Public Finance
Rating Outlook
S
(FY15: S
)
Positive Stable Negative/RWN
100%
80%
60%
40%
20%
0%
End-FY14 End Feb-2015
Source: Ind-Ra
Sector Outlook
P
(FY15: P
)

Government support and enabling environment

Increasing demand due to rising purchasing power

Low profit margin (DCs and less diversified private entities)

Inclusion, investments and innovations
Sector Outlook Remains Positive: India Ratings & Research (Ind-Ra) has maintained a positive outlook on the dairy sector for FY16 as the sector is witnessing strong growth both in demand and prices. We expect the dairy sector’s market size to increase 15.6% yoy in FY16
(FY13: 12.6%). Milk production is forecasted to grow at 4.6% yoy in FY16 (FY14: 4.2%). The agency expects the dairy sector to remain one of the focus areas of the government to improve the economic wellbeing of rural population. Therefore, the government programmes and policies aimed at supporting the industry are expected not only to continue but also be strengthened further.
Rating Outlook Stable: The agency has maintained a Stable Outlook on its rated entities for
FY16. In FY15 (until end-February 2015), Ind-Ra affirmed all its rated dairy entities (dairy cooperatives (DCs) and private entities). Ind-Ra expects this trend to continue in FY16.
Firm Milk Prices : Despite a collapse in the global milk and dairy product prices in 2014, domestic prices have remained firm. We do not expect the rising dairy product prices to affect demand for milk and milk-based items such as cheese and butter in light of the changing dietary habits and rising disposable income of the Indian population. Also, agency’s expectation of GDP
1
growing at 6.5% and agriculture at 2.0% in FY16, up from 5.6% and 1.9%, respectively, in FY15, will boost the dairy sector in general and the demand for milk and milk products in particular.
Low Profitability of DCs : DCs operate with the primary focus of providing additional income to farmers without profit maximisation. We expect DCs to continue to report low profit margins of below 5% (profit after tax margins) in FY16. The open market procurement prices of milk crashed in the flush season as private players did not absorb the increased supply of milk.
However, DCs continued to procure milk from farmers at regulated prices, due to their in-built social objectives. Also, since the magnitude and pace of output price revisions, especially for liquid milk, are decided after consulting the state governments, it further constraints the ability of the DCs to improve margins.
3Is of Progress - Inclusion, Investments and Innovation: The dairy sector is likely to benefit from the aimed financial inclusion with the Ministry of Finance necessitating banks to bring 15.4 million dairy farmers registered with DCs under the ambit of Jan Dhan Yojana (JDY). Also, the federal government plans to invest INR9.7bn according to the Union Budget 2015-16 for dairy development, increasing the availability of quality fodder and promoting bovine breeding, among other aspects of enhancing milch productivity.
Analysts
Devika Malik
+91 11 4356 7259 devika.malik@indiaratings.co.in
JB Sivakumar
+91 44 4340 1714 jb.sivakumar@indiaratings.co.in
Sunil Kumar Sinha
+91 11 4356 7255 sunil.sinha@indiaratings.co.in
Along with adding three more dedicated trains to the existing three between Palanpur and
Baraut for the transportation of milk, Indian Railways has worked upon a special design for milk wagons and is adding 30 new specially designed high capacity milk tankers. These tankers have 11.5% higher capacity and can carry 44,600 litres of milk. These steps will result in lower milk wastage and enable the transportation of milk to areas hitherto not covered at lower cost and less time.
1 The GDP and value of output numbers mentioned/used in this report refer to factor cost at 2004-05 prices
www.indiaratings.co.in 19 March 2015

FY16 Outlook: Dairy
March 2015
Public Finance
Sluggish Global Demand : The international dairy market has been in turmoil during FY15.
Due to a drop in international prices, sluggish global demand, rising domestic prices and the abolition of skimmed milk powder (SMP) export incentives by the government in July 2014,
India’s dairy exports have remained sluggish lately. 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 the total exports will remain low. Ind-
Ra estimates that India will continue to be a net dairy exporter in FY16 as the government is likely to maintain its stand on ‘no import duty concessions on dairy products’.
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 further erosion of the already thin profit margins of DCs could affect their Outlook.
DCs operate in a quasi-regulated environment, in tandem with state governments. Most policy decisions such as procurement and output prices and their magnitude and pace of revision, especially for liquid milk, are decided after consulting the state governments. At the time of glut during flush season, DCs face typical problems of excessive milk supply. While increased milk supply generally leads to lower procurement prices, due to their social objective, DCs generally don’t cut the procurement prices leading to further shrinkage of their already thin profit margins.
This phenomenon is not limited to India alone.
A little over one-thirds of the marketable surplus is sold as loose unpackaged milk in urban areas, about 15% is sold as packaged milk through formal markets and 11% is sold as milk products through formal markets. Since the profit margins on loose milk are miniscule, DCs are diversifying to produce milk products. They are also assisting farmers by providing quality fodder and semen to improve milk production. Ind-Ra expects these steps to continue in FY16 to boost milk production and thus improve the profitability of DCs and strengthen their balance sheets.
The membership base of DCs is impacted by the international prices and demand. A sluggish international market often leads to domestic private players reducing their milk procurement from milk farmers. This prompts in milk farmers to sell their milk to DCs. DCs, bounded by their objectives, have to procure the milk even if they are already running in surplus. This results in most of their plants operating beyond their installed capacity. However, a bullish international market leaves DCs with shortage of milk. During such times, the government imposes export/import bans on the dairy products to iron out the supply demand mismatches.
The support DCs receive from National Dairy Development Board (NDDB) and the government
(central and state), in the form of cheaper/subsidised loans, is likely to continue considering their quasi-regulated stature and strong linkages with rural economy.
Various government schemes finance a major portion of DCs’ capex, thus alleviating their stressed balance sheets. Ind-Ra expects liquidity strain to continue in FY16.
2

