30% rise in milk procurement cost hits dairy firms' margins

Since November, milk procurement prices have shot up 30% to Rs 28-29 a litre across the country

Producers of dairy products are facing pressure on their profit margins due to a sharp hike in milk procurement prices this season.

Private dairies in Maharashtra were able to procure milk at Rs 17-18 a litre in 2014-15 due to a glut in supply but did not reduce the prices of their products. Since then milk prices started increasing to Rs 20-21 a litre in October last year.

Up to a point, dairy companies were maintaining their product prices by cushioning the increase in costs. But since November, milk procurement prices have shot up 30 per cent to Rs 28-29 a litre across the country. While private dairies increased their product prices by 6-7 per cent so far this season, they are taking a hit of more than 20 per cent on profit margins.

“A sudden increase in milk procurement prices has eroded our profit margins as we cannot pass on such a huge 30 per cent price rise to consumers. Thus, the industry is going to suffer. We, therefore, have represented to the Ministry of Agriculture and urged the minister to arrange for the import of skimmed milk powder (SMP),” said Amitabha Ray, managing director, Schreiber Dynamix Dairies Pvt Ltd, the producer of the Dynamix brand dairy products.

Vishal Punmiya, an analyst with Motilal Oswal Securities Ltd, cut profit (after tax) estimates for Parag Milk Foods by 37 per cent and 15 per cent for FY 18 and FY19, respectively. 

“There is no clarity on where procurement costs will settle and while the management has increased prices in 4QFY17, the hike is not adequate and even that will have an adverse initial impact on volumes in a downbeat consumption environment,” Punmiya said in the latest report.

Opportunity size in dairy is huge and gives growth visibility for branded players. Parag, with its strengths in procurement, distribution, innovation and management bandwidth, is best-placed among peers while the rest of the listed dairy players are either regional or have a dominant business-to-business positioning. 

Prabhat Dairy, another major dairy producer, has started increasing prices. According to the latest study by Emkay Global Financial Services, Prabhat Dairy has reduced expenditure on its promotional activities. 

Since most of the work of the company was done on a cost-plus basis, Prabhat Dairy would be least impacted with increases in milk prices, said Dhaval Mehta, an analyst with Emkay Global Financial Services Ltd.

Apart from Maharashtra, dairy companies in Gujarat and Uttar Pradesh have witnessed a sharp increase in their cost of milk procurement. The Gujarat Cooperative Milk Marketing Federation (GCMMF), which produces the Amul brand milk and other dairy products, has padded in the increase in milk procurement cost in the prices of its products. 

According to GCMMF Chairman RS Sodhi, the organisation had not cut its milk prices two years ago, when supply was in abundance. Hence, the impact of the price increase is lower and the company has comfortably passed it on to consumers.