Milking the right cow!

During lockdowns, India’s organized sector has shown a tremendous commitment towards dairy farmers even as their first-world counterparts crumbled under the pandemic pressure. With changing consumer preferences and the thrust of government on improving the productivity of the sector, have prospects of private sector dairies brightened? Let’s find out…

Lockdown stories across the globe are the same—people going out of work, stores running out of stock, manufacturers running out of business and economies running out of steam. But the dairy sector, which never ran out of milk has ghastly suffered the effects of the coronavirus outbreak.

As they say, ‘milk is a daily crop’; farmers can’t switch on and switch off its production. A cow must be milked irrespective of the demand, for it to stay healthy. As a result, farmers dumped milk during lockdowns—be it a first world country or a third world country.

The Royal Association of British Dairy Farmers (RABDF) had warned the British government that if the farmers were not provided financial assistance, they will be forced to obliterate cows—first world country third world problems?

America’s dairy sector was facing the pressure of depressed prices due to excess production even in the pre-COVID times. On the onset, 2020 looked like a year of rebound but the pandemic has upset the math terribly.

Is the situation in India different?

Since milk was classified as an essential commodity, there were no restrictions on its movement. However, factors such as supply chain disruptions, manpower shortage, inadequate storage and processing facilities threw the dairy sector out of whack in India. Like that in other countries, demand for milk and milk products from the hotels, restaurants and canteens (HORECA) segment—in the lingo of marketers— plummeted during the nationwide lockdown.

As a result, milk prices declined in the range of 5%-30% depending on the market (FMCG companies like Britannia have benefited from this).  True, as soon as the HORECA business returns to normal, the milk prices may rebound. But given that India is the largest producer of milk, infrastructure and value additions really need to play catch up.

The fall in prices also highlighted a fact that we as a country are highly underinvested in infrastructure for the dairy sector.

However, there seems a silver lining to this cloud.

The face of India’s dairy sector may change in the foreseeable future due to:

  • Change in government’s approach towards the sector
  • Potential changes in consumer preferences
  • The commitment shown by the organized players in the milk sector during lockdowns and their learnings

India’s largest dairy brand Amul, operated at 115% of its capacity during the lockdowns. Amul alone pumped in Rs 9,000 crore in the rural economy by increasing its milk procurement at a time when small dairies in the unorganized sector, traders and local vendors stopped buying due to falling demand and logistical constraints. Amul’s daily milk procurement shot up 17% during the lockdowns. Even some private sector players too honoured their commitment (of 100% off take) to the contracted farmers.

Amul also offered higher incentives to distributors for taking extra efforts during lockdowns. The company’s e-commerce sales volumes have doubled during the lockdown period.

According to National Dairy Development Board (NDDB), the country had 70,000 metric tonnes of milk powder stock as on March 15, 2020. By April 30, the stock went up to 1.34 lakh metric tonnes. This reveals what the organized players have done with the milk they procured during the lockdowns.

Inference: A goodwill gesture during the times of emergencies counts! Organized players can be a more trusted source for farmers when it comes to selling their surplus milk production in future.

Adversity drives the first step of experimentation

Under normal circumstances, it usually takes 15 days for Amul to transport goods from its plant in Gujarat to Assam by road and 7 days by train. As the passenger trains didn’t operate during lockdowns, this transportation time reduced to 3 days. 40% of Amul’s supplies are now transported by rail ; this translates into a 100% jump.

Inference: Organized players will now think to experiment with their logistic networks and preferences with an aim of achieving more cost-effective and time-saving transportation of goods.

Rise in household demand: Just a lockdown phenomenon?

While it’s true that people have only changed the place where they eat and perhaps not how much they eat, it looks like consumer habits are changing. Sale of packaged milk over loose milk was on the rise. Demand for ghee, butter, paneer and cheese also went up.

Many FMCG brands that have witnessed a rise in demand during lockdowns, be it any product line—biscuits or cheese—are expecting at least some of it to be permanent. As Indians become health cautious, consumption of packaged food articles may also go up along with that of immunity-boosting foods. Packaged milk and value-added milk products may gain from this trend.

Is formalization of India’s dairy sector on the cards?

At present, organized players hold a market share of only 20% in India’s dairy sector. Of this, only half is with private companies and the rest is with cooperatives. As far as the unorganized sector is concerned, nearly half the production is for self-consumption and another 50% is controlled by small dairies, local vendors and traders. This leaves huge scope for the formalization of the sector.

During lockdowns, organized players have continued to procure milk (when smaller dairies, traders and local vendor stopped); they have experimented with supply-chains, incentivized distributors, explored e-commerce in a bigger way and have experienced shifts in consumer preferences.

All these factors may help them grab a substantial market share from the local vendors. If organized players capitalize on this, their lockdown learnings might help them lay a foundation for future growth.

Many of you might say Amul is Amul; its private sector counterparts won’t be able to match its performance. While this may not be wrong at this juncture, other players can always learn from the industry leader and play catch up. For example, if the market for cheese grows, Amul being the market leader will benefit but how about Go Cheese— the 2nd largest brand in the cheese category?

The market grows for all. It’s then upto individual companies how much they can make of it.

Can organized sector gain?

(Source: Parag Milk Foods)

Policy tailwinds for the dairy sector…

So far, the government was incentivizing investments by cooperatives in the dairy sector. However, given the importance of the dairy and livestock sector in India’s overall development, the government seems to have recognized the importance of encouraging private sector investments in the development of the value addition chain.

