Gross margins for dairy companies are expected to improve sequentially in FY24 due to a healthy improvement in milk supply by H2 FY2024, according to ICRA. The report revealed that there was a demand-supply gap in FY2023 as domestic milk supply was impacted by the Lumpy Skin Disease, which reduced milk yields.
The gross margins for dairy companies will improve sequentially in FY24, according to rating agency ICRA. A report released by ICRA said that domestic milk supply was impacted in FY2023 due to the incidence of Lumpy Skin Disease (LSD) in cattle and its impact on the milk yields during the flush season, thus resulting in a demand-supply gap as demand remained steady.
ICRA expects healthy improvement in milk supply by H2 FY2024 as these factors are likely to ease. Raw milk demand remained buoyant in FY2023 with both liquid milk and value-added dairy product (VADP) segments witnessing a healthy volume growth. There is 8-10% increase in liquid milk sales volume despite multiple price hikes undertaken by dairy companies, whereas there is 18-22% increase in VADP volumes; VADPs continued to witness strong volumes, which along with price increases, resulted in revenue growth of 28-32% in FY2023. The demand for VADPs is expected to remain healthy owing to growing disposable incomes and increasing demand from the HoRECA segment.
The demand for liquid milk is expected to remain robust due to its essential nature. ICRA sample set witnessed 15-18% growth, a double digit increase, in raw milk procurement in milk procurement volumes in FY2023 to meet growing demand for both liquid milk and VADPs. Fodder and cattle feed prices increased in FY2023 due to erratic weather conditions. With delayed onset of monsoons, inadequate and uneven rainfall through June 2023 and consequent YoY lag in kharif sowing across most crops, fodder and feed prices remained firm. However, pick-up in monsoon over the last few weeks is likely to accelerate kharif sowing pace, which would determine price corrections. Nevertheless, ICRA expects green fodder availability to be adequate for the season.
ICRA’s sample set witnessed a YoY increase of 17-19% in raw milk procurement prices during FY2023. Although the dairy companies took around 11-13% retail price hikes over the last few quarters, the increased costs were not passed on completely. With a normal flush season in the South in early FY2024, milk procurement prices are witnessing a correction. Prices in North India are expected to moderate during the flush season in H2 FY2024 amid better milk availability. The gross margins for dairy companies are thus expected to improve on a sequential basis.
ICRA’s sample set witnessed a healthy revenue growth of 21% during FY2023, driven by both volume growth and price hikes. The OPM witnessed an improvement in H1 FY2023 driven by price hikes, though H2 witnessed some moderation with sharp increase in raw milk prices. It is expected to start improving in FY2024 with expected normalisation of milk supply and correction in raw milk prices.
