HIGHER MILK PROCUREMENT COST DENTS DAIRY FIRMS’ MARGINS
A possible decline in milk prices by ~1-2 a litre in October may provide cushion in the December quarter
Operating margins of dairy companies remained under pressure in the June quarter due to an increase in milk procurement costs and reduced supply of raw material as a result of farmers’ week-long strike in May.
N Chandrababu Naidupromoted Heritage Foods posted a net profit of ~10.37 crore for Q1FY18, a sharp decline from ~17.11 crore in the corresponding quarter last year.
Similarly, Kwality Ltd reported a sharp decline in its June quarter profit to ~27.88 crore, from ~42.27 crore a year ago, while Umang Dairies posted a loss of ~2.90 crore against a net profit of ~1.48 crore in the year-ago period. Interestingly, net sales of the two companies jumped 7 and 11 per cent, respectively.
Companies like Parag Milk Foods and Hatsun Agro Products, with increased focus on value-added products, however, maintained their profit margins in the June quarter. While organised sector players are adjusting the increase in compliance costs of the goods and services tax (GST) without increasing products’ prices, unorganised players are considering raising milk prices by ~2-4 a kg to pass on the increased cost burden to consumers.
“Gross margins of Heritage Foods were impacted by an increase in milk procurement cost, which the company was unable to pass on to consumers completely. The Ebitda margin at 4.4 per cent was also hit by loss-making Reliance Dairy business and increase in other expenditure, which grew 37.8 per cent y-o-y because of higher branding expenditure. However, the company is confident with initiatives taken on cost optimisation and the expectations of lower milk procurement cost after the monsoon. We expect recovery to be gradual,” said Dhaval Mehta, an analyst with Emkay Global Financial Services Ltd.
Heritage has formed a joint venture with a France-based company, Novandie SNC, for making yogurt and frozen desserts with an accumulative capex of ~75 crore in the next five years.
The company envisages ~300 crore of revenue from this joint venture in the next six years when the plant is fully operational.
Industry sources said the average milk procurement cost jumped 6-10 per cent in the AprilJune quarter, depending upon the location of the plant and its proximity from milk collection centres.
The supply of raw milk got interrupted in May due to farmers’ nationwide strike and pouring of milk on roads in protest of low realisation. Farmers were demanding implementation of the M S Swaminathan report with a sharp increase in milk prices.
R S Sodhi, managing director, Gujarat Cooperative Milk Marketing Federation (GCMMF), which sells Amul brand dairy products, said, “After a drastic fall over the past one year, milk prices are recovering. Prices are likely to remain stabilised now.”
“Milk prices started moving up since December 2016 with average cow milk prices ranging between ~28-29 a litre now. Buffalo milk, however, is procured at ~38 a litre in the north Indian states. But, with the peak arrival season in October, milk prices might decline by ~1-2 a litre which would benefit dairy companies,” said Shirish Upadhyay, senior vice president (strategic planning), Parag Milk Foods Ltd, the producer of “Gowardhan” and “Go” brands dairy products.
Nawal Sharma, president & head business transformation, Kwality Ltd, said, “We intend to increase our direct procurement to over 50 per cent over the next 3-4 years. With our persistent focus on selling to consumers, strong position in north markets, and planned product rollouts of value-added products, we shall continue to witness strong growth in the forthcoming years.”
Industry sources said the average milk procurement cost jumped 6-10% in the June quarter