Rising out-of-home milk consumption and cattle feed prices are not the only reasons for the increase in procurement costs, the heatwave is equally to be blamed, a report by ICICI Securities has said, highlighting how inflation will make dairy companies raise prices in the coming months.
Amul, Parag, and Verka, among other dairy firms, have already hiked milk prices this year by Rs 2, citing a rise in input costs owing to a sharp increase in energy, packaging, logistics and cattle feed costs. In fact, Amul has raised prices by 8 percent in the last two years, including the recent Rs 2 hike.
But ICICI Securities believes they "need to raise prices again" to pass on higher milk procurement prices.
"All the dairy companies under our coverage have taken some price hikes (5-8 percent), but rising milk procurement prices remain a key concern. We expect all dairy companies to take further price hikes in the first half of FY23," said ICICI Securities.
A look at how milk prices have gone up:
Higher skimmed milk prices and inflation
Another reason behind costlier milk is that global skimmed milk powder (SMP) prices have steadily increased over the past 12 months. They are up 26.3 percent year-over-year (YoY) and 3 percent month-over-month in June.
India is the world's largest milk producer but doesn't export much as supply meets domestic demand and also because exports don't earn much premium. But the recent shortage in milk products in the US and some other markets raised the prices of SMP.
"Higher SMP prices make exports attractive due to higher realisations. Higher demand and lower milk supply for domestic consumption will likely result in higher milk procurement prices for dairy companies," stated the report.
ICICI Securities also stated that rising prices of maize, wheat and soybean would lead to higher feed prices at the dairy farmer end.
A look at wholesale milk prices:
The report, however, warns that while higher milk prices will lead to higher revenues for dairy companies, margins are expected to see pressure.
ICICI Securities expects the EBITDA margins of dairy companies to correct 50-100 basis points in FY23. Earnings before interest, taxes, depreciation, and amortisation is a measure of a company's overall financial performance.
However, considering the strong return ratios and growth potential, ICICI Securities remains positive on the dairy sector, with Heritage Foods and Dodla Dairy as its top picks.
| Company | Rating |
| Heritage Foods | BUY |
| Dodla Dairy | BUY |
| Hatsun Agro | HOLD |
| Parag Milk Foods | HOLD |
Among the key risks for the dairy companies are higher than expected rise in milk prices, delay in hikes and irrational competition, it added.
