September 5, 2013

 

India's dairy sector to benefit from involvement of foreign companies

 

 

Foreign entities have looked to India as an important dairy market with potential for fast growth in value-added products such as cheese and milk.

 

"Of the top 20 dairy companies in the world, six have already set foot in India in some way or the other many others are gauging the market, considering options to enter, although the market here is very complex," said Shiva Mudgil, assistant vice-president (food and agribusiness research and advisory), at Rabo India Finance.

 

Rabobank expects value added dairy products such as yogurt, paneer, cheese, ice cream and baby food to grow at a CAGR (compound annual growth rate) of 20% to 30% in the next four to five years.

 

Kuldeep Saluja, managing director of Delhi-based Sterling Agro Industries, said, "Apart from Danone Food and Beverages (India), no one has yet set up production base in India. Danone, too, is outsourcing parts of its production, while New Zealand's Fonterra is exploring possibilities of tying up with local partners. Outsourcing of production would only help local players."

 

In 2012-13, India's formal dairy market size was US$10 billion. The formal market comprises organised players such as cooperatives and private entities which control the supply chain linkages. Rabobank expects this segment to grow at a CAGR of 13% to 15% until 2019-20.

 

According to Sandeep Aggarwal, director of SMC Foods, the foreign players would opt for a partnership model with local ones, and not go for direct procurement from farmers. "They would focus on high-end value-added products like flavoured yogurt, very popular in the international market. Right now, 90-95% of the Indian market is traditional liquid milk and the remaining is value-added products. Entry of foreign players will drive demand in this segment and open the value-added products segment for Indian players as well," he explained.

 

Most local entities feel that foreign dairy players can help expand the market. However, they point out that these parties are not keen on backward integration; they would prefer tying up with local players for production and focus on marketing and distribution.

 

Due to the rise in disposable income, there is heightened consumer interest in higher protein diets. With entities paying attention to this segment, the sector is set to grow further over the years.

 

Organised retail selling of value-added dairy products and the food service segment have helped the sector grow. In addition, the growth of food and coffee chains such as Cafe Coffee Day, Pizza Hut, Dominos, KFC and McDonald's are expected to help increase the consumption of value-added dairy products.

 

Production growth in the milk segment has been around 4% CAGR in the past few years, said R G Chandramogan, chairman and managing director of Hatsun Agro Products. In comparison, consumption growth has been expanding at 11% CAGR, said Saluja, adding that the Indian market would continue to grow for the next 20-25 years.

 

"After China, India is a very big dairy market. With growth in their home-markets becoming static, foreign players need to crack another big market, which is India," said J Agarwal, director of Bhole Baba Dairy Products, which sells milk and milk products under the Krishna brand.

 

While local entities are not worried about the entry of foreign players, they are concerned about the impact of the proposed free trade agreement (FTA) with the EU. "We strongly oppose the FTA with EU, and foreign players should not come through that route. It will only lead to dumping of dairy products in the Indian market," said Saluja.

 

In India, cooperatives will still hold a large share in the organised dairy market in the coming years with some small regional entities still managing to have a strong hold. This means that India's organised dairy industry will still likely be the smallest formal dairy market among Brazil, Russia, India and China by 2017 in value terms, the Rabobank's report noted.

 

Currently, 70-80% of milk is procured from small and marginal farmers. Rabobank expects this procurement pattern of milk to continue over the next decade as well. Foreign players might find this challenging and it will take some time for them to be successful in India.