Milk industry to witness higher growth after decadal low of 1% growth in 2020-21

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  Milk industry to witness higher growth after decadal low of 1% growth in 2020-21

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1. The story: India has the world's largest dairy industry. But its revenues in 2020-21 grew at a decadal-low of just 1%. Now, experts estimate the industry will grow by 5-6% to Rs 1.5 lakh crore in 2021-22. Healthy demand revival in value added products (VAP, 30-35% of organized sector revenue) post pandemic effect, lower restrictions as compared with the earlier covid wave, and steady demand for liquid milk (65-70% or organized sector revenue) will support overall growth.
2. Consumption pattern: Milk is consumed in two forms – liquid milk and by converting into VAP. Dairies also convert liquid milk into skimmed milk powder (SMP) for use in the lean season, when milk supplies decline. SMP can be reconverted into liquid milk or VAP, and has a shelf life of 12-18 months. Interest coverage last fiscal was supported by up to 4% interest subvention on working capital loans to dairy co-operatives.
3. Expectations: With increasing demand, milk procurement prices will increase, and higher sale of VAP will help manage the impact on profitability. Skimmed milk powder (SMP) inventory will decline by the end of this fiscal from the peak seen last fiscal, easing working capital borrowings. Almost stable profitability, controlled working capital and prudent capital spend will keep credit profiles of dairies ‘stable’. (This is as per an analysis of 65 CRISIL-rated dairies) India's demand for most VAP products such as ghee, butter, cheese and milk powder is expected to remain healthy.
4. VAP revenues matter: VAP revenue de-grew in 2020-21 due to the complete shutdown in the first quarter, which impacted the hotels, restaurants and café segment (~20% of organised sector revenue). In 2021-22, increased home consumption and continuing food-delivery services even in regions seeing lockdowns will change the scene.
5. Some categories impacted: The various local restrictions could delay demand recovery in certain VAP categories such as flavoured milk, buttermilk, lassi and ice cream. Sales of these peak in summer, and are likely to be affected if restrictions are prolonged. These comprise 14% of overall VAP sales. Liquid milk sales will grow ~5% this fiscal compared with ~3% last fiscal, due to increased consumption by households and non-households, supporting overall growth. Milk procurement prices will be 5-7% higher on-year. Subdued demand had pushed prices down last year.
6. Summary: Capital spending by dairies may remain prudent, though higher than last year, resulting in only a modest increase in overall debt levels. That will keep credit profiles stable. Key debt metrics such as gearing and interest cover are estimated at 1.34 times and ~5.0 times, compared with 1.25 times and ~6.32 times last fiscal.  

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