Profits still elude food industry

Even as the Indian food industry is undergoing a gradual shift towards increased processing and value addition, companies operating in this sector are mired in low profitability, according to the updated CII-McKinsey Food & Agriculture Integrated Development Action (FAIDA) report.

While the top 10 poultry companies in the country reported a profit after tax margin of 4.1 per cent on a turnover of Rs 2,207 crore in 2002, the top 10 dairy companies recorded a margin of 4.6 per cent on a turnover of Rs 2,201 crore, the report says.

Though many companies have entered the food processing industry in the past few years, few have turned into large businesses, the report points out.

"Food companies have struggled to remain profitable. Dairy and poultry companies show after-tax profit margins of less than 5 per cent. Companies have been caught in a viscious cycle of high costs leading to high prices, resulting in inadequate scale to cover high fixed costs. Import duties on processing and cold-chain equipment and taxes on processed foods have worsened their profitability," it says.

Outlining the key constraints to profitability of processed food companies, the report says these range from high taxes on processed foods, high import duties on equipment, minimum support prices that prevent cost reduction in sourcing of inputs and the nascent state of contract farming in the country.

The report says investments in these sectors have largely come from domestic sources. "From over Rs 4,000 crore in 1995, domestic investment has tapered to Rs 2,000-2,500 crore in the last five years. Moreover, almost 85 per cent of the committed projects are not being executed. Because of this, the large investment required to integrate the chain does not seem to have materialised," the report notes. The actual investment in the sector between 1991 and 2000 was around 15 per cent of the planned investment, it added.

This is the reason why Indian agriculture continues to suffer from low productivity and yields, the report says.

While food processing accounted for 28 per cent of agriculture income in 1993-94, it went up to 37 per cent in 2000-01, the report says. At the same time, the agriculture sector grew from Rs 309,000 crore to Rs 399,000 crore.

"The absolute revenue increase in food manufacturing, at Rs 90,000 crore between 1993 and 2000, is significantly greater than those in infotech and pharmaceuticals. Products such as packaged atta, fruit juices, ready-to-eat foods, soft drinks, pickles and namkeens have grown at over 10 per cent annually. The organised share of products such as pickles, namkeens and papad is over 20 per cent," the report says.

The change, the report points out, has been driven by the evolving food habits of Indians. "The mix within the food basket has evolved, moving away from cereals to milk, meat, fruit and vegetables," the report says.