India's Dairy Sector to See 13-14% Revenue Boost This Year: Crisil Report

India's dairy industry is projected to see a robust revenue growth of 13-14 per cent this financial year, driven by strong consumer demand and an improved supply of raw milk, according to a report released on Wednesday. Crisil Ratings highlighted that the demand will be bolstered by increased consumption of value-added products (VAP) and a good monsoon forecast.

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The report noted that the rise in raw milk supply will also necessitate higher working capital for dairy companies. Despite continued capital expenditure by organised dairies over the next two years, resulting in increased debt levels, their credit profiles are expected to remain stable due to strong balance sheets.

Revenue Growth Driven by VAP Segment

Revenues in the dairy sector are anticipated to rise on the back of a healthy 9-11 per cent growth in volumes, despite modest realisation growth of 2-4 per cent. The VAP segment, which contributes 40 per cent to industry revenues, will be the main driver, fuelled by rising income levels and a shift towards branded products.

Mohit Makhija from Crisil Ratings stated, "Rising sales of VAP and liquid milk in the hotels, restaurants and cafes (HORECA) segment will also support revenue growth of 13-14 per cent in FY25." The report further indicated that improved raw milk supply is expected to increase by 5 per cent in FY25 due to better cattle fodder availability following a favourable monsoon outlook.

Improved Milk Supply and Profitability

The availability of milk will also benefit from the normalisation of artificial insemination and vaccination processes after previous disruptions. Additionally, measures such as genetic improvement in indigenous breeds and increased fertility rates of higher yield breeds will help enhance milk supply.

Crisil Ratings mentioned that steady milk procurement prices bode well for the profitability of dairies. Operating profitability is expected to improve by 40 basis points to reach 6 per cent this financial year. However, debt levels are anticipated to rise due to two main factors.

Factors Contributing to Increased Debt Levels

Firstly, a healthy milk supply during the flush season will result in higher skimmed milk powder (SMP) inventory, which will be consumed over the rest of the year. SMP inventory typically accounts for 75 per cent of the working capital debt for dairies. Secondly, continued milk demand will require increased debt-funded investments for new milk procurement, processing capacities, and expanding distribution networks.

Rucha Narkar from Crisil Ratings stated, "Despite additional debt contracted for working capital and capex, the credit profiles are expected to remain stable supported by low leverage." The report concluded that while revenue and profitability will improve this fiscal year, debt levels are also expected to increase mainly due to these reasons.

The dairy industry's outlook remains positive with strong consumer demand and improved raw milk supply driving growth. Organised dairies' continued investments in capacity expansion and distribution networks will support this growth while maintaining stable credit profiles.