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Higher milk prices to hurt dairy companies: report

A steady increase in animal feed prices and rural wages have led to higher costs for dairy farmers. (Photo: Mint)Premium
A steady increase in animal feed prices and rural wages have led to higher costs for dairy farmers. (Photo: Mint)

  • Dairy companies will likely be be adversely impacted due to higher milk procurement prices. While revenues of dairy companies may rise due to inflation, their EBITDA margins peaked in FY20- 21 and a correction is expected over FY22-24E

NEW DELHI: Milk procurement prices have been rising, prompting higher revenues for dairy companies but also leading to pressure on margins in FY2023-24, according to a report.

“After a period of lower milk prices for two years, milk prices have started the up-cycle. We note higher milk prices will result in higher revenues for dairy companies but will also result in lower margins in FY23-24," said analysts at ICICI Securities in a report on the dairy sector released on Tuesday.

The report pointed to a steady increase in animal feed prices and rural wages, indicating higher costs for dairy farmers. Additionally, skim milk powder (SMP) prices globally are up 35% year-on-year resulting in higher exports.

Meanwhile, out-of-home consumption that accounts for 30% of milk demand in India has improved too. This has resulted in higher demand for milk, again pushing prices up, the analysts said.

“We expect all dairy companies to be adversely impacted due to higher milk procurement prices. While revenues of dairy companies may increase due to inflation, we believe EBITDA margins of dairy companies have peaked in FY20- 21 and expect correction over FY22-24E," they said.

In April 2020, wholesale milk prices rose an average 4.8% year-on-year across India.

“We believe the rise in wholesale prices is attributable to the end of the flush season and higher consumption in the economy. Global SMP prices have increased drastically over the past 12 months. They are up 35.7% year-on-year and 5.8% month-on-month in March 2022," they said.

Meanwhile, raw material inflation of key materials such as maize, wheat and soybean has resulted in higher food cost for bovines.

“Further, rural wage rate is growing steadily. We expect dairy farmers to pass on any further inflation in key raw materials and wages via higher milk prices," they added.

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