India Ratings Maintains Positive Outlook on Dairy Sector

New Delhi, March 19, 2015: India Ratings & Research (Ind-Ra) has maintained a positive outlook on the dairy sector for FY16. This is based on vigorous sector growth both in demand and prices, continued policy and monetary support from the federal government and an expected improvement in the economy. Ind-Ra expects GDP to grow at 6.5% and agriculture at 2.0% in FY16. 

Domestic prices have remained firm in FY15 despite the collapse of global milk and dairy product prices in 2014. The demand for milk and milk-based products remained high due to changing dietary habits and rising buying power. As a result, dairy products witnessed a steep rise in prices in 2014. The dairy sector grew 12.6% yoy in FY13 and Ind-Ra expects it to grow at 15.6% in FY16. 

Seasonal variation in the production of milk has an impact on industry’s margins. As dairy cooperatives (DCs), unlike their private counterparts, continue to procure milk from farmers at the regulated prices even during the flush season, their margins are affected more than private players. In fact, DCs also procure the excess milk available in the market at regulated prices. 

The sector will reap benefits from the federal government’s increased focus on dairy development, enhanced availability of quality fodder, and promotion of bovine breeding, among other aspects of raising milch productivity. The government is also working on ensuring better transportation and storage options for milk and milk products. Ind-Ra expects the dairy sector to also benefit from the Jan Dhan Yojana aimed at improving financial inclusion in the country. 

Despite being the world’s largest milk producer, India is not a significant player in the global dairy market. India’s dairy exports have remained sluggish lately due to a drop in international dairy prices, sluggish global demand, rising cost of domestic milk production and the abolition of skimmed milk powder export incentives by the government in July 2014. Although FY16 is likely to open up new export markets for India in view of Russia not planning to give up on its import embargo on dairy products from Europe, the share of dairy exports in India’s total exports will remain low. 

OUTLOOK SENSITIVITIES 

Change in Government Policies: Ind-Ra expects the government to continue to support the dairy sector, especially cooperative sector in the form of capex and technological improvements. Any significant change from the present policy stance could affect both sectoral and issuer outlooks. 

Sharp Decline in Price: A sharp decline in prices (not a base case scenario) leading to a further erosion of the already thin profit margins of DCs could affect their Outlook. 

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)