Indian dairy industry: Value added products help Indian dairies tide over milk price volatility

The Indian dairy industry is seeing a steady growth in business despite volatility in milk procurement prices over the past couple of years, thanks to high margin value-added products (VADP) and a good product portfolio.

Companies such as Parag, Heritage and Dodla, among others, were able to absorb some 10-27% price rise in milk procurement, largely on the back of improved revenues from VAD products.

Further, companies are focusing on increasing share of revenues from VADP to over 50% to drive growth, apart from increasing their market coverage. This, industry participants and analysts anticipate should also help increase the share of the organised dairy industry to 26% by 2020 from 22% in 2016.

For instance, Shradha Seth, senior analyst with Edelweiss Securities, said, “While milk procurement prices jumped 27% in FY17, Parag Milk Foods was able to absorb due to premiumisation, which led to a 39 basis points rise in gross margin.”

RG Chandramogan, managing director, Hatsun Agro, expressed concerns over an inflationary trend in milk procurement prices, which increases pressure on dairies, especially in the private sector.

Many state governments like Telangana and Karnataka have extending subsidies of Rs 4-5 a litre to the milk farmers, forcing many private dairies to match the procurement prices. However, a few dairies haven’t raised procurement prices and instead prefer to bank on their long-standing relations with the loyal dairy farmers through initiatives such as timely payments and supply of inputs at subsidised costs, among others.

“Despite an upward trend in milk procurement prices, we have been able to mostly absorb the impact mainly driven by effective product mix of value-added products with high margins like curd, ice cream, etc.,” said D Sunil Reddy, managing director of TPG Growth-backed Dodla Dairy.

According to industry analysts, VAD products enjoy margins of around 25-45%, against low margins of 6-8% that liquid milk entailed.

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