Input prices exert pressure on margins

IN FOCUS / FOOD PROCESSING

India is the third largest global producer of food items, growing 150 million tonnes of fruits and vegetables, 91 mn.t. of milk, 6.2 mn.t. of fisheries products and 43 million eggs per year. India's livestock population at 483 million is also the largest in the world.

All this sustains a food processing sector, with major players in the product categories of dairy, meat, poultry, fish, bakery and alcoholic and non-alcoholic drinks.

However, sustained rise in prices has started eroding the margins of the food processing industry as key commodities and raw materials have become more expensive over the last few months.

According to credit rating agency ICRA Ltd, the uneven monsoons has caused a rise in prices across most agricultural commodities. With strong competition, most companies could not pass on the rise in costs to consumers and have had to absorb the rise in prices till now.

This is expected to affect margins of food processing companies adversely.

In the milk and dairy sector, milk powder production data indicated that the uptrend in production observed in FY2004 failed to sustain beyond April 2004, an ICRA study said.

Production in May 2004 declined below May 2003 levels. The drop in production was primarily because of lower milk availability. Milk availability was affected by the uneven monsoons.

Drop in production led to rise in prices of milk powder and affected the profitability of companies using milk powder as raw material, the report added.

Strong demand growth for milk products was continuing. In response, around 48 projects aggregating investments of Rs 6 billion were under various stages of consideration and implementation as of March 2004.

As of April 2004, the investment figure had increased to Rs 6.7 billion. The Gujarat-based co-operative, GCMMF, would be setting up 12 plants across the country.

The projects were expected to benefit from a full exemption of excise duty on dairy machinery announced in the Union budget 2004-2005.

Glaxosmithkline Consumer, which is primarily into malted foods, recorded 6 per cent growth in sales but its PBDIT declined by 10 per cent, primarily because of rise in raw material prices.

Modern Dairies' sales declined by 15 per cent but its PBDIT increased by 17 per cent.

In the confectionery segment, the outlook for chocolate and sugar confectionery was depressed. Total production in FY 2004 was 6 per cent lower than that in FY 2003, ICRA pointed out.

Production in April-May 2004 was roughly at the levels in these months in the previous financial year. Margins of chocolate and confectionery companies were likely to be under pressure owing to rising prices of major raw materials - cocoa and sugar.

Bakery sector production rose strongly by 6.9 per cent in the April May 2004, driven by strong demand for biscuits.

Independent estimates reveal that the biscuit category grew by around 8-10 per cent in calendar year 2003 to become one of the quickest growing categories in the Indian FMCG sector, ICRA admitted.

The performance was reflected in the financial results of the companies in the sector. Companies reported 17 per cent growth in sales during the quarter.

However, prices of the key inputs like flour, milk powder, oils and sugar rose.

As a result, the rise in costs in Q1 of FY 2005 was higher at 18 per cent against sales growth of 17 per cent, the study said. Owing to strong competition, players could not pass on increases in costs to the consumers. As a result, margins would come under pressure in this fiscal.

ICRA also reviewed the FY 2005 first quartetr results of a wider sample of companies operating in various segments of the food processing industry.

Two factors have helped food processing comapnies cope with the price rise in raw materials, ICRA stated in its report. First, companies witnessed strong sales and profit growth during the quarter. Finally, margins were aided by lower interest outgo, as the cost of borrowing declined.