Com­pe­ti­tion Trig­gers Fresh Con­sol­i­da­tion in Dairy Sec­tor

Smaller firms sell out to big­ger ones as high costs, de­cline in pro­duc­tion also hurt busi­ness

The Economic Times - - Economy: Macro, Micro & More - Ashish.Kul­shrestha@ times­group.com

Hy­der­abad: There is a fresh round of con­sol­i­da­tion tak­ing place in the dairy in­dus­try with sev­eral smaller firms sell­ing out to big­ger ones due to tougher com­pe­ti­tion, ris­ing in­put costs, fall­ing pro­duc­tion, and, in some cases, a lack of in­ter­est among the new gen­er­a­tion of some en­trepreneurs.

Hy­der­abad-head­quar­tered Dodla Dairy, backed by Black River As­set Man­age­ment, has ac­quired a milk pro­cess­ing fa­cil­ity in the Dharmapuri district of Tamil Nadu in per­haps the lat­est among a slew of deals in this mar­ket in re­cent months.

French di­ary gi­ant Lac­talis last month ac­quired the dairy busi­ness of In­dore-based Anik In­dus­tries and an­nounced plans to ac­quire few more smaller and at­trac­tive dairy busi­nesses. Ear­lier, Chen­nai-head­quar­tered Hat­sun Agro Prod­ucts ac­quired Hy­der­abad-based Jyothi Dairy. Kolkata-based con­glom­er­ate ITC re­cently an­nounced plans to en­ter the dairy busi­ness through small ac­qui­si­tions in cer­tain mar­kets, while Delhi-based dairy firm Kwal­ity, too, said it is look­ing at smaller buy­outs.

The do­mes­tic dairy mar­ket is set to see more ac­qui­si­tions of small and medium sized busi­nesses by some big groups like ITC and Mahin­dra that had an­nounced foray into the dairy sec­tor through both or­ganic and in­or­ganic routes, in­dus­try ex­perts and an­a­lysts said.

Con­tin­ued losses com­pel small play­ers to ei­ther shut shop and sell off busi­ness, or merge with larger firms, they said, adding that large firms with deep pock­ets can af­ford to ab­sorb losses caused by in­crease in procu- re­ment costs or fall in re­tail prices of milk for longer pe­ri­ods.

D Su­nil Reddy, man­ag­ing di­rec­tor at Dodla Dairy, said smaller dairy play­ers were fac­ing many chal­lenges in scal­ing up busi­ness ow­ing to in­creased com­pe­ti­tion from do­mes­tic and global play­ers, high risks in­volved, and ris­ing cap­i­tal ex­pen­di­ture re­quire­ments.

“The smaller play­ers face a per­sonal chal­lenge in man­ag­ing busi­ness as they lack ex- per­tise,” he said. “Also, the man­age­ment’s sec­ond gen­er­a­tion is gen­er­ally not in­ter­ested in car­ry­ing for­ward fam­ily busi­ness.”

A cou­ple of years ago, when Lac­talis ac­quired Hy­der­abad-based Tiru­mala Milk Prod­ucts, founder pro­mot­ers of the lat­ter had pointed to non-in­ter­est of man­age­ment’s lat­est gen­er­a­tion in dairy busi­ness as key a rea­son for them di­vest­ing stake.

JB Sivakumar, as­so­ciate di­rec­tor at In­dia Rat­ings and Re­search, con­firmed such a trend. “A gen­er­a­tion shift hap­pens ev­ery 30 years in the in­dus­try and the new gen­er­a­tion need not have the same in­ter­est in run­ning fam­ily busi­ness as it eyes on more prof­itable op­tions avail­able for it,” he said.

Also, “the profit mar­gins in liq­uid milk seg­ment is very low and pro­duc­ing large vol­umes is the only way to have sub­stan­tial profit”, he said.

“How­ever, dairy play­ers with a limited num­ber of milch an­i­mals are un­able to pro­duce large quan­ti­ties and fail to have a long run.”

As for rea­sons for the likes of ITC and Mahin­dra to en­ter this sec­tor, Sivakumar pointed out that they re­quire dairy prod­ucts for their value-added prod­uct seg­ment as they are al­ready present in the food sec­tor. “Hav­ing their own dairy plants would help them in­crease their ca­pac­ity and cut op­er­at­ing costs,” he said.

Ac­cord­ing to rat­ing agency Crisil’s De­cem­ber 2015 re­port, the In­dian dairy in­dus­try is likely to wit­ness in­vest­ments of .₹ 15,000 crore over the next three years. A re­port by An­tique Stock Broking had said the pro­cessed milk and milk seg­ment is ex­pected to grow at 12-13% CAGR be­tween 2014 and 2017.

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