Public Finance

INR4.88bn for Dairy Vikas Abhiyan

INR4.82bn for National Dairy Plan,
Dairy Entrepreneurship, National
Programme for Dairy Development and Delhi Milk Scheme

Excise duty on dairy products packaging machinery reduced to 6%

Benefiting 15.4 million dairy farmers with JDY

Milk sale proceeds to be directly transferred to bank accounts

JDY to help milk farmers have a bank account
FY16 Outlook: Dairy
March 2015
The Union Budget 2015-16 provides an outlay of INR4.82bn for National Dairy Plan, Dairy
Entrepreneurship, National Programme for Dairy Development and Delhi Milk Scheme and
INR4.88bn for Dairy Vikas Abhiyan. Also, the industry continues to benefit from the reduced excise duty on the machinery used for the packaging of dairy products (to 6% from 10%-12%) announced in the Union Budget 2014-15. Ind-Ra expects higher government support to the dairy sector in the medium term. This will help dairy players both in DCs as well as private ones.
The Ministry of Finance has necessitated banks to bring 15.4 million dairy farmers registered with DCs across the country under the ambit of JDY at the earliest. This will not only enable the farmers to take advantage of JDY but also ensure that payments by DCs would now be made directly to their respective accounts instead of being paid through cash twice or thrice a month.
Till 23 February 2015, 132 million JDY bank accounts were opened with over INR110bn being deposited in them. We believe the successful implementation of JDY will uplift the rural economy while benefiting the dairy sector and enable dairy farmers to avail cash credit facilities directly from banks.
Figure 1
Median net sales (FY11) (LHS) Median net sales (FY13) (LHS)
(INRbn)
70
60
50
40
30
20
10
0
4.27
4
5
Number of observations FY11 (RHS)
10.42
DCs and units
41.21
60.64
1
1
Diversified DCs
1.49
21
18
1.91
Milk & value added dairy products -
Private company
Source: Industry analysis and Ind-Ra
Number of observations FY13 (RHS)
1.21
9
10
2.21
Value added dairy products - Private company
6
1.48
6
8.90
Diversified private companies
(No.)
24
20
16
4
0
12
8
Figure 2
Median EBITDA margins FY11 (LHS) Median EBITDA margins FY13 (LHS)
(%)
8
6
4
6.63
Number of observations FY11 (RHS)
21
5.47
7.60
18
Number of observations FY13 (RHS)
4.90
7.23
10
3.52
4.99
(No.)
24
20
16
12
3.03
2
0
4
1.28
5
DCs and units
0.02
1
1
Diversified DCs Milk & Value added dairy products -
Private Company
9
Value added dairy products - Private company
6
7
Diversified private companies
8
4
0
Source: Industry analysis and Ind-Ra
Private dairy companies have also been operating on paltry and almost unchanged operating margins (largely ranging between 5% and 8%) during the last five fiscal years. Companies operating in value-added dairy products are comparatively better placed than the ones with milk as the prime revenue generator. With raw materials (largely raw milk) accounting for 70%-
80% of the total expense burden, rising milk prices adversely impacted their profit margins. Ind-
Ra expects raw material cost to continue impacting the margins of dairy players in FY16.
3

