificial insemination, cattle breeding and vaccination schedules had affected supply last year. These issues are expected to be ironed out this year, resulting in better milk supply during the flush season (refers to the peak period of raw milk supply, which is generally from December to mid-March every year). The drivers of demand remain strong. While demand for liquid milk continues to be robust, that for value-added products (VAP; accounting for 28% of organised sector revenue1 ) such as ghee, butter, cheese, curd, ice cream has been growing at a healthy pace.
As the VAP segment is comparatively price inelastic, profitability is typically better, at 7-9%. Also, the HoReCa (hotel, restaurant and café) segment has made strong recovery in a post-pandemic world, which will prop up revenue growth for the dairy industry. Volume growth, along with an increase in average realisations by 6-6.5% this fiscal, following the hikes in retail milk prices will translate to 13-14% higher revenue for organised dairy players. Working capital position should also improve as strong domestic demand for VAP and liquid milk will limit exports of skimmed milk powder (SMP) and prune inventory, given that SMP inventory accounts for 70-75% of the working capital requirement of dairies.
Saina S Kathawala, Associate Director, CRISIL Ratings said “Despite the decline in profitability to ~4.7% this fiscal, interest coverage2 of players will remain adequate at 7.3-7.4 times, compared with 7.7 times last fiscal. Leverage should remain comfortable with total outside liabilities to tangible net worth ratio expected at 2.5-2.6 times, compared with 2.7 times last fiscal.” All said, improvement in supply-side variables is an important monitorable and a healthy increase in milk collection remains critical for stability in retail milk prices.
