PDF CRISIL Ratings webinar on the dairy sector

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Analytical Team:

CRISIL Ratings webinar on the dairy sector:

Adding value to milk

June 29, 2021

Anuj Sethi Senior Director, CRISIL Ratings

Mohit Makhija Director,

CRISIL Ratings

Rahul Guha Director,

CRISIL Ratings

Tanvi Shah

Associate Director, CRISIL Ratings

Shirish Mujumdar Associate Director, CRISIL Ratings

Akshita Jain

Associate Director, CRISIL Ratings

Ashish Kumar Manager, CRISIL Ratings

Vedant

Rating Analyst

CRISIL Ratings

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Key messages:

• Organized dairies’ revenues to grow by 5-6% in FY22, rebound to pre-pandemic growth of ~10% in FY23

– Healthy growth in value-added products (VAP) and steady liquid milk sales to support growth in the medium term – Lockdown in Q1FY22 impacting the HoReCa segment, pushes pre-pandemic growth rate of ~10% to FY23

• Operating profitability to moderate to pre-pandemic levels of ~5% this fiscal

– Expect moderation of 50-70 bps due to higher average milk procurement price compared with last fiscal – Healthy demand in higher-margin VAP to arrest the impact on operating margin

• Credit quality seen ‘Stable’

– Despite higher capex, capital structure to remain under control this fiscal, backed by lower skimmed milk powder inventory – Liquidity to remain adequate, as milk business is also largely cash and carry

HoReCa: Hotel, restaurants, & café segment

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3

248

458 508 533 587

57

123 144 154 170

0 200 400 600 800

FY13 FY18 FY21E FY22P FY23P

Unorganised revenue (Rs '000 crore) Organised revenue (Rs '000 crore)

Indian dairy sector - an overview

Source: CRISIL Research, CRISIL estimates

• Unorganised segment dominates the Rs 6.5 lakh crore dairy sector

• Cooperatives and large private players dominate Rs 1.44 lakh crore organised segment, which sees consistent growth

• The second Covid-19 wave impacted sales of a few cold VAPs;

however, these account for only 14% of overall VAP sales

Note: Milk-focussed: >70% revenue from milk; diversified: 30-70% revenue from VAPs;

VAP-focussed: >70% revenue from VAPs

Sources: CRISIL estimates

E: Estimated, P: Projected SMP: Skimmed milk powder

Overall sector revenue 305

581

652 687 757

9%

5%

13%

73%

VAP Focussed Milk Focussed Diversified Co-operatives

Sources: CRISIL Research, CRISIL estimates

Organised segment accounts for 22% of overall sector Cooperatives dominate organized segment revenue

VAPs account for 28% of organized segment revenue

Milk 65%

SMP 7%

Butter 6%

Ghee 11%

Paneer

2% Cheese 2% Curd

1%

Flavoured Milk 1%

Ice cream 2%

Yoghurt 2%

Others 1%

VAP 28%

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40 54 66 68 72 75

24

35

50 49 52 56

0 40 80 120 160

FY12 FY16 FY20 FY21E FY22P FY23P

Liquid milk volume VAP volume

Sales growth to accelerate to 5-6% this fiscal, ~10% in FY23

Source: CRISIL Research, CRISIL estimates

million tonne

184

308 416 430 449 488

86

152

228 222 237 269

- 200 400 600 800

Liquid milk sales (Rs '000 crore) VAP sales (Rs '000 crore)

Industry sales growth

1% 5-6%

9%

14%

10%

• Despite 3-4% decline in VAP sales, overall sales is estimated to have grown 1% last fiscal due to steady growth in liquid milk sales

• Overall sales expected to grow 5-6% this fiscal, backed by less stringent lockdowns and lower supply chain disruption in Q1FY22 v/s Q1FY21

• Sales growth is expected to return to pre-pandemic level in FY23, supported by healthy pickup in VAP volume and expected price hike

• Price hike expected in FY23, given prolonged period of no price hikes even as milk procurement prices increase

Industry volume growth

5% 6%

1%

7%

9%

Rebound in VAP sales coupled with steady milk sales supports overall growth

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5

-8%

1%

5% 5%

1%

6% 6% 6% 6% 6%

-2%

7%

11% 11%

7%

-10%

-5%

0%

5%

10%

15%

20%

Q1 Q2 Q3 Q4 Overall

FY 21 vs FY 20 FY 22 vs FY 21

Source: CRISIL estimates

• Horeca segment, accounting for ~20% of overall sales, was only partially shut in Q1FY22 vs total shutdown seen in 1HFY21

• Increased retail consumption of milk and VAPs to restrict de-growth in Q1FY22 v/s Q1FY21

• Second half of this fiscal to log healthy growth, supported by wedding season, festivals and improved customer sentiment with vaccination

