August 14, 2014
India's dairy producers need to focus on value-added dairy products (VAPDs) in order to increase profits, according to CARE (Credit Analysis & Research Limited) Ratings, a Mumbai-based research & ratings agency.
"The share of VADP in the milk and milk derivatives segment is growing currently at around 25% yearly and is expected to grow at the same rate until 2019-20," said the agency. "Rising consumption, coupled with better margins in the VADPs, are driving dairy players to get into the growth and higher profitable trajectory. Change in demographics and rapid urbanisation have resulted in manifold surge in the demand for VADPs."
Due to health benefits and increased consumerism, milk derivatives like buttermilk, low fat yogurt and flavored milk are currently part of regular consumption. "Profitability in liquid milk space ranges from 4% to 5%, whereas the profitability in VADPs ranges from 12% to 18%," CARE observed.
As per the National Dairy Development Board (NDDB) and Indian ministry of animal husbandry figures, liquid milk has a market share of 73%, followed by 8% for milk powder, 8% for ghee, 4% for ice cream, 3% for butter, and 1% for curd, cheese, flavored milk and panner.
Product innovations are expected to boost India's dairy market which is anticipated to improve industry margins by attaining greater scale, higher capacity use and an increasing contribution from new milk variants.
As per NDDB, the Indian dairy industry is all set to experience high growth rates in the next eight years with demand likely to reach 200 million tonnes by 2022 from 132 million tonnes in 2013.
Presently, only 20% of the milk production comes from the organised sector comprising co-operatives and private dairies.
The key factors driving the growth in the dairy sector include rising disposable incomes, advent of nuclear families and fast/instant food gaining ground in India.
Other factors, such as structural changes in food habits, expansion of fast food chains and popularity of pizzas and pastas, aided the usage of milk variants of mozzarella cheese, processed cheese and flavored milk.
Consumer preference towards VADPs is bringing the dairy sector forward. Besides brown-field/ green-field expansion, global dairy companies are venturing into milk derivatives business in India. The most recent development is the full acquisition of Tirumala Milk Products Pvt Ltd by Groupe Lactalis SA. In addition, French dairy producer, Danone, is increasing its presence in the country with a slew of product launches such as flavored curd and yoghurt.
Other investments include Nestle India's acquisition of 26% stake in Indocon Agro and Allied Activities Pvt Ltd, and Hatsun Agro Products Ltd acquiring a 100% stake in Jyothi Dairy Pvt Ltd. Companies, such as Parag Milk Foods Pvt Ltd and Prabhat Dairy Pvt Ltd, have recently augmented their capacities to meet increased demand of milk products.
CARE also noted that India's consumption history and diversification by dairy players into VADPs are drawing interests of investors which have led to surge in the private equity deals. The dairy companies, including Mother Dairy Fruit And Vegetable Private Ltd, and some private firms, have been rated in the 'AA' and 'A' rating category on account of their superior procurement and marketing channels and high share of VADPs in product portfolio.
During fiscal year 2014-15, the credit profile of CARE rated dairy companies have broadly remained stable.
The entities with the right product mix of liquid milk and VADPs are expected to have better profitability and solvency parameters. Consequently, there is a high possibility of improvement in the credit profiles of such companies given the robust milk procurement and distribution system, the report stated.
