India’s organized dairy sector anticipates rapid growth in next three years

A key characteristic of Indian dairy sector is that it is largely unorganised, explained Anuj Sethi, one of the directors at CRISIL Ratings, the company behind the report. 

“By unorganized, we mean the milk that is sold by milkmen (largely based in villages and small towns), vendors who collect the milk from local producers and sell it directly to households and sweet (mithai) shops in both urban and rural areas,”​ Sethi said.

On the other hand, the organized dairy sector represents milk that is processed using modern infrastructure and marketed through organized channels under their own brands, such as Amul, Mother Dairy, etc, he explained.

CRISIL Ratings has ratings on 84 firms comprising 60% of the organized capacity in India, according to the company.

Faster sector growth in the next three years​

Even though the organized dairy segment has been growing 22% annually for the last five fiscal years, it will do even better over the next three years, reports CRISIL.

“Changing consumer preferences is the key reason for the organized sector to grow at a faster pace,”​ Sethi said. “The rising purchasing power and increasing health consciousness of the consumers has shifted their preference towards branded products.”​

On top of that, value-added products such as curd and butter milk, which are traditionally made at home in India, are now among the branded products exhibiting the highest growth rates, Sethi said.

The value-added segment will witness 22% to 24% CAGR over the next three years, according to Sethi. Among all the dairy products in this segment, ice-cream, cheese and yogurt are expected to register highest growth.

However, the report suggests small and medium players, which are more dependent on liquid milk, could lose market share because of stiff competition from local and large organized players.

As the demand for value added products rises, the dairy processing capacity is also going to increase by 40% in three years, according to Sethi.

“The dairy processing capacity which is around 730 lakh litre per day (LLPD, 10 Lakh = 1 million) currently is expected to increase to 1050 LLPD… Northern India, especially Uttar Pradesh, Punjab and Haryana, which are big on milk production but have low organized dairy penetration, will witness the highest capacity addition,” ​he said.

In terms of finding investment sources to fund the capacity expansion, Sethi said the large players are expected to use a mix of debt and internal accruals to fund the expansion, while some small and medium players are expected to benefit from increasing funding support from private equity (PE) firms.

“Over Rs. 900 crore (Rs.1 crore = Rs.10 million) has been invested by PEs in the sector since 2010; the bulk of the investments however have happened in 2015.”​

Robust domestic dairy industry, yet bleak exports​

According to National Dairy Development Board (NDDB), India is the leading producer and also the largest consumer of milk and milk products. The milk India produces every year accounts for one fifth of the global output,  CRISIL research estimates.

However, India is a marginal exporter, since most of its exported products are powered milk, Sethi said.

“Exports are less because India itself is a huge market and the supply barely meets demand requirements… With the industry expected to grow at 15% CAGR, CRISIL expects the supply to be just about sufficient to meet this requirement.”​

Sethi added exports are less attractive now due to the sharp decline in international skimmed milk powder (SMP) prices in the last fiscal year.

“Sharp fall in the international market price of dairy products, attributed to reduced demand from China and Russia and higher production by the European Union and New Zealand, led to a steep decline in exports of SMP from India; dropped drastically to just about 25,000 tonnes in fiscal 2015 from over 1.25 lakh tonnes the previous year,”​ he said.

The biggest challenge India’s organized dairies face is assured availability and quality of raw milk, since it’s key for success in the industry, according to Sethi. So diverse and direct procurement from farmers, backed by robust infrastructure to keep logistics costs under check, is imperative.

“The organized sector thus focuses at establishing robust milk sourcing network, by setting up milk processing units closer to the procurement centres to ensure stable and quality milk supply,”​ he said.