Indian milk production is gauged to increase by 5-6 percent in the financial year 2021-22, aided by normal monsoon and early onset of the flush season in some regions of the country.
According to Icra’s report, the industry-wide demand to grow by 9-11 percent in the financial year 2021-22.
The report stated that the dairy industry is expected to grow by 9-11 percent in 2021-22, driven by a revival in economic activities, increasing per capita consumption of milk and milk products, changing dietary preferences due to rising urbanization.
"Demand recovery was stunted by the resurgence in COVID-19 cases in the first quarter FY22, and the impact was severe in institutional segments. However, there has been a healthy revival in demand in recent months with a sharp fall in fresh COVID cases and resumption in business activities. The organized dairy segment, which accounts for 26-30 percent of the industry has seen faster growth compared to the unorganized segment and we expect the trend to continue," Sheetal Sharad, Vice President and Sector Head at Icra, said.
Revival of Diary Industry
After the impact of the epidemic, the industry has seen a steady recovery in consumption throughout end segments. The report informed that revival in economic activities, increasing per capita consumption of milk and milk products, changing dietary preferences due to rising urbanization, and continued government support to the dairy industry will drive demand.
"With the expected recovery in demand during the festive season, skimmed milk powder (SMP) prices are likely to improve and lead to the liquidation of stocks in FY22. Raw milk procurement prices, which were subdued in FY21 due to weak demand, have increased in the current fiscal supported by a recovery in demand. Nevertheless, the higher procurement costs are not compensated by an equivalent increase in selling prices, which coupled with elevated fuel costs will result in contraction of 150 bps margins for dairy players in FY22," Sharad added.
Growth over the medium term would continue to be driven by demand from stable liquid milk consumption growth and steady recovery in institutional demand for the VADPs segment.
Government Supporting the Sector
Most industry players continue to maintain high SMP inventory levels as the procurement remained high in H1 FY22. As per the report, besides this, many soft SMP prices are expected to result in additional working capital debt requirements, though inventory levels are expected to decline from FY23 onwards as demand-supply dynamics normalize, it added.
The rating agency also expects private players to continue their capital expenditure on the VADPs segment, given its better margins.
The report stated that the financial risk profiles of pure-play ice-cream manufacturers are expected to be under pressure in the near term given the slow pace of recovery, it added. Further, the industry will remain supported by the government's continued support and favorable cost of funds leading to growing processing capabilities. Despite moderation in margins and increase in long-term debt and working capital debt (mainly due to SMP stocks), coverage indicators for integrated players are expected to be comfortable, it said.