Stable To Lower Milk Procurement Prices Expected in Near Term: Report
The recent report stated that milk procurement prices are poised to remain stable or experience a slight decrease in the coming months. Several key observations shed light on the trends influencing milk prices and the factors contributing to this projection.
Wholesale milk prices have shown a year-on-year increase in August 2023, with prices rising by 10.5 per cent year-on-year and 0.6 per cent month-on-month in various regions across India.
As per the findings, the rate of milk price inflation in South India has demonstrated a consistent deceleration, declining from 12.8 per cent YoY in December 2022 to 9.6 per cent YoY in August 2023, with a slight inflationary trend on a month-on-month basis.
The stability in global Skimmed Milk Powder (SMP) prices, which have corrected by 31.1 per cent YoY in August 2023, along with the stabilisation of cattle feed prices, is expected to alleviate costs for Indian farmers.
It is anticiapated that the upcoming flush season, a healthy monsoon, a reduction in the impact of lumpy skin diseases, and the stabilisation of global supplies are anticipated to serve as crucial factors contributing to the stability of milk procurement prices. This trend reduces the likelihood of significant inflation in milk procurement prices in the immediate future.
With milk procurement prices being a significant determinant of margins for dairy companies, the sector is expected to witness a cyclical revival. Forecasts indicate an upcycle mode in margins for H2FY24E-FY25E ((H2 = Half year 2 part means the last 6 months, FY 24 = Financial year 2024 and E = end)) following a period of weakness in the previous fiscal year and the first half of FY24.
The modeling of dairy companies under coverage points towards an expansion in EBITDA margins for the latter half of FY24. Factors contributing to this improvement include lower raw material (RM) prices, the carry-over effect of price hikes, operational leverage coming into play, and a favorable base.
In a broader sector perspective, the dairy industry is poised for positive growth due to underlying structural triggers, including the shift from unorganized to organized sectors, increased consumption of value-added products, and a promising blend of robust return ratios and growth potential. Among the top picks, Heritage Foods is recommended as a "BUY," Dodla Dairy as an "ADD," and Hatsun Agro as a "HOLD."
As the Indian dairy landscape navigates through these nuanced trends, the stability in milk procurement prices and the ongoing cyclical revival offers insights into the sector's promising trajectory for the coming months.
