How dairy companies recorded sharp rebound but lost some cream

India’s dairy industry, which was once characterised as largely unorganised sector, has changed significantly over the years with farmer cooperatives and the emergence of private milk producers who have an eye on not just pushing branded liquid milk but also the more lucrative value-added products.

The organised sector players had seen a sharp slowdown in revenue growth that barely moved in the year ended March 31, 2021, rising just about 1% during the initial burst of the Covid-19 pandemic coupled with the lockdowns and prolonged impact on supply chain.

However, the low base of the previous year is likely to help the revenue of India’s organised dairy industry to rebound by a solid 12% to go up to Rs 1.6 lakh crore, according to rating agency CRISIL.

This is on the back of strong demand recovery in most value-added products, steady liquid milk sales and retail price hikes during the fiscal.

What’s encouraging is that steady demand for both value-added products, which comprise around one-third share of organised sector sales, and liquid milk is likely to lead to 5-6% growth next fiscal, too, in line with the pre-pandemic trend.

While some large milk companies have undertaken price hikes, as the cost of transportation and other expenses have gone up, there could be more price hikes in the near future that may further provide a revenue upside.

“Operating profitability, however, will be set back to the pre-pandemic level of 5-5.5% in the next two fiscals — from the peak of 6% seen in fiscal 2021 — because of high raw milk prices, along with higher transportation and packaging costs, and despite dairies increasing retail product prices by 3-4% across categories this year,” according to CRISIL.

Demand for value-added products such as ghee, butter, cheese, curd, and SMP saw strong recovery amid the festive and wedding season in third quarter of this fiscal and reopening of commercial establishments on a pan-India basis.

Indeed, CRISIL estimates that value-added products sales growth will rocket 17-18% this fiscal on a lower base of last fiscal. This, in turn, will be driven by strong volume growth of 13-14% as hotels, restaurants and café (HORECA segment, accounting for a fifth of organised sector sales) have opened up, and festive and wedding celebrations, as well as home consumption have increased. The second and third Covid-19 waves have had no material impact on most dairy segments, with food-delivery services and eateries continuing to function despite local restrictions.

However, the first and second Covid-19 waves had coincided with peak summer season for ice-creams that account for around 14% of overall value-added products sales and partially impacted demand.

On the other hand, liquid milk sales volume is expected to remain steady at 6% this fiscal. That, coupled with retail price hikes already taken, would lead to sales growth of 10% this fiscal.