FY22 vs FY20

Milder, localised lockdowns soften impact of second wave

CRISIL-rated players: Quarterly sales trend compared with pre-pandemic level (FY20)

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Profitability to moderate to pre-pandemic level this fiscal

• Operating profitability improved in fiscal 2021, as average procurement price declined by Rs 3 per litre from fiscal 2020 level

• Profitability to moderate by 50-70 bps this fiscal, due to relatively higher milk procurement price and freight-related inflationary pressures;

however, growth in remunerative VAP sales will offer support

• Retail milk price hike expected in fiscal 2023, after prolonged period of no price hikes

Note: Milk-focused: >70% revenue from milk; diversified: 30-70% revenue from VAPs; VAP-focused: >70% revenue from VAPs

37 39 40 42 42 43

47 47 47

29 32 31 33 35

32

38

35 37

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22P FY23P

Rs/Litre

Retail price* Procurement price

Source: CRISIL Ratings estimates

4.8% 5.7% 5.2% 5.7% 5.2% 5.3%

0%

2%

4%

6%

8%

10%

FY18 FY19 FY20 FY21 E FY22 P FY23 P

Overall

Operating margin of CRISIL rated players

Operating margin to revert to ~5% in FY22 Procurement price to rise, after fall in FY21

* Retail price of liquid milk

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Source: CRISIL Ratings

Working capital cycle to normalise by end fiscal 2022

• Debt increased in fiscal 2021 due to high working capital intensity, especially due to rise in SMP inventories

• Substantial inventory built up for cooperatives during first half of fiscal 2021 due to pandemic

• Debt levels to moderate by the end of the current fiscal as inventory levels correct

40 38 35 36 34 34

10 13

11 12 12 12

50 51

46 48 47 46

5931 5830

5261

6093 6160 6469

0 1000 2000 3000 4000 5000 6000 7000

0 10 20 30 40 50 60 70 80

Inventory (days) Debtors (days)

GCA (days)

ST debt (RHS)

Working capital to normalise with inventory correction

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Source: CRISIL Ratings, CRISIL Research, Ministry of Commerce and Industry, International SMP prices from www.globaldairytrade.info, INR/USD - Rs 75

• SMP inventory has been declining since fiscal 2018, due to higher exports in fiscal 2019 and delayed flush season in fiscal 2020

• Increase in SMP inventory in fiscal 2021 due to surplus milk procurement amidst the pandemic

• Recovery in VAP demand to correct SMP inventory levels by the end of the current fiscal

176 188 198 198 206 218

0 50 100 150 200 250

Milk production

million tonne

Milk production growth

5%

6% 0%

11.3

44.4

0.9

16.5

0 10 20 30 40 50

FY18 FY19 FY20 FY21

SMP exports (000’ tonne)

Higher exports led by subsidies from the Centre and state govts

of Gujarat and Maharashtra

Supported by Rs. 50/kg export subsidy by Gujarat govt during

Sept 2020-Mar 2021

SMP inventory to correct by end of current fiscal

200 164

116 170 153

- 100 200 300

- 50 100 150 200 250

FY18 FY19 FY20 FY21 E FY22 P

SMP inventory with Indian co-ops ('000 ton) International price (Rs/Kg) - RHS

Domestic price (Rs/Kg) - RHS

SMP inventory expected to correct by end of FY22 High exports supported by subsidies

Milk production to see steady growth over FY22-23

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Despite capex revival, debt metrics to remain adequate

• Long-term debt to increase this fiscal due to revival in capex, which was partly deferred in the last fiscal. Capex to be primarily undertaken by cooperatives and large private players

• Steady cash generation to help sustain gearing below 1.5x

• Despite drop in profitability and absence of interest rate subvention, dairies’ interest cover to remain adequate at over 5x

Source: CRISIL Ratings

3.8 3.9 4.3 4.5

5.9

6.7

2.7 2.1

1.6 0.8

2.4 2.3

0 2 3 5 6 8

‘000 Crore

LT debt Capex

9.75 9.69 9.54 10.57 12.02 13.14 1.41

1.29

1.21 1.24

1.34 1.38

1.00 1.25 1.50

0 4 8 12 16

‘000 Crore

Total debt Gearing

Capex partly deferred to restart in FY22, long term debt to rise Gearing to remain moderate

Interest coverage to remain adequate above ~5x

6.6

8.7

6.1 6.5

5.4 5.8

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Conclusion

 Growth in VAP sales and steady liquid milk sales to drive revenue growth from current fiscal onwards

 Milder disruptions during the second wave and inherent resilience support the growth momentum

 Operating profitability to moderate slightly to ~5% due to higher milk procurement cost

 Credit profiles of CRISIL-rated players to remain ‘stable’, with adequate balance sheet strength and liquidity

 Recovery momentum to continue, provided there are no major COVID waves and vaccination

picks up pace

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Thank you

For any queries write to us at [email protected]

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