COVID-19 disruptions to keep dairy industry’s revenue flat in 2020-21: Report

By: |
June 12, 2020 6:02 PM

The report is based on an analysis of 65 Crisil-rated dairies that account for slightly over two-thirds of the Rs 1.5 lakh crore revenue of the organised dairy segment, and assumes a return to normalcy in the second quarter.

It may reduce operating profitability by as much as 50-75 basis points (bps), it added.It may reduce operating profitability by as much as 50-75 basis points (bps), it added.

Weak demand for value-added products (VAPs) following disruptions caused by the coronavirus pandemic may lead to flat revenue growth of the Indian dairy industry in the current financial year, according to a report.

Sales of VAPs, such as ice cream, cheese, flavoured milk, curd and yoghurt, that are more profitable than liquid milk and account for over a third of the organised dairy sector’s revenue, are expected to de-grow 2-3 per cent in 2020-21, Crisil Ratings said in the report.

It may reduce operating profitability by as much as 50-75 basis points (bps), it added.

Further, it said there is a built-up of inventory following conversion of surplus milk to skimmed milk powder (SMP), and the unsold VAP inventory will raise working capital needs of dairies and test the liquidity of mid-sized ones (revenue below Rs 500 crore).

The report is based on an analysis of 65 Crisil-rated dairies that account for slightly over two-thirds of the Rs 1.5 lakh crore revenue of the organised dairy segment, and assumes a return to normalcy in the second quarter.

Meanwhile, the two-month-long closure of hotels and restaurants because of the nationwide lockdown halted institutional VAP sales, which account for almost 20 per cent of the organised dairy segment’s revenue.

Moreover, logistical challenges and apprehensions about consuming cold products (ice creams, flavoured milk and yoghurt) during the pandemic are impacting sales in the first quarter, which is the peak-demand season, it added.

The report said that steady liquid milk sales, comprising two-thirds of total industry sales, will prevent a bigger fall in revenue.

The lockdown has not affected the supply of milk since it is an essential product.

Therefore, the milk sales are likely to grow 3-4 per cent this fiscal, it added.

“Steady demand for milk and higher VAP prices (hiked 10 per cent in the second half of last fiscal) will help partially offset lower VAP volume, and arrest any decline in the dairy sector’s revenue. Further, softer input prices will provide some respite and limit the fall in operating profitability to 50-75 basis points,” Crisil Ratings Director Sameer Charania said.

The flush season (typically from October to March), which sees higher production, got extended by a couple of months, leading to oversupply of milk in April and May, the report said. “Consequently, dairies, especially cooperatives that are better off in terms of liquidity and working capital, have converted such excess milk into SMP.”

It added that the upshot will be that year-end inventory could rise 14 per cent after dropping sharply in March 2020, resulting in higher working capital needs.

“While dairies reduce capital spending, tapered cash flows stemming from lower sales and higher working capital requirement will jack up short-term borrowings by 20 per cent this fiscal. While large dairies have better liquidity, mid-sized ones would feel the squeeze,” Crisil Ratings Director Rahul Guha said.

Inherent sectoral resilience will ensure faster recovery in the financial year 2021-22, assuming the pandemic abates, the report added.

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