The recent round of milk price hike will restrict the slide in profitability of the organised dairy players, who were facing margin pressure due to higher costs and increased procurement prices.

A latest CRISIL Ratings report showed that the recent hike in retail milk price by ₹2 per litre will limit the slide in profitability of the organised dairy sector to 50 basis points (bps) on-year this fiscal.

This is "despite a higher than anticipated rise in procurement prices, and transport and packaging costs."

"Despite lower profitability, comfortable balance sheets and better working capital management will keep the credit profiles of players stable," the CRISIL analysis said.

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Notably effective August 17, India's largest cooperative dairy player Gujarat Cooperative Milk Marketing Federation Limited (GCMMF), which markets Amul milk and Delhi-based Mother Dairy, had announced ₹2 per litre of price hike for retail pouch milk across markets in the country.

Surge in prices

Anand Kulkarni, Director, CRISIL Ratings, said, "Milk procurement prices have shot up 8-10 per cent 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."

However, Kulkarni further stated, "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."

CRISIL’s analysis

Disruptions in artificial insemination, cattle breeding and vaccination schedules had affected the supplies last year. But these issues are expected to be ironed out this year. This will result into better milk supply during the flush season generally from December to mid-March.

The CRISIL analysis also noted that the demand drivers remained strong. "While demand for liquid milk continues to be robust, that for value-added products 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 per cent," it added.

The analysis also showed that the post-pandemic revival in HoReCa (hotel, restaurant and café) segment would further prop up revenue growth for the dairy industry.

"Volume growth, along with increase in average realisations by 6-6.5 per cent this fiscal, following the hikes in retail milk prices will translate to 13-14 per cent higher revenue for organised dairy players," it said.

The dairies are expected to have improved working capital position following a strong domestic demand for value-added products and liquid milk. This is expected to limit exports of skimmed milk powder (SMP) and prune inventory, given that SMP inventory accounts for 70-75 per cent of the working capital requirement of dairies.

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