India Dairy Needs to Focus on VADPs to Boosts Profits

INDIA - To increase profits, India dairy producers need to focus on value added dairy products (VAPDs), CARE (Credit Analysis & Research Limited) Ratings, a Mumbai based research & ratings agency said in a report.
calendar icon 13 August 2014
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The agency said, “The share of VADP in the milk and milk derivatives segment is growing currently at around 25 per cent every year and is expected to grow at the same rate until 2019-20.”

“Time has arrived for dairy players to skim the cream out of the milk business. Rising consumption coupled with better margins in the VADPs are driving the dairy players to get into the growth and higher profitable trajectory. Change in demographics and rapid urbanisation have resulted into manifold surge in the demand for VADPs,” the report said.

Due to convenience, health benefits and increased consumerism, milk derivatives like buttermilk, low fat yogurt and flavored milk are nowadays part of regular consumption.

The report said, “Profitability in liquid milk space ranges from four to five per cent, whereas the profitability in VADPs ranges from 12 per cent to 18 per cent.”

As per the National Dairy Development Board (NDDB) and Indian ministry of animal husbandry figures, liquid milk has a market share of 73 per cent, followed by eight per cent milk powder, eight per cent ghee, four per cent ice cream, three per cent butter, one per cent for curd, cheese, flavored milk and panner each.

Product innovations are likely to accelerate India’s dairy market which is anticipated to improve industry margins by attaining greater scale, higher capacity use and an increasing contribution from new milk variants, the report adds.

As per NDDB, the Indian dairy industry is all set to experience high growth rates in the next eight years with demand likely to reach 200 million tonnes by 2022 from 132 million tonnes in 2013.

Presently, only 20 per cent of the milk production comes from the organized sector comprising co-operatives and private dairies.

The paramount factors driving the growth in the dairy sector include rising disposable incomes, advent of nuclear families and fast/instant food gaining ground in India.

Other factors such as structural changes in food habits, expansion of fast food chains and popularity of pizzas and pastas aided the usage of milk variants of mozzarella cheese, processed cheese and flavored milk etc.

Consumer preference towards VADPs is taking forward the dairy sector. Besides brown-field/ green-field expansion, global dairy companies too are venturing into milk derivatives business in this part of the world.

The most recent one is the 100 per cent acquisition of Tirumala Milk Products Pvt Ltd by Groupe Lactalis SA, France and French dairy major Danone increasing its presence in the Indian dairy sector with slew of product launches such as flavored curd, yoghurt etc.

Other investments include Nestle India’s acquisition of 26 per cent stake in Indocon Agro and Allied Activities Pvt Ltd and Hatsun Agro Products Ltd acquiring 100 per cent stake in Jyothi Dairy Pvt Ltd.
Companies such as Parag Milk Foods Pvt Ltd, Prabhat Dairy Pvt Ltd have augmented their capacities in the recent past to meet the increased demand of milk products.

CARE also noted that India consumption story and diversification by dairy players into VADPs are drawing interests of investors which have led to surge in the private equity deals.

The dairy companies that includes Mother Dairy Fruit And Vegetable Private Ltd, Co-operatives associated with Gujarat Cooperative Milk Marketing Federation and some private dairies have been rated in the ‘AA’ and ‘A’ rating category on account of their superior procurement and marketing channels and high share of VADPs in product portfolio.

During fiscal year 2014-15, the credit profile of CARE rated dairy companies have broadly remained stable.

The entities with the right product mix of liquid milk and VADPs are expected to have better profitability and solvency parameters. Consequently, there is a high possibility of improvement in the credit profiles of such companies given the robust milk procurement and distribution system, the report stressed.

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