Dairy industry reels under input cost pressures; price hikes may continue: ICRA

Indian dairy companies are estimated to achieve revenue growth of 12-14% on a year-on-year basis in the financial year 2022-23, backed by strong revival in demand, especially the HoReCa segment and increase in retail prices, according to a report by ICRA.

However, operating profit margins are expected to contract by 120-160 basis points on a year-on-year basis as the retail price hikes are expected to provide only a partial support to the input cost pressures.

While credit metrics of dairy companies are likely to see some moderation, ICRA expects the industry to maintain a stable credit profile, supported by favourable demand outlook and moderate debt levels.

Milk production yields in the first half of FY23 were hampered by the prevalence of the Lumpy Skin Disease (LSD), notably among cows in the northern states.

Although a successful immunisation programme helped contain the disease, ICRA expects a slight moderation in milk production growth to 4-5% in FY23.

"Raw milk procurement prices increased in FY2022, led by healthy demand and constricted milk availability as a result of disruption in cattle insemination programmes earlier during the pandemic. Raw milk prices have continued to rise in the current fiscal too, owing to rising cattle feed and fodder prices for dairy farmers. While erratic monsoons in various parts of the country impacted fodder availability, rising prices of grains like maize, wheat and soyabean led to soaring cattle feed concentrate prices," says Sheetal Sharad, sector head and vice-president, ICRA.

"The prevalence of LSD briefly limited milk availability. Furthermore, companies faced rising logistics, processing and packaging expenses. Given the healthy demand expectations over the festive and wedding seasons, ICRA anticipates raw milk prices to stay firm in H2 FY2023 as opposed to a typical correction in the flush season. Retail prices for dairy products have thus gone up in the current fiscal to make up for higher costs," Sharad adds.

Revenues from value added products witnessed a healthy year-on-year growth of 18-20% in FY22, the ratings agency says. The early commencement of summer demand, relatively higher temperatures and the waning impact of the pandemic boosted growth. ICRA anticipates the value added products segment to continue to grow at 18-20% in FY2023 as well.

"Revenues in the liquid milk segment are predicted to expand at a faster rate of 7-9% in FY2023, owing to growing per capita consumption and rising realisations. However, on the flip side, increased input costs for dairy companies continue to be a worry. Thus, more retail price hikes could follow in the backdrop of the current inflationary scenario," warns ICRA.