Public Finance
Figure 4
Actual Ind-Ra's forecast
(MT)
160
120
80
CAGR:
4.41%
CAGR:
3.23%
CAGR:
5.11%
40
0
FY92 FY96 FY05 FY14 FY16
F: Forecast (F)
Source: NDDB and DAHD
Figure 5
Dairy products (unregistered)
Dairy products (registered)
Milk (INRbn)
6,000
5,000
4,000
3,000
2,000
1,000
0
F: Ind-Ra's forecast
Source: National Accounts Statistics,
Ind-Ra
FY16 Outlook: Dairy
March 2015
Private companies face intense price competition from DCs. A higher degree of diversification remains the key to achieve decent margins in the dairy industry. However, Ind-Ra believes this will take a while and profit margins of dairy sector players may not witness a considerable jump in FY16.
Figure 3
Median total debt/equity (FY13) (LHS) Number of observations FY13 (RHS)
(x)
4
(No.)
20
18
3
16
9
12
2
5
3.62
7
8
1
0.45
1 0.63 0.79
0.91
4
0 0
DCs and units Diversified DCs Milk & value added dairy products -
Private company
Value added dairy products - Private company
Diversified private companies
Source: Industry analysis and Ind-Ra
Both private players and DCs cannot plough back huge amounts for expansion or modernisation, thanks to their thin margins. This negatively impacts their gearing. Although the dairy industry has been able to largely maintain a comfortable gearing, the net worth of some companies was eroded in FY13. Also, seasonal volatility in milk production increases
DCs’/private companies’ dependence on cash credit lines.
The Indian dairy industry grew steadily to 138.0 million tonnes (MT) in FY14 from 17 (MT) in
FY51 (Source: Department of Animal Husbandry, Ministry of Agriculture). ‘Operation Flood’ and other initiatives by the state and central government to improve the livestock productivity and increase the availability of quality fodder helped India to become the worlds’ largest milk producer. This has resulted in India being a net exporter of dairy products since 2001. In response to the successful implementation of Operation Flood, the Indian dairy sector grew at a CAGR of 5.11% over FY05-FY14 against a CAGR of 3.23% over FY96-FY05.
Ind-Ra expects the dairy industry to expand to INR5,546.90bn in FY16 from INR3,592.56bn in
FY13. The milk production is expected to increase to 151MT by FY16 (FY14: 138MT). The government is striving to expand the milk production to 180MT-200MT by FY22 to meet the growing demand and address the nutritional requirement of country. Ind-Ra estimates that if the industry continues to grow at FY14 levels (4.21%), it will be able to achieve the set target.
India’s share in the global milk production increased to 18.4% in 2013 from 14.72% in 2005, and is likely to increase to 21.78% by 2023 (Organisation for Economic Co-operation and
Development (OECD) and Food and Agriculture Organisation (FAO)).
Figure 6
2005
(%)
25
20
15
10
5
0
India
P: Provisional
F: Forecast
Source: OECD and FAO
2008 2012
United States of
America
2013 (P) 2014 (F)
China
2015(F)
Pakistan
2020(F) 2023(F)
Russian Federation
4

FY16 Outlook: Dairy
March 2015
Public Finance
Although the proportion of milk to the value of output of agriculture and livestock sector improved to 19.12% in FY13 from 17.79% in FY08, it was lower than 19.41% achieved in
FY05. Also, the contribution of milk to the value of output of livestock declined to 65.05% in
FY13 from 68.82% in FY05. The main reason for this was the sharp increase in domestic meat consumption and meat export from India.
The Indian dairy industry is highly fragmented and unorganised. Milk production, in particular, emanates from over 70 million rural households scattered across the country. Almost 45% of the milk produced is consumed by households themselves. Of the remaining 55%, which is marketable surplus, 34.5% is sold in the urban market as loose unpackaged milk and 40% is sold as processed products through informal markets. Only a little over 25% of the milk and milk products are sold through formal markets in India.
Figure 7
Share of marketable surplus Production (%) Use
34.5%
40.0%
14.5%
11.0%
45 Home consumption
55 Marketable surplus sold in urban and rural markets
(informal and formal)
19 Sold in urban markets as loose unpackaged milk
22 Sold as processed products through informal markets
8 Sold as packaged milk through formal markets
6 Sold as packaged milk product through formal markets
Source: Small Dairy Development: Lessons Learned in Asia, FAO and Ind-Ra
Despite being the largest milk producer, there is only one Indian company in the global top 20 milk companies’ list (15th position with 0.6% global market share; source IFCN Dairy Data).
Until 2002, cooperatives were the dominant players in the formal sector. However, with the liberalisation of the industry, private investment has increased quite significantly. Yet, the organised sector’s share in milk procurement is miniscule. The formal channel, with its packaged milk and dairy products, accounts for only about 25.5% of the marketable surplus, which is about 14.0% of the total milk production.
India's dairy exports, on an average, contributed only 0.09% to the total exports and grew at a
CAGR of 22.02% over FY06-FY14 to INR33.26bn. Dairy imports during the same period grew at a CAGR of 25.57% to INR2.14bn and on an average accounted for only 0.03% of the total imports. India’s dairy exports and imports were affected during FY11 and FY12 due to the export ban imposed on milk products such as skimmed milk powder (SMP), whole milk powder
(WMP), dairy whitener