Milk price rise: Will dairy stocks milk gains for investors? Analysts weigh

Analysts believe the momentum in dairy stocks such as Dodla Dairy, Heritage Foods, Hatsun Agro is here to stay

Dairy stocks strategy amid milk price rise: Amid rising milk prices, analysts have an optimistic view on India's dairy stocks such as Heritage Foods and Dodla Dairy, aided by hopes of margin expansion in the near-to-medium term.

From a long-term perspective, too, they believe the growing population, changing lifestyle patterns, increasing disposable incomes, and rising health consciousness will drive the growth of dairy consumption in India.

"We are witnessing a price rise after a gap of nearly 16 months. Value added products, such as curd, cheese, and frozen desserts, too, will witness price increases. As procurement prices remain low, margin improvement will happen for dairy stocks," Ambareesh Baliga, an independent market analyst, said while suggesting investors to continue holding related stocks.

Rising milk prices

Global skimmed milk powder (SMP) prices increased about 14.3 per cent on a year-on-year (Y-o-Y) basis, and around 6 per cent on a month-on-month (M-o-M) basis in June.

Back home, pan-India wholesale milk prices rose by 2.8 per cent Y-o-Y last month, scaling to record highs in all the key regions.

Milk prices in South India are up 4.6 per cent Y-o-Y, 1.3 per cent in North India, 2.2 per cent in West India, and 1.8 per cent in East India on a yearly basis.

Among cooperatives and state-supported enterprises, Mother Dairy, Amul, and Karnataka-based 'Nandini' Milk increased prices by Rs 2 per litre in June, a first since February 2023.
 

Private listed players, however, have not raised selling prices yet. This, analysts said, may help them gain market share and raise prices later, as and when required.

Dairy companies, analysts noted, have adopted a grammage reduction policy rather than raising retail prices. This trend may continue going ahead, with price hikes, if any, likely in the last quarter of the current financial year (Q4FY25).

Margin expansion for dairy companies to continue

Analysts believe dairy companies may see Ebitda (earnings before interest, tax, depreciation, amortisation) margin expansion continuing in the first half of the current financial year (H1FY25).

This, they said, would be aided by lower milk procurement prices, which have declined by Rs 1 per liter in most regions, coupled with higher selling prices.

"The accumulation of low-cost skimmed milk powder (SMP) inventory in Q4FY24 may aid the dairy companies during cost inflationary period (likely Q4FY25)," said analysts at ICICI Securities led by Aniruddha Joshi and Manoj Menon.

They have a 'Buy' rating on Heritage Foods, and Hatsun Agro, and an 'Add' rating on Dodla Dairy.

In the March quarter of the previous fiscal year, Dodla Dairy reported Ebitda margin expansion of 492 basis points, Hatsun Agro saw 250 bps expansion, and Heritage Foods saw 220 bps margin improvement.

Long-term plays

On the bourses, dairy stocks have largely been milking gains over the past one month.

MilkFood share price, for instance, has surged 26.9 per cent, while that of Dodla Dairy, and Hatsun Agro have rallied 9.9 per cent and 4.5 per cent, respectively, ACE Equity data shows. By comparison, the benchmark Nifty50 has advanced around 4.5 per cent during the period.

Thus far in the calendar year 2024, meanwhile, Heritage Foods has rallied 82.5 per cent, followed by Dodla Dairy (25 per cent), and MilkFood (12 per cent) as against the Nifty50's 12 per cent and Nifty MidCap's 23.3 per cent surge during the period.

Analysts believe the momentum in dairy stocks is here to stay as a low per capita consumption, when compared to global standards, implies enormous potential for further growth, said Abhinil Dahiwale, research analyst at Investec.

"With key structural demand drivers in place, private dairy companies are poised for significant growth, especially as the industry shifts towards a more organised sector. As we factor in a mix of lower inflation and healthy demand ahead, the earnings for the dairy industry are set to boost," he added with a 'Buy' rating on Dodla Dairy, Heritage Foods, and Parag Milk Foods.