The Indian dairy industry is set to grow by 13-14% this fiscal year, driven by high consumer demand and improved milk supply. Favorable monsoon conditions and increased consumption of value-added products are key factors. Despite higher working capital needs and increased debt from ongoing capital expenditures, the industry’s credit profiles remain stable due to strong balance sheets. Enhanced milk supply, supported by better cattle fodder and resumed artificial insemination, will bolster profitability. Overall, the industry shows robust growth potential with stable financial metrics.
The Indian dairy industry is on the brink of significant revenue growth, with projections indicating a 13-14% increase this fiscal year. This surge is primarily driven by strong consumer demand and an enhanced supply of raw milk, according to Crisil Ratings. Over the past few years, the industry has faced challenges such as fluctuating milk production due to inconsistent monsoon patterns and disruptions from the COVID-19 pandemic. Despite these obstacles, the sector has demonstrated resilience, supported by rising incomes and a growing preference for branded and value-added dairy products. The anticipated good monsoon this year is expected to stabilize milk supply, further bolstered by improvements in cattle fodder availability and agricultural practices. This promising outlook sets the stage for a prosperous period for the Indian dairy industry, with sustained demand and improved supply conditions paving the way for robust growth.
Market Dynamics
The Indian dairy industry’s growth trajectory is set to reach new heights, driven by an increased supply of raw milk and strong consumer demand. Crisil Ratings projects a 13-14% revenue growth this fiscal year, underpinned by several key factors:
- Increased Supply and Working Capital Requirements: The anticipated rise in raw milk supply will necessitate higher working capital for dairy companies. This is coupled with ongoing capital expenditure (capex) by organized dairies over the next two fiscal years, resulting in a slight uptick in debt levels. However, the stable credit profiles of these companies, supported by robust balance sheets, will help mitigate the impact of increased debt.
- Revenue Growth Analysis: Crisil Ratings analyzed 38 dairies, representing approximately 60% of the organized segment revenue. The analysis revealed that despite modest growth of 2-4% in realization, the dairy industry’s revenues are set to rise due to a healthy 9-11% growth in volumes. The value-added product segment, which contributes 40% of the industry’s revenues, will be a significant growth driver. This growth is further supported by rising income levels and a consumer shift towards branded products.
- Contribution of Value-Added Products: The increased sales of value-added products and liquid milk in the hotels, restaurants, and cafes (HORECA) segment will bolster revenue growth. This segment’s performance is crucial in driving overall industry growth, as noted by Mohit Makhija, Senior Director at Crisil Ratings.
Milk Supply
The supply side of the dairy industry is poised for improvement, with an expected 5% increase in raw milk supply this fiscal year. This growth is attributed to several factors:
- Improved Fodder Availability and Favorable Monsoon: Better availability of cattle fodder and favorable monsoon conditions are key contributors to the increased milk supply. These factors play a crucial role in enhancing the productivity of dairy farms.
- Normalization of Artificial Insemination and Vaccination: The resumption of artificial insemination and vaccination processes, which faced disruptions in the past, will positively impact milk availability. These practices are essential for maintaining the health and productivity of dairy cattle.
- Genetic Improvements and Fertility Rates: Initiatives aimed at genetic improvements in indigenous breeds and increased fertility rates of higher-yield breeds will further enhance milk supply. These measures contribute to the overall sustainability and growth of the dairy industry.
- Profitability of Dairies: Steady milk procurement prices are expected to boost the profitability of dairies. Operating profitability is projected to improve by about 40 basis points, reaching around 6% this fiscal year. This improvement is indicative of the positive market dynamics and effective supply chain management within the industry.
Financial Implications
The financial landscape of the Indian dairy industry is characterized by increased revenue and profitability, balanced by rising debt levels. Key financial insights include:
- Impact of Flush Season: According to Rucha Narkar, Associate Director at Crisil Ratings, the healthy milk supply during the flush season will result in higher skimmed milk powder (SMP) inventory, which will be utilized throughout the year. SMP inventory typically accounts for about 75% of the working capital debt of dairies, highlighting its significance in the financial structure of dairy companies.
- Debt-Funded Investments: Continued demand for milk will necessitate increased debt-funded investments in new milk procurement, processing capacities, and distribution network expansion. These investments are essential for sustaining growth and meeting market demands.
- Stable Credit Profiles: Despite the additional debt for working capital and capex, credit profiles are expected to remain stable due to low leverage. The gearing ratio of dairy companies is projected to remain at 1.8 times as of March 31, 2025, compared to 1.7 times a year earlier. Debt protection metrics are also likely to remain comfortable, with the interest coverage ratio expected to be 10-11 times this fiscal year.
In summary, the Indian dairy industry is set for robust revenue growth driven by strong consumer demand and an improved supply of raw milk. The market dynamics indicate a positive trend, with rising demand for value-added products and increased milk supply supporting this growth. Despite the challenges of increased working capital requirements and debt levels, the industry’s strong balance sheets and stable credit profiles will ensure financial stability. The concerted efforts in improving milk supply and maintaining profitability underscore the resilience and potential of the Indian dairy industry.
