Dairies to milk 13-14percent revenue growth this fiscal on strong demand

31 July 2024 India’s dairy industry will see healthy revenue growth of 13-14% this fiscal, as strong consumer demand continues along with an improved supply of raw milk. While the demand will be supported by rising consumption of value-added products (VAP)1, the ample milk supply will be driven by good monsoon prospects.

A rise in raw milk supply will also lead to higher working capital requirements for dairy players. That, along with continued capital expenditure (capex) by organised dairies over the next two fiscals will result in debt levels inching up. Nevertheless, credit profiles will be stable and supported by strong balance sheets.

A CRISIL Rating analysis of 38 dairies accounting for ~60% of the organized segment revenue indicates as much.

Says Mohit Makhija, Senior Director, CRISIL Ratings, “Amidst modest growth of 2-4% in realization, the dairy industry’s revenues are seen rising on healthy 9-11% growth in volumes. VAP segment – a 40% contributor to the industry revenues – will be the primary driver, fueled by rising income levels and consumer transition towards branded products. Rising sales of VAP and liquid milk in the hotels, restaurants, and cafes (HORECA) segment will also support the revenue growth.”

The strong consumer demand will be complemented by improved raw milk supply which is expected to increase ~5%2 this fiscal, due to better cattle fodder availability, given the favorable monsoon outlook this fiscal. Milk availability will be further supported by the normalization of artificial insemination and vaccination processes after facing disruption in the past. Additionally, various measures such as genetic improvement in indigenous breeds and an increase in the fertility rate of higher yield breeds will help enhance milk supply.

Steady milk procurement prices augur well for the profitability of dairies, and their operating profitability is expected to improve ~40 basis points to ~6% this fiscal.

Says Rucha Narkar, Associate Director, CRISIL Ratings, “While the revenue and profitability of dairies will improve this fiscal, debt levels are also expected to increase, mainly for two reasons. One, a healthy milk supply during flush season will result in higher skimmed milk powder (SMP) inventory which will be consumed over the rest of the year. The SMP inventory typically accounts for ~75% of the working capital debt of dairies. Two, continued milk demand will require increased debt-funded investments for new milk procurement, milk processing capacities, and expanding distribution network.”

Despite additional debt contracted for working capital and capex3, the credit profiles are expected to remain stable and supported by low leverage. The gearing of the players is expected to remain at 1.8 times as of March 31, 2025, compared with 1.7 times a year earlier. Debt protection metrics are likely to remain comfortable, too, with the interest coverage ratio seen at 10-11 times this fiscal.