30% of agri-GDP is dairy…

(Source: National Dairy Development Board)

Improvement in the productivity of the dairy and animal husbandry sector is one of the key measures identified by the government for doubling farmers’ income by 2022.

India’s milk production has grown at a compounded annualized rate of 4.6% over the last three decades. However, lack of adequate infrastructure and apathy to value addition results in lots of wastage. An ASSOCHAM report reveals that as much as 50% of India’s fresh milk production goes waste.

Trends in milk production

(Source: National Dairy Development Board)

As a part of Atma Nirbhar Bharat Abhiyan stimulus package, the government committed Rs 15,000 crore lately for setting up an Animal Husbandry Infrastructure Development Fund (AHIDF). The government has also envisaged an ambitious programme of doubling the milk processing capacity from 54 million tonnes at present to 108 million tonnes by 2025.  Besides, it aims to eradicate Foot & Mouth Disease and Brucellosis in cattle by 2025. The Budget 2020-21 made an allocation of Rs 1,300 crore for this initiative. The government is planning to spend Rs 13,343 crore in total by 2024.

Some experts believe doubling the milk processing capacity isn’t required when many organized sector players aren’t operating anywhere near their full capacity. That said, efforts to eliminate Foot & Mouth Disease and Brucellosis will help improve the productivity of the sector and result in cost control. Lack of efforts in fodder development has been another area that requires immediate attention to reduce the cost of milk production and improve productivity. Experts believe fodder development can also help in the initiative of doubling farmers’ income.

Since milk production and value addition can be quite critical to rural development, the policy thrust may remain positive for the sector.

Are there focused dairy sector plays in the listed space?

Since the private dairies are 10% of the industry, there aren’t many focused plays on the dairy sector in the listed space. Companies such as Hatsun Agro, Parag Milk Foods, Heritage Foods and Prabhat Dairy are the only few companies that have attained a critical mass and hold a comprehensive product portfolio.

For example, Hatsun Agro—a dominant player in southern India, offers milk and value-added milk products under the brands Arokya and Hatsun. It manufactures ice creams under the brand names Arun and IBACO. Besides this, it runs a chain of dairy outlets, Hatsun Daily and owns Oyalo, a brand in the ready-to-cook segment.

Some dairies also engage in co-manufacturing besides having a presence in the B2C category, and cater to institutional customers. For example, Prabhat Dairy is a co-manufacturer for some famous regional brands, such as Gokul and Nandini. The company also supplies to some marquee companies such as Britannia, GSK and Abbott among others.

On the other hand, companies such as Parag Milk Foods have created a niche for themselves. The Company holds a 35% market share in the Cheese category (Amul has a 42% market share). It has one of the only two cheese processing facilities in Asia with UHT technology. Cheese manufactured at this facility has a shelf life of 6 months and requires zero refrigeration.

Interestingly, it bought a plant in Hariyana from Danone – a French giant, a couple of years ago. Danone exited the dairy business in 2018 since it couldn’t develop a supply chain for procuring milk and build a reliable distribution network. However, Danone, which is well known for its brand Protinex, is aiming to reenter with new categories through its flagship brand.

This only shows how lucrative the opportunities are for the milk-based valued added products but how tough the business is to start from the scratch.

Nonetheless, big corporate houses have shown keenness in entering the market by acquiring regional brands. For example, Godrej Agrovet entered the dairy segment by buying a majority stake in Creamline Dairy Products Limited about five years ago. The Company is aiming to substantially grow this business by adding value added products under the Jersey brand.

Nestle, HUL and Britannia cater to value added segments such as confectionaries (chocolates), ice creams, butter and cheese, among others. However, they are not dairy focused companies.

Private sector dairies: fact check

(Source: ACE Equity)

At present, return ratios and balance sheets of the listed players don’t look encouraging. Their performance has been lackluster as well. Promoters of some companies have pledged their shares. However, considering the FMCG nature of the value-added and packaged milk business, valuations are moderate with a few exceptions.

If you want to take exposure to any of the focused plays of India’s dairy sector, you should closely track growth and valuations.  Don’t forget to check the track record of the promoter group.

Connecting the dots…

The unorganized sector is likely to lose market share to the organized sector with policy thrust on encouraging private sector investments, changing consumer preferences and the ever-changing business environment.

That said, not all’s hunky-dory within the organized sector.

For decades, India’s dairy sector has been dominated by cooperatives. Political parties have milked cows and cooperatives alike to their benefit. For every Amul, there’re tens of instances of defunct cooperatives. Ideally, a cooperative should have a union in every district but at the grassroot level, every district has several unions controlled by different political parties having their own structure and brand.

Since co-operatives are entities run by farmers for farmers, they usually don’t engage in manufacturing of value-added products. More often than not, their cost structures aren’t competitive since they aren’t professionally run and often experience political meddling.

Speaking about private sector players, they might have immense growth opportunities going forward, if the government encourages bigger private sector participation but they will have to show a higher commitment to the farmer, like some of them did during the lockdowns.

Given the sensitive nature of the commodity (milk) in India, only an amphibian approach (empathy to farmers and corporate professionalism) can unlock the true potential of India’s dairy sector.

Two objectives—higher corporate profits and doubling of farmers’ income—can co-exist. Market-oriented approach and cost controls at the industry level would be the key.

 

You may also like to read: FMCG: Moving fast in the times of cyclones and pandemic

 

Disclaimer: 

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

Leave a Reply