CRISIL foresees revenue from value-added dairy products¹ (VAP) growing at a healthy 14-15%, annually over the next three fiscals, or ~50% faster than the overall sector’s growth rate.

That, along with steady growth in milk sales, should crank up the dairy sector’s revenue to Rs 7.5 lakh crore by fiscal 2021 from Rs 5.7 lakh crore in fiscal 2018.

CRISIL rates over 100 dairy firms, which account for ~60% of the organised segment’s revenue.

A study of business profiles of these firms shows rising income levels, changing lifestyles and increasing health and quality consciousness is leading to higher revenue growth from VAP compared with milk.

“We believe VAP revenues will continue to benefit from rising urbanisation. And with more women joining the workforce, fewer homes would continue the chore of processing milk into curd and butter in the urban and semi-urban areas,” said Anuj Sethi, Senior Director, CRISIL Ratings. “Firms with higher VAP share are better placed to take advantage of this.”

With contribution from VAPs rising, operating margins of CRISIL-rated dairies have improved ~50 basis points (bps) to ~4% (not adjusting for periodical bonus paid by cooperatives to farmers) in three fiscals through 2018. A further 50 bps improvement is likely by fiscal 2021, driven by VAP sales.

Revenue growth will be driven largely by volumes. Increase in realisations will remain muted given that growth in milk supply will be in line with demand.

But the high growth in VAP will necessitate investments in capacities and infrastructure.

CRISIL foresees organised dairies spending ~Rs 14,000 crore over the next three fiscals – similar to the previous three fiscals – to enhance processing capacity by 25-30% and strengthen milk procurement infrastructure.

The investments are expected to be funded with moderate dependence on borrowings, including soft loans from the government’s Dairy Processing & Infrastructure Development Fund, besides public and private equity.

“Prudent funding mix and better cash generation will keep capital structure of organised dairies satisfactory with gearing of 1.0-1.2 times, in spite of sizeable capex,” said Poonam Upadhyay, Associate Director, CRISIL Ratings. “The credit ratio (upgrades to downgrades) of CRISIL-rated dairy firms has been above 1 time in four out of the past five years, and this trend is likely to continue.”

¹ Refers to all products excluding milk sold in unorganized market (bulk or loose milk) and pouch milk (all variants such as whole milk, toned milk, and double-toned milk)