Changing Scenario In India’s Dairy Industry

When we think dairies and dairy products in India, the first thing comes to our mind is the strongest brand in this country, Amul. An ever-green example of co-operative movement in the country headed by ‘India’s Milkman’ Verghese Kurien. Thereafter comes National Dairy Development Board which markets its Mother Dairy products and private sector biggie, Britannia. Dairies in India till recent times have been synonymous to a successful co-operative movement, courtesy Amul, the utterly butterly delicious! So much power the brand has remained across all these years that all other brands in this segment have come under long shadows of Amul.

During last two years, however, things have started changing though Amul continues to hold its numero uno position. Private players have started aggressive marketing activities and some of them even have geared up to get them listed in the country’s bourses. Three months back, Prabhat Dairy got itself listed on the capital market and this new year, Parag Milk has lined-up its IPO. The IPO which has obtained clearance from market watchdog SEBI, is aimed at raising Rs 1200 crore. In this special report, we will take you along in a travel down the dairy sector in India and also get you introduced with the latest happenings.

A quick technical look reveals, liquid milk constitutes the largest segment of the country’s dairy industry, valued at Rs 2,62,100 crore in 2014. Currently, 80 per cent of liquid milk is sold through the unorganised segment; however, the penetration of the organised segment is increasing on a day to day basis having recorded a CAGR of 22 per cent during 2007-2014. Going forward, organised market will grow at a CAGR of 21 per cent as against total market growth at a CAGR of 15 per cent by 2020, in value terms. Devendra Shah, Chairman of Parag Milk Foods said, “there are a lot of opportunities in Indian dairy industry as milk and dairy products’ production is expected to increase at a CAGR of 4.2 per cent over 2015-20 resulting to India overtaking the European Union to become the largest milk and dairy products producer by 2020. This growth was primarily driven by population growth, rising disposable income, urbanisation and westernisation of diets.”

Within the organised sector, the co-operative sector is by far the largest in terms of volume of milk handled, installed processing capacities and marketing infrastructure. Dairy cooperatives account for major share of processed liquid milk marketed in India due to cooperatives are highly supported by respective state governments. This is apart from funding the cooperatives to expand and augment infrastructure. Therefore, most private players are concentrating on value-added product as margins are much higher compared to liquid milk.

Milk products such as curd, buttermilk and paneer which used to be largely home made products but now, consumers preferring to buy packaged products. With the changing consumer consumption habits and daily lifestyle, most of the consumers are opting for the Value Added Dairy product (VADP) which are more consumed for direct consumption and do not require any processing at home. VADP’s consumption can only grow when these products become a part of the daily diet of Indian consumers like it has happened in the western world. The market for value-added dairy products in India is in at nascent stage. For instance, branded curd is less than 10 per cent of the total curd market in the country. At present the value-added product segment contributes around 20 per cent of the dairy market excluding ghee. With rising urbanisation, introduction of pro-biotic and other fortified products, growth in the VADP industry is expected to grow at CAGR of 20-25 per cent by 2020 in the organised segment.

Ghee currently controls the second largest market share in terms of revenue of Rs 61,822 crore in Indian dairy market followed by paneer and curd along with yoghurt with a market size of Rs 29,330 crore and 21,876.4 crore respectively. Sales in each of these product categories are expected to grow at a CAGR of 14, 14 and 15 per cent, respectively by 2020. Ice-cream which currently controls a minor market share in Indian dairy market is expected to grow at CAGR of 26 per cent till 2020 due to rising consumption.
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Since 1991, after the economic liberalisation, the government de-licensed the dairy industry, resulting in a sharp increase in private players. The dairy industry is a largely informal sector; still there is a huge scope for private players, even bigger than the cooperatives. There is very large scope for further growth of value-added milk products in urban as well as in small towns. In this business, the value-added products such as yoghurt and lassi have higher margins at around 12 to 18 per cent where as liquid milk is more or less commoditised and margins are 3-4 per cent which are getting attention from private players. Buoyed by the increased demand in value added products, Devendra Shah explained, “we intend to increase the share of our value-added product portfolio by focusing on health and nutrition to cater to evolving consumer trends. We have recently launched flavoured milk with higher protein content under our ‘Topp Up’ brand and buttermilk under our ‘Go’ brand with a few variants each. Further, we intend to sell premium quality butter and ghee through the farm-to-home concept under our ‘Pride of Cows’ brand.

Other Companies such as Heritage Foods, Hatsun Agro, Prabhat Dairy, Kwality Dairy have augmented their capacities in the recent past to meet the increased demand of milk products. Some of the large private players that are handling more than 1 million litres per day in the market today are Hatsun Agro, Heritage Foods, Tirumala Milk Products, VRS Foods, Sterling Agro Industries, Dynamix Dairy Industries and Bhole Baba Dairy Industries.

Besides typical brown-field or green-field expansion, Hatsun Agro Products acquired 100 per cent stake in Jyothi Dairy. Godrej Agrovet acquired an additional stake of 25 per cent in Creamline Dairy Products for Rs 150 crore, where it already holds 26 per cent in it. Even Kolkata-based diversified conglomerate ITC has forayed into the dairy segment with the launch of its new product Aashirvaad ghee this Diwali. Reliance also has an in-house dairy brand in its retail stores and biscuit major Britannia, whose dairy business constitutes 5 per cent of its Rs 7,775 crore turnover, have been planning to invest as much as Rs 300-350 crore.

Global dairy companies too are venturing into Indian milk derivatives business. In 2014, Groupe Lactalis SA,France, the world’s largest dairy player1 acquired 100 per cent stake in Hyderabad-based Tirumala Milk Products. Another French dairy major, Danone has also increased its presence in the Indian dairy sector with slew of product launches such as flavored curd, yoghurt etc. Other investments include Nestle India’s acquisition of 26 per cent stake in Indocon Agro and Allied Activities Pvt Ltd. The heavy advertising and promotions being undertaken by these private players is expected to lead to strong 20-25 per cent growth in the segment.

PE Funds In The Dairy Sector

India consumption story means long-term growth prospects and high return potential especially as VADPs are drawing interests of investors which have led to surge in the PE deals. In terms of finding investment sources to fund the capacity expansion, the large players are managing mix of debt and internal accruals to fund their expansions while some of the small and medium players done the same from increasing funding support from private equity (PE) firms. Today, dairy is among the top 10 sectors monitored closely by PE players. PE players are clearly optimistic about the Indian dairy industry. They have invested over Rs 900 crore in the sector with 15 deals since 2010 as per a CRISIL report.

The prominent deals include, Parag Milk Food to raise fund via IFC in 2013 and in 2012 through IDFC and Motilal Oswal whereas TVS capital funds and Rabobank group invested in Prabhat Dairy in 2015 and 2013 respectively. In 2012, Blackriver Investment invested into Dolda Dairy Ltd. Fidelity Growth Partners invested in Odisha-based Milk Mantra Dairy in 2013. Recent deals in the sector are the indications that the investors perceive value in the deals and see growth prospects in the Indian dairy space.

Growth Drivers

·         Rising share of high-margin milk products

·         Government incentives via priority lending status and National Dairy Plan

·         Favourable demographic trends

·         Innovations, better quality across price points

·         Improvement in supply chain infrastructure

Conclusion: