Competition Triggers Fresh Consolidation in Dairy Sector
Smaller firms sell out to bigger ones as high costs, decline in production also hurt business
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.