Industry Risk Score: Dairy

Executive Summary

Domestic dairy demand is expected to be healthy on the back of rising disposable income, increasing urbanisation and socio-economic growth in the country. Further, demand-side risks are minimal, as dairy products are essential commodities and cannot be easily replaced with any other beverage or product.

The industry is highly fragmented, but is witnessing a structural movement towards the organised sector on the back of urbanisation and consequent shift in customer preferences towards branded products. Both cooperatives and private dairies have been expanding their procurement and processing capacities.

As of FY 2016-17, co-operatives and private dairies procured about 20% of the milk produced in the country, while the rest was sold and consumed in the unorganised market itself. For the purpose of this report, we would be focusing on the organised market. The organised dairy market size stood at Rs. 1.2 lakh crores as of FY 2016-17 .

Over the last decade, where raw milk procurement cost has increased by 11.7% (10-year CAGR), wholesale milk prices have also been grown by 9.5% . Thus, Acuite believes that any rise in raw milk cost will not be a major risk to the industry, as it will be passed on to the consumers as was done in the past.

Cooperatives and private dairies in the industry, specifically in liquid milk category, mostly compete within their own geographies owing to the perishable nature of the product, which needs to be procured, processed, stored and sold quickly. Hence, local established players are better positioned to compete with new entrants or pan-India players like Amul or Mother Dairy.

India's average milkyield stands at 2.8 kg/day , which is significantly lower than the global average of 24-25 kg/day. Even the average milk yield of the or exotic crossbred cows, that are the milk source for most of the large organised players and comprising ~28% of the milk producing cattle, stands at 7.5 kg/day. The same is primarily due to inadequate cattle feed/fodder resources (fodder deficit of about 30 per cent), poor nutrition / feed supplements and infectious diseases like mastitis, brucellosis. These factors impact the milk productivity to the extent of being as low as below 1 kg/day from 10-15 kg/day. These challenges have the potential to impact the milk producers / farmers profitability adversely, if left unaddressed. However, the current measures taken by the government under National Dairy Plan Phase I in terms of improvement in productivity of milch animals are: increased availability of artificial insemination for better genetic breed and animal health services at village level, ration balancing advisory services, fodder management - including making available green fodder / silage under national fodder scheme at subsidised rates (being implemented by State Governments), initiatives for improving the fodder yield with certified fodder seed among others.

Key Risks & Attributes

  • Low milch animal yield
  • Fodder quality and prices
  • Regional concentration


Demand & Supply Scenario

4/6

The dairy industry contributed roughly 4.5% to India's gross domestic product (GDP; at constant prices) and stood at Rs. 5.6 lakh crore in FY 2016-17. Almost all the dairy produce is consumed with in the country, with less than half a percent contribution to the international dairy trade market.With an annual output of 165.4 million metric tonne (MMT) in FY 2016-17, India is one of the leading milk producing nations in the world, contributing almost 20% to world production. Domestic production has grown at 5% CAGR over the last five years in line with the growing demand.

India's estimated demand for milk is likely to grow at 5% CAGR from 155.0 MMT in FY 2016-17 to 200.0 MMT in FY 2021-22. This will largely be driven by the growth in urbanisation, higher disposable income, growing young population and socio-economic growth. Increasing presence of food retailing and quick service restaurants has also boosted demand. Demand-side risks are minimal, as dairy products form part of essential commodities and cannot be easily replaced with any other beverage or product owing to their nutritional advantages and lower cost.

Traditional products like fluid milk and ghee constitute about 46% and 28% of the total dairy demand, respectively. The rest is contributed by value added dairy products (VADPs) like curd(7%), butter and condensed milk (6% each), skimmed milk powder (4%), paneer (2%), and cheese & other products (1%).

As VADPs enjoy high margins of 25-45%, against low margins of 4-6% of liquid milk, organised players have increased their focus on this segment. Going forward, this segment is expected to grow higher at 15-30% than the liquid milk segment at 4%-5% . Thus, to mitigate the risk of losing market share, players will have to improve their ability to cater to the VADP segment.

Domestic milk prices are largely independent of the global milk price movements. While global milk prices have been extremely volatile, domestic prices have grown at a steady rate keeping pace with the rise in cattle feed and raw milk procurement prices. Though rising raw milk cost is a risk to the industry's profitability, organised players have been able to successfully pass on the rise in costs to the consumers. Over the last decade, where raw milk procurement cost has increased by 11.7% (10-year CAGR), wholesale milk prices have also grown by 9.5% . Thus, Acuite believes that for the large organised players raw milk cost maynot pose a risk, though offset to some extent, if it can be passed on to the consumers, as done in the past; however, competition among the brands (national as well as regional) impacts the profitability.

