Value added products help Indian dairies tide over milk price volatility

The Indian dairy industry is seeing a steady growth in business despite volatility in milk procurement prices over the past couple of years, thanks to high margin value-added products (VADP) and a good product portfolio. Companies like Parag, Heritage and Dodla, among others, were able to absorb 10-27% price rise in milk procurement, mostly on the back of improved revenues from VAD products. Further, companies are focusing on increasing share of revenues from VADP to over 50% to drive growth, apart from increasing their market coverage. This, industry participants and analysts anticipate should also help increase the share of the organised dairy industry to 26% by 2020 from 22% in 2016. RG Chandramogan, managing director, Hatsun Agro, expressed concerns over an inflationary trend in milk procurement prices, which increases pressure on dairies, especially in the private sector. Many state governments like Telangana and Karnataka have extending subsidies of Rs. 4-5 a litre to the milk farmers, forcing many private dairies to match the procurement prices. According to industry analysts, VAD products enjoy margins of around 25-45%, against low margins of 6-8% that liquid milk entailed.
At present, companies such as Parag, Heritage and Prabhat derive nearly 64%, 24% and 26% of their revenues from VADP segment, respectively, and are looking to further increase its share. Several dairies are looking to increase their network of direct procurement of milk from farmers aimed at
reducing volatility in procurement prices and also bring in efficiencies. According to an Edelweiss report titled India Dairy-Creme de la creme: Milking the value chain, the organised Indian dairy industry will grow rapidly at 20% per annum, doubling into a Rs. 2.5 lakh crore market by 2020, led by increasing consumption of value-added products.