The revenue of the Indian dairy industry will be flat in FY 2020-2021, stated a report by rating agency, Crisil. This is mainly due to weak sales of value-added products (VAP). While this condition prevailed for some time now, it was aggravated during COVID-19-induced lockdown.
Sales of products like ice cream, cheese, flavoured milk, curd and yoghurt among others, which are more profitable than liquid milk and account for over a third of the organised dairy sector’s revenue, are expected to de-grow 2-3 per cent this fiscal. That would reduce operating profitability by as much as 50-75 basis points (bps), the agency claimed. This report comes at the time when some dairy brands have seen a rise in demand for value added products except for ice cream.
The analysis is based on analysis of 65 CRISIL-rated dairies that account for slightly more than two-thirds of the Rs 1.5 lakh crore revenue of the organised dairy segment, and assumes a return to normalcy in the second quarter. These dairies will touch a five-year low of approximately 4 times this fiscal.
Sameer Charania, Director, CRISIL Ratings, said, “Steady demand for milk and higher VAP prices (hiked 10 per cent in the second half of last fiscal) will help partially offset lower VAP volume, and arrest any decline in the dairy sector’s revenue. Further softer input prices will provide some respite and limit the fall in operating profitability to 50-75 basis points.”
The report further stated that these unsold products will mostly probably increase the working capital needs of dairies and test the liquidity of mid-sized ones (revenue below Rs 500 crore).
The two-month-long closure of hotels and restaurants because of the nationwide lockdown hit the sales of value added products, which account for almost 20
per cent of the organised dairy segment’s revenue. Moreover, logistical challenges and apprehensions about consuming cold products during COVID-19 times, hurt the sales in the first quarter, which is the peak-demand season.
The flush season (typically from October to March), which sees higher production, got extended by a couple of months leading to oversupply of milk in April and May. Consequently, dairies, especially cooperatives that are better off in terms of liquidity and working capital, have converted such excess milk into skimmed milk powder (SMP).