Supply-side concerns include inadequate cattle feed across the seasons, poor cattle yield, gaps in the transport, chilling facilities to maintain the quality of milk, inadequate veterinary services among others. These are long-term concerns and would take significant investment and government support to be surmounted. While the industry is well poised to meet the increasing demand, these supply side constraints may prove to cap individual player's growth and margins.

Acuité believes that the Indian dairy industry is well poised to cater to the increasing domestic demand, but the growth and margins are under pressure with challenges related tomilkyield and availability of cattle feed. The growing VADP segment is expected to boost the industry's growth going forward. Thus, demand and supply risk is moderate for the medium term.



Nature & Extent of Competition

5/6

The Indian dairy industry is highly fragmented with organised players comprising only 20-25% of the market, 40-45% being captively consumed and the rest being sold by unorganized or small regional players . The pattern is reverse in most developed nations like New Zealand etc, where 90% of the surplus milk is processed through the organised sector.

However, the industry is witnessing a structural movement towards the organised sector on the back of urbanisation and consequent shift in customer preferences towards branded products. Both cooperatives and private dairies have been expanding their procurement and processing capacities and are continuously looking at fresh investments to meet the growing demand. While the total installed processing capacity of the cooperatives has grown to approximately 66 Million Liters Per Day (MLPD) in 2016 from 36 MLPD in 2006, private dairies installed capacity has grown higher to 73 MLPD in 2016 from 46 MLPD in 2006.

With regards to the organised players, competition is limited as most players have regional presence. Apart from Amul, no other brand has a pan-India market presence. Cooperatives and private dairies in the industry, specifically in liquid milk category, mostly compete within their own geographies owing to the perishable nature of the product. Hence, each region has its own leading brands, e.g., Amul in Gujarat, Nandini in Karnataka, Mother Dairy in Delhi, Verka in Punjab, Parag in Uttar Pradesh, Saras in Rajasthan, Milma in Kerala, Vijaya in Andhra Pradesh and Telangana, and Sanchi in Madhya Pradesh. Hence, local established players are better positioned to compete with new entrants or players like Amul or Mother Dairy, who are expanding their presence across the country. However, in VADP's, there is fierce competition among Indian players and MNC's like Amul, Vijaya, Vadilal, Britannia, Parag, Kraft among others particularly for cheese, butter, paneer, flavoured milks, ice cream among others.

Acuité believes that though the overall industry is highly fragmented and less capital intensive, the competition in the organised segment is low, players being region specific. Hence, well-entrenched cooperative and private players in their own regions will continue to have leadership position.



Input Related Risk

3/6

Availability of raw milk and its prices are critical to the industry. In winters, higher milk yields leads to excess milk production, while in summers, lower milk yields result in deficient milk production. Thus, excess liquid milk in winter season is processed into Skimmed Milk Powder (SMP), which has a greater shelf life and is converted back to liquid milk in lean summer season. Thus, volatility in SMP prices both domestic and globally have an impact on the profitability.

To mitigate the availability risk, dairy processing units are set up in proximity to milk producing areas. Owing to regional concentration of most of the players, any adverse change in the local economy and monsoons poses a risk to their business prospects. While rising raw milk prices impact the industry adversely, organised players have been able to successfully pass on the rise in costs to the customers. Over the last decade, where raw milk procurement cost has increased by 11.7% (10-year CAGR), wholesale milk prices have also grown by 9.5% . Thus, any rise is raw milk cost may not be a major risk to the industry, as it will be passed on to the consumers as done in the past.

Despite having the largest cattle and buffalo population, about one-fifth of the world, the industry faces challenges on the production front. India's average cattle yield stands at 2.8 kg/day, which is significantly lower than the global average of 24-25 kg/day. Even the average milk yield of the or exotic crossbred cows that are the milk source for most of the large organised players and comprising ~28% of the milk producing cattle, stands at 7.5 kg/day. Another challenge is inadequate cattle feed. There is an urgent need to improve fodder resources and minerals and cattle health services to meet the growing domestic dairy demand.

On the back of various measures initiated by the National Dairy Development Board, the average yield of India's non-descript indigenous cattle only cattle improved to 5.3kg/day in FY 2016-17 from 2.3 kg/day in FY 2012-13. For buffalo, it has improved to 5.2 kg/day from 4.8 kg/day. Yield from crossbred animals has also improved to 7.5 kg/day in from 7.0 kg/day. These measures include ration balancing programme (for balanced feeding with local feed resources and minerals), progeny testing, pedigree selection, import of bulls (for cross breeding), fodder development and wastage reduction of dry fodder through enrichment and densification.

As almost all the players are region specific, any adverse change in the local economy and monsoons poses a risk to their business prospects.

Acuité believes that the above challenges can potentially impact the industry, if left unaddressed. these are long-term concerns and are not likely to have any immediate implication on industry's ability to meet the growing demand.



Regulatory Risk

5/6

Considering the industry's significant contribution towards the economy and dependency of millions of farmers on it, the government has always been proactive in supporting the industry and the farmers alike with various measures on a regular basis including subsidised green fodder for the drought / drought like villages to ensure livelihood of the cattle and the dependant people, improving veterinary health services by State Governments, higher availability of artificial insemination for better genetic quality calves among others.

Being a part of the essential commodities, there is no tax (nil rate under Goods and Services Tax, GST) on fresh milk. While, GST is applicable on the VADP segment, the rates are in the lower slab.

With a minuscule contribution to the international dairy trade market, the government's policy orientation for dairy products has been neutral on both exports and imports front, with limited barriers to import as well as no subsidies for exports.

Acuité believes that the industry being of a national importance, benefits from various government measures and support. Also, the neutral stance of government on international dairy trade makes the regulatory risk substantially low.



Technology Risk

5/6

Though there are no major substitutes to dairy products,with increased awareness of animal cruelty for dairy production (artificial insemination, milking regimens, and excess dose of drugs), with innovation and enhanced processes, vegan (non-dairy) products like soya milk, plant-based milks or yogurts, non-milk desserts, etc.,have entered the market. However, this segment currently is very small and does not pose any threat in the immediate future.



Operating Margin

2/6

The Operating Margin of the industry are very low and have ranged between 4.60% to 6.21% in the last three years. The median Operating Margin stood at 5.61% in FY 2016-17. Inadequate cattle feed and poor milkyield continue to supress the margins.



Interest Coverage

6/6

Given the limited leverage in the industry the Interest Coverage is highly favourable. The median Interest Coverage for FY 2017 was 3.27 times



Return on Capital Employed

2/6

The median ROCE for the industry for FY 2017 stood at 6.79% marking a very limited change as compared to 6.86% in FY 2015. The industry is not very capital intensive and returns have remained range bound, as mentioned above.



Debt / Equity

6/6

The industry had an average gearing of 0.94 during the study period of 3 years times indicating limited reliance on borrowed funds and poor availability of organised credit.



GCA

6/6

The median GCA of the industry in FY 2017 was 50 days.



Industry Financials and Medians

Fact Sheet (As on Year Ended March 31st)SUM Unit 201703 201603 201503
Net Sales Rs. Cr. 31,256.44 28,471.67 26,948.45
OPBDIT (Excl. NOI) Rs. Cr. 1,898.35 1,909.31 1,360.80
Depreciation Rs. Cr. 509.15 435.89 386.83
PAT Rs. Cr. 755.03 736.97 495.77
Net Cash Accruals Rs. Cr. 1,264.18 1,172.86 882.60
Networth Rs. Cr. 5,106.52 4,010.90 2,854.18
Total Debt Rs. Cr. 4,266.46 3,874.38 4,442.37


Median Unit 201703 201603 201503
EBITDA Margin % 5.61 6.21 4.60
PAT Margin % 2.50 2.35 1.40
ROCE % 6.79 8.11 6.86
Interest Coverage Times 3.27 2.84 2.57
Debt to Equity Times 0.79 0.97 1.06
Debt to EBITDA Times 2.42 2.07 3.20
GCA Days Days 55.79 51.23 44.29


The entities considered in the static pool are as under:
List of Companies

Company Name
Mother Dairy Fruit & Vegetables Pvt. Ltd.
Kwality Ltd.
HatsunAgro Products Ltd.
Heritage Foods Ltd.
Tirumala Milk Products Pvt. Ltd.
Sterling AgroInds. Ltd.
Parag Milk Foods Ltd.
Dodla Dairy Ltd.
Prabhat Dairy Ltd.
Creamline Dairy Products Ltd.
Govind Milk & Milk Products Pvt. Ltd.
Vadilal Industries Ltd.
Milkfood Ltd
Tasty Dairy Specialities Ltd.
Umang Dairies Ltd
Vidya Dairy


IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


Disclaimer:

Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.



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