Milk price hike may limit drop in profitability of organised dairies: Report

The recent hike in retail milk prices by two major players is likely to limit the drop in profitability of organised dairies in this financial year, according to a report. The recent hike in retail milk price by Rs 2 per litre will limit the slide in profitability of the organised dairy sector to 50 basis points year-on-year this fiscal, despite a higher than anticipated rise in procurement prices and transport and packaging costs, Crisil Ratings said in a report.

Despite lower profitability, the report stated that comfortable balance sheets and better working capital management will keep the credit profiles of players stable. Milk procurement prices have shot up 8-10 per cent in the past six months because of lower-than-expected milk collection - on account of cattle diseases in some of the major milk-producing states - and high prices of cattle feed. Additionally, the surge in crude price has translated into a significant increase in transport and packaging costs," Crisil Ratings Director Anand Kulkarni said. Milk procurement prices have shot up 8-10 per cent in the past six months because of lower-than-expected milk collection - on account of cattle diseases in some of the major milk-producing states - and high prices of cattle feed.

He said this necessitated a second price hike in the past six months. "We don't anticipate any more price hikes as an expected improvement in milk collection and softening input prices will support profitability in the second half of the fiscal, he added.

The report further revealed that disruptions in artificial insemination, cattle breeding and vaccination schedules had affected supply last year. These issues are expected to be ironed out this year, resulting in better milk supply during the flush season (refers to the peak period of raw milk supply, which is generally from December to mid-March every year), it said.

The demand drivers remained strong, as requirement for liquid milk continues to be robust as well as that for the value-added products (accounting for 28 per cent of organised sector revenue) such as ghee, butter, cheese, curd, ice cream has also been growing at a healthy pace. As the VAP segment is comparatively price inelastic, profitability is typically better, at 7-9 per cent, it added.