India's organised dairy sector is expected to witness a strong revenue growth of 13-15 per cent in the current financial year, driven by sustained demand, healthy volume growth and gradual price increases, according to a new report by CRISIL Ratings.
The ratings agency expects revenue growth to accelerate by 200-400 basis points over the estimated around 11 per cent growth recorded in the previous fiscal. The growth will be supported by 8-10 per cent volume expansion, reflecting the essential nature of milk and traditional dairy products such as butter and ghee, along with rising demand for value-added dairy products.
CRISIL's assessment is based on an analysis of 37 organised dairy companies, which together account for nearly 60 per cent of the organised dairy sector's revenue.
Milk prices likely to rise 4-5%
According to Shounak Chakravarty, Director, CRISIL Ratings, the emergence of El Niño conditions, resulting in a harsh summer and below-average monsoon, is expected to affect cattle productivity during the current fiscal. Along with rising fodder costs, this is likely to slow raw milk production growth to 4 per cent year-on-year, compared with a compound annual growth rate of about 5 per cent between FY20 and FY25.
As a result, raw milk procurement prices are expected to increase by 4-5 per cent. Dairy companies are likely to pass on these higher costs to consumers in phases, with sharper price increases in value-added product categories. Overall, average retail prices across milk product segments are projected to rise by 5-6 per cent this fiscal.
Value-added dairy products to drive demand
Despite higher prices, CRISIL expects demand to remain resilient, supported by the expanding portfolio of value-added dairy products. Companies are increasing their focus on protein-rich and probiotic offerings, reflecting growing consumer awareness about health and nutrition.
Although value-added products currently account for less than 5 per cent of the dairy market, the segment is expected to grow at more than 20 per cent in the coming years.
The report also noted that rising consumer preference for quality products is accelerating the shift from unbranded to branded dairy products, further benefiting organised dairy companies.
CRISIL expects the organised dairy industry's operating margin to remain broadly stable at around 4 per cent, similar to the previous fiscal. Companies are expected to calibrate price increases in a manner that offsets higher raw milk procurement costs without significantly affecting demand.
Capex and credit profiles remain healthy
According to Rucha Narkar, Associate Director, CRISIL Ratings, strong revenue growth and higher cash accruals are expected to support continued capital expenditure in line with the average of the past four years.
Even though much of the expansion will be debt-funded, the sector's credit profile is expected to remain stable due to healthy cash generation, strong balance sheets and stable working capital cycles.
CRISIL estimates that the sector's debt-to-EBITDA ratio will improve to around 2.3 times this fiscal from 2.5 times last year, while interest coverage is expected to remain strong at over six times, compared with 5.6 times in the previous fiscal.
The ratings agency said key factors to monitor going forward include the extent of weather-related disruptions to milk production and the timely commissioning and ramp-up of new dairy processing facilities.