Big brands line up to buy local players in dairy despite steep valuations

Lactalis, Danone, Nestle, Britannia and ITC are getting aggressive

This week French major Lactalis made its third acquisition in India, snapping up the dairy business of Prabhat, in a  transaction that has caught the attention of all. At Rs 1,700 crore, this is clearly a big deal in dairy and signals the importance Lactalis is giving the Indian market.

However, it is not the only company that is active in the domestic dairy category. A year after exiting the space, rival Danone re-entered India last week with an investment in yoghurt maker Epigamia. It did not disclose the deal size, but said it was open to more investments in India. Clearly, the French giant, which fights Lactalis globally, had realised exiting India wasn’t in its best interest at all. It is now making amends, one step at a time.

Britannia and Nestle, on the other hand, who are already present in the domestic dairy market, are now fine-tuning their strategy, targeting more value-added products. ITC, meanwhile, has major plans for the segment, including launching an array of milk-based beverages and frozen desserts from its Kapurthala plant in Punjab. It has already test-marketed regular milk, flavoured milk and dahi in select pockets.

Big players are clearly upping the ante in dairy as growth beckons. “India is a large market, where dairy in any form, whether milk, cheese, chaas, lassi  or curd, is an essential part of the diet of people. So, the growth prospects are significant for players. I am therefore not surprised to see companies wanting a piece of the market,” said R S Sodhi, managing director, Gujarat Co-operative Milk Marketing Federation (GCMMF), which markets the Amul brand of dairy products.

Sodhi isn’t wrong here. The Rs 1 lakh crore organised dairy market while being the preserve of state cooperatives has also seen private players dot the landscape as the demand for products remains high. Industry estimates peg the growth rate of the market at around 15-20 per cent per annum. Apart from packet milk, which is an essential commodity, value added dairy products are gaining ground in Indian homes, led by higher disposable incomes and changing habits.

Besides GCMMF in the west, there is National Dairy Development Board (which owns Mother Dairy) in the north, and Karnataka Co-operative Milk Producers' Federation (which owns Nandini) in the south among others. Private players include Hatsun Agro in Tamil Nadu, Heritage Foods in Andhra Pradesh and Parag Milk Foods in Maharashtra.

Foreign and Indian players eyeing acquisitions  though are also having to contend with expensive valuations in dairy. Prabhat's exit out of its dairy business, which will be bought by Lactalis’s subsidiary Tirumala Milk Products, is coming at 1.1 times its FY18 sales. On Tuesday, Prabhat's stock price fell 16 per cent from its previous day's close on the Bombay Stock Exchange, after climbing up 20 per cent in the first session, as investors reacted nervously to the deal. The stock was weak on Wednesday too, closing 2.45 per cent down from its last close on the BSE.

At a broader level, the money, say experts, that Lactalis is parting with for the transaction is significant, since talks with the Tata group earlier for Prabhat’s dairy business was stuck at a valuation of Rs 400 crore. The Tata group was not ready to give more and Prabhat's expectations were high, industry experts said.

"Companies buying assets in dairy seek access to every end of the value chain, from procurement to processing, distribution and marketing," says Sachin Bobade, research analyst at Mumbai-based brokerage Dolat Capital. “A key reason for the valuation of local players being steep is because of this factor,” he said.

Abneesh Roy, senior vice president, research, institutional equities, Edelweiss, says that the gestation period in dairy, when setting up a business is long, pushing companies who have deep pockets to take the inorganic route, even if valuations are steep.

Lactalis itself paid Rs 1,750 crore when acquiring Hyderabad-based Tirumala Milk in 2014, which was 1.22 times the latter’s FY13 sales of Rs 1,424 crore. It also coughed up nearly Rs 500 crore for the dairy business of Indore-based Anik Industries, a small regional player, to make inroads in the north. The push and pull for local brands will only grow.