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Dairy firms' Q1 profit margins slip on high milk procurement cost

Dilip Kumar Jha/Mumbai 18 Aug 17 | 05:00 AM

Operating margins of dairy companies remained under pressure in the June quarter due to an increase in milk procurement cost and reduced supply of raw material on farmers' week-long strike in May.

After a sharp increase in topline to Rs 616.44 crore for the April-June quarter, Chandrababu Naidu-promoted Heritage Foods posted net profit at Rs 10.37 crore for Q1FY18, a sharp decline from Rs 17.11 crore in the corresponding quarter last year. Similarly, Kwality Ltd reported a sharp decline in its June quarter profits to Rs 27.88 crore, from Rs 42.27 crore a year ago, while Umang Dairies posted a loss of Rs 2.90 crore compared to a Rs 1.48 crore profit. Interestingly, net sales of both companies jumped by 7 per cent and 11 per cent, respectively.

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Companies with increased focus on value-added products, such as Parag Milk Foods and Hatsun Agro Products, however, have maintained their profit margins in the June quarter despite interruption in milk supply due to the farmers' mass protest and roadblock. While organised sector players are adjusting increase in compliance cost of GST (goods and services tax), rollout without an increase in product prices, unorganised sector players are considering raising milk prices by Rs 2-4 a kg to pass on the increased cost burden to consumers.

"Gross margins of Heritage Foods were impacted by an increase in milk procurement cost which the company was unable to pass on to the consumers completely. EBITDA margins at 4.4 per cent was also hit by loss making Reliance Dairy business and increase in other expenditure which grew by 37.8 per cent yoy a function of higher branding expenditure. However, the company is confident with initiatives taken on cost optimization and expectation of lower milk procurement cost post monsoons. We expect the recovery to be gradual," said Dhaval Mehta, an analyst with Emkay Global Financial Services Ltd.

Source: Capitaline; Compiled by BS Research Bureau

Heritage has formed a joint venture with a France-based company Novandie SNC for manufacturing of yogurts and frozen desserts with an accumulative capex of Rs 75 crore in next five years. The company envisages Rs 300 crore of revenue from this joint venture in next six years when the plant is fully operational.

Trade sources said the average milk procurement cost jumped by 6-10 per cent in April-June quarter depending upon the location of the plant and proximity of plants from milk collection centres. Supply of raw milk got interrupted in May due to farmers' nationwide strike and pouring of milk on roads in protest of low realisation. Farmers were demanding implementation of M S Swaminathan report with a sharp increase in milk prices.

According to R S Sodhi, Managing Director, Gujarat Cooperative Milk Marketing Federation (GCMMF) which sales Amul brand dairy products, "Milk prices had declined drastically over the last one year. Milk prices, therefore are recovering. Prices are likely to remain stabilised now."

"Milk prices started moving up since December 2016 with average cow milk prices ranging between Rs 28 - 29 a litre now. Buffalo milk, however, is procured at Rs 38 a litre in the north Indian states. Milk supply got interrupted in May across the country due to farmers' nationwide strike. But, with the peak arrival season in October, milk prices might decline by Rs 1-2 a litre which would benefit dairy companies being GST costs fully absorbed by them," said Shirish Upadhyay, senior vice president (Strategic Planning), Parag Milk Foods Ltd, the producer of "Gowardhan" and "Go" brands dairy products.

"We intend to increase our direct procurement to over 50% over the next 3-4 years. This would accelerate the transition towards B2C by enabling faster shifting of our product mix towards consumer products, primarily fresh milk and value-added products. With our persistent focus on B2C segment, strong position in north markets, and planned product rollouts of value-added products, we shall continue to witness strong growth in the forthcoming years. We believe favourable demographics such as rising disposable income and changing consumer lifestyle would further support our growth story," said Nawal Sharma, president & head business transformation, Kwality Ltd.

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