‘Higher prices, demand for value added products to drive dairy firms’ revenues’

Companies will ramp up capital expenditure by about 10% this fiscal and a sizeable portion of it will be to enhance capacities for value-added products, a segment that continues to outpace the traditional liquid milk category
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AMIT DAVE

Indian dairy companies will see revenue grow 11-13% this fiscal, compared with about 10 per cent last fiscal, on strong demand, increasing share of value-added products (VAP) and aided by higher retail milk prices.

Profitability, too, will improve 20-30 basis points (bps), aided by better realisations, healthy milk supply keeping procurement prices in check and a favourable shift towards VAP, which fetch higher margins, Crisil Ratings said, based on the analysis of 34 dairy companies which account for about 60 per cent of the organised segment revenues.

Further, to capitalise on the healthy growth momentum, companies will ramp up capital expenditure (capex) by about 10 per cent this fiscal and a sizeable portion of this capex will be to enhance capacities for VAP, a segment that continues to outpace the traditional liquid milk category, Crisil said. Despite higher capex, credit profiles will remain stable because of improving cash flows and strong balance sheets.

“The VAP segment is expected to clock a strong 16-18 per cent growth this fiscal, driven by changing consumer tastes, rising nutritional awareness and preference for protein rich diets. Consequently, its share in the product mix will increase to around 45 per cent from about 40 per cent a couple of years back. In contrast, growth for liquid milk should be stable at around 10 per cent. Overall, improved product mix, healthy volumes and rising retail prices will be the key growth drivers,” said Shounak Chakravarty, Director, Crisil Ratings in a statement,

The forecast of a favourable monsoon, coupled with stable fodder prices and increased adoption of artificial insemination to boost productivity will also support the dairies, ensuring steady availability of raw milk, thereby limiting the increase in procurement prices to a modest 2-3 per cent this fiscal.

“Profitability will benefit from improving realisations and a modest increase in procurement prices resulting in a 20-30 bps improvement in operating margin to around 5.3 per cent, supporting overall cash generation. The prospects and healthy demand supply dynamics are already encouraging dairies to ramp up capex,” it said.

Rucha Narkar, Associate Director, Crisil Ratings said “Capital expenditure of dairy companies is expected to rise around 10 per cent this fiscal to about Rs 3,400 crore. The VAP segment will account for more than 60 per cent of the overall capex — a trend seen over the past three fiscals — given its higher growth potential. The balance capex will be for augmenting liquid milk processing capacities and shoring up supply-chain infrastructure. Despite higher debt levels owing to the capex, credit profiles will remain stable, supported by strong balance sheets and healthy cash accrual.”

Crisil further said the debt protection metrics should also remain comfortable this fiscal, as evidenced by an expected interest coverage ratio of above eight times and net cash accruals/repayment obligation of around 2.6 times as against 7.6 times and 2.8 times, respectively, in the previous fiscal. Further, capital structure should remain steady, with gearing at about 1.30 times compared with 1.26 times last fiscal. All said, a normal monsoon and timely ramp-up of newly commissioned capacities will bear watching, it said.