Dairies to log 5-6% growth this fiscal, but lag pre-Covid level: Crisil

Revenue of the organised dairy sector in India, after churning to a decadal-low growth of 1 per cent last fiscal, is expected to grow 5-6 per cent to Rs 1.5 lakh crore this fiscal, Crisil said on Wednesday.

Healthy demand revival in value added products (VAP, 30-35 per cent of organized sector revenue) post pandemic effect last fiscal, lower restrictions as compared with the earlier covid wave, and steady demand for liquid milk (65-70 per cent or organized sector revenue) will help support overall growth in the current fiscal, the ratings agency said in a report on the sector.

With increasing demand, milk procurement prices are expected to increase; albeit higher sale of VAP will buttress material impact on profitability. Besides, skimmed milk powder (SMP) inventory will also decline by 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', the report said.

The report is based on an analysis of 65 CRISIL-rated dairies, which account for over two-thirds of the organised segment revenue.

As per the analysis, VAP will see 7 per cent growth this fiscal compared with a contraction of 3 per cent last fiscal. Demand for most VAP products such as ghee, butter, cheese and milk powder is expected to remain healthy.

According to Anuj Sethi, Senior Director, CRISIL Ratings, "VAP revenue de-grew last fiscal because of the complete shutdown in the first quarter, which impacted the hotels, restaurants and cafe segment (20 per cent of organised sector revenue). This fiscal, we expect it to rebound on the back of increased home consumption and continuing food-delivery services even in regions seeing lockdowns."

Crisil said, local restrictions however could delay demand recovery in certain VAP categories such as flavoured milk, buttermilk, lassi and ice cream, where sales had rebounded to 70-80 per cent of pre-pandemic levels in March 2021.

Sales of these products, which typically peak in summer, are likely to be affected if restrictions are prolonged the way it was last fiscal. Even so, the impact is unlikely to be significant on overall growth, as these comprise only 14 per cent of overall VAP sales.

Liquid milk sales is expected to grow 5 per cent this fiscal compared with 3 per cent last fiscal, backed by increased consumption by households and non-households, supporting overall growth.

As for milk procurement prices, they are expected to be 5-7 per cent higher year-on-year. Subdued demand had weighed on the prices last fiscal. Overall, operating profitability of dairies will moderate slightly to 5-5.25 per cent, from 5.7 per cent estimated for last fiscal.

"With demand for VAP and liquid milk improving, SMP inventory, which had increased 7 per cent on-year last fiscal, is expected to moderate this fiscal. About 70-75 per cent of the working capital requirement of dairies consists of SMP inventory. As a result, we expect their working capital requirement to normalise by the end of this fiscal," said Tanvi Shah, Associate Director, CRISIL Ratings.

Capital spending by dairies is expected to be prudent, though higher than last fiscal, resulting in only a modest increase in overall debt levels. That will help keep credit profiles stable. Key debt metrics such as gearing and interest cover are estimated at 1.34 times and 5.0 times, respectively, this fiscal, compared with 1.25 times and 6.32 times last fiscal.

How the pandemic and restrictions pan out, and their impact on VAP sales will bear watching in the road ahead, the ratings agency said.