Crisil SME Tracker: Profitability of dairy units will rebound in FY21

Crisil SME Tracker: Profitability of dairy units will rebound in FY21

CRISIL expects a sharp hike in milk procurement costs relative to milk retail prices to deal a huge blow to the earnings before interest, tax, depreciation and amortisation (EBITDA) margins of dairy processors — especially private small and medium enterprises (SMEs) — in the current fiscal year (FY20).

The all-India milk procurement cost is estimated to have risen 19 per cent year-on-year (y-o-y) for dairy processors over April-December 2019, and is expected to rise by 18-20 per cent for the full fiscal. The uptick in prices has been fuelled by a 5-6 per cent decline in milk production in the current fiscal year — due to high temperatures during April-June, and floods in July-August.

Retail milk prices rose by 3-4 per cent during April-December 2019, and are expected to rise 10 per cent during January-March 2020, thus closing this fiscal 5 per cent higher y-o-y.

The impact will be magnified in states such as Karnataka and Haryana, where state governments offer a subsidy of ~4-6 per litre on milk supplied to cooperatives. While large private players are able to match the price offered by cooperatives to obtain the quantity of milk they require, SMEs are unable to do so, and fail to procure as much milk as they require.

Milk procurement prices are expected to stabilise in FY21, given abundant availability of water following a monsoon that was 10 per cent surplus compared with the long period average.

Though the surplus monsoon played spoilsport for kharif crops, lowering production by an estimated 6 per cent, it has boosted sowing of rabi crops and is expected to lead to a healthy harvest, improve animal health, and exert downward pressure on fodder prices in coming months.

With the monsoon expected to be normal in 2020 too, milk procurement prices are likely to be stable hereon. This is expected to stabilise milk procurement costs, easing pressure on SME margins from Q1, FY21.