Profit margins of dairy firms to remain robust

The profit margins of dairy companies are likely to remain strong in the near term, thanks to soft milk prices and increased focus on value addition.

Analysts, however, are cautious on the revenue growth of these entities.

“While the September quarter sales growth of Heritage (Foods), Parag (Milk Foods) and Prabhat (Dairy) are likely to be only around five per cent, 12 per cent and six per cent, respectively, we estimate their Ebitda (operating earnings) to jump 114 per cent, 19 per cent and 10 per cent, as milk over-supply is likely to drive margins,” said Shradha Sheth, an analyst with Edelweiss Securities.

Analysts are expecting Heritage Foods to report sales of ~6,469 million for the September quarter, against ~6,161 million in the same period of last year. Its Ebitda margin is forecast to jump to 7 per cent for the quarter versus 3.4 per cent for the corresponding period last year. The profit margins of Parag Milk Food and Prabhat Dairy are also likely to improve.

“Considering the industry volume growth of 3.5 per cent (annually), a shift from unorganised to organised sector, higher revenue share of value added products and inflation, the organised sector can report compounded annual growth rates in low double-digit,” said Aniruddha Joshi, an analyst with ICICI Securities.

A soft milk price scenario is favourable for organised players. However, the current situation has given rise to a number of new entrants and penetration of unorganised players in the south.

“While we expect the working capital cycle to improve and Parag to generate positive free cash flow in FY19, increase in cost of funds is likely to impact its working capital funding and cash flow. Further, the government’s recently announced subsidy on export of skimmed milk powder (SMP) and ~5 a litre subsidy for procuring milk from farmers at a higher rate of ~25 a litre, is likely to further stretch the working capital,” said Sheth.

Prabhat derives two-third of its revenue from the business to business segment, which operates on a cost-plus model. Therefore, in a low milk price scenario, which is likely to persist over the short to medium term, the company’s ability to drive value growth is limited. It is consciously reinvesting the benefits of gross margin expansion in brand building and distribution expansion.