Positive Days Ahead For Dairy Industry

For the last couple of years, there have been huge investment activities going on in the Indian Dairy industry. Recently, the Fitch group company, India Rating & Research has also given a positive outlook for the dairy sector in India for FY15. The rating agency mentioned the expected 16.3% yearly growth in organised market size, cost efficient production structure and manageable debt burden of the dairy sector as key triggers to assign an optimistic outlook till FY15. Here are the reasons why the Indian Dairy industry is looking positive.

Traditionally, milk in India plays a pivotal role in the daily diet of the people. It acts as a nutrient supplement and a nourishing drink for children. India is the largest producer and consumer of milk in the world sharing about 17% of global production. India produced 132 million tons (mt) of milk in FY13. The dairy market in India is quite huge and more than 50% is under the unorganized market. The overall market is currently growing by more than 5% in terms of volume on a yearly basis. Milk production in India has showed a compounded annual growth of 3% in the last three years (FY11-FY13). Fourteen states contribute 90% of the overall milk production in the country. These include Uttar Pradesh, Punjab, Haryana, Gujarat, Rajasthan, Madhya Pradesh, Bihar, West Bengal, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, Odisha and Kerala.

There are some issues in the dairy sector such as lack of infrastructure, managing the quality of milk and the large unorganised market. But, the dairy companies present in the organised markets are really making massive efforts and investments to understand the consumers, strengthen distribution, build infrastructure and brand. Additionally, scalping-up the front-end retail will drive the investment in infrastructure, encouraging the branding of milk and related products. The branded dairy and related products sector is expected to increase its sum to more than double from 31% at present. The Ministry of Agriculture and Food Processing in a report has estimated that the country's demand for dairy products will increase to 150mt by the year 2015. It also announced an investment of Rs 22000 crore in the next couple of years to meet the increasing demand in the country.

With the rise in disposable income and shift in people's consumption habits, from plant-based food products to animal-based proteins, India is spending more on high value food products. This shift in the consumption pattern is a growth driver for the sector. The sector is not only grabbing attention from the Indian government for various investments but also attracting foreign private equity investors. Companies like Tag Capital and Danone are considering buying about 80% stake in the Tirumala Milk, the second largest milk producer in south India, where Carlyle group has invested Rs 100 crore.

Further, milk production in India is higher than its demand. Coupled with the surplus of powdered milk, it provides great export opportunities to the Indian dairy market. In addition, the growing demand of milk in countries like Nepal, Sri Lanka, Bangladesh, Malaysia, Thailand etc will also offer export opportunities to the Indian milk market.

Some of the country's leading dairy companies which are in the news for the last couple of years are Mother Dairy, Vasudhara Dairy, Tirumala Milk, Bhagyalaxmi Dairy Farm and Modern Dairy. The companies in this sector in the Indian listed place, which has considerable exposure to the dairy business are Hatsun Agro Product, Heritage Foods, Modern Dairies, MilkFood, Umang Dairies and Vadilal Enterprises. 

On the financial front, the dairy industry's net sales registered a four year compounded annual growth (CAGR) of 14% for the year ending FY13. Among all these companies, Hatsun Agro Product, Heritage Foods and Umang Dairies outperformed the industry on the revenue front with a four year CAGR of 17%, 15.5% and 36% respectively. On the other hand, Vadilal Enterprises, Modern Dairies and MilkFood showed lower four year CAGR of 12.6%, 7.5% and 1.8% respectively in the same period.

During the same period, the dairy industry's net profit showed an impressive four year CAGR of 197%, where Hatsun Agro Product and Heritage Foods showed 102% and 73.5% four year CAGR respectively. However, the rest of the companies showed a negative growth in its profits for the similar period. 

On valuations front, companies such as Heritage Foods, Umang Dairy, MilkFood and Modern Dairies stocks are available at attractive valuations. The trailing twelve month (TTM) price to earnings multiple of the above companies are 8.6x, 14.6x, 12.8x and 2x respectively. However, Hatsun Agro Product is trading at TTM PE of 38x. Backed by a healthy growth in the past four years, on both revenue and net profit front, and huge growth opportunities in the sector, we expect the listed players to show a healthy growth in the coming period. Especially companies like Hatsun Agro Product, Heritage Foods and Umang Dairy are likely to show a good growth in the future.