The opening up of the economy had helped dairy companies post strong revenue growth in the April-June quarter. But the long-standing pressure on their profitability was not going to stop.
Hatsan Agro, Heritage Foods and Dodla Dairy posted revenue growth of 27-40% year-on-year on strong demand. However, their respective EBITDA margins declined by 530 bps during the quarter.
The industry attributed the lower performance on higher milk procurement prices, increase in raw material and logistics cost.
Besides, inflation in animal feed and lack of cyclical production exacerbated the poor performance, experts said.
According to Puneet Patni, Research Analyst, Swastik Investmart, “Since 2015, the milk production cycle has not seen a normal season, mainly due to weather effects such as extreme floods or droughts and volatility in skim-milk powder prices among others. are factors. In addition, we expect the current high milk prices to continue due to higher inflation in food items, fuel and fodder.
Against this background, analysts remain cautious on this area and believe that investment strategy should be guided by the company’s procurement network, contribution from value-added products and working capital intensity.
AK Prabhakar, head of research, IDBI Capital, says margins in milk are very low. Companies dependent on milk cannot tolerate the increase in prices. Investors should evaluate management strategy before buying and look for companies with high market share and focus on value-added products.
Value-added products such as cheese, cottage cheese, frozen desserts and ice cream are items where margins are generally higher, or in some cases, even double that of milk.
Analysts said the industry saw a 5-8% increase in prices during the first half of 2022, but more price hikes are expected in the second half.
For example, the management of Dodla Dairy has said that it aims to offset the rise in raw material and freight prices by raising the selling price in the coming quarters. Overall, experts expect margin pressure to continue in the short term despite some respite with the onset of the flush season.
Today, US retail inflation numbers for July will determine the mood of the market as Q1 corporate earnings enter their final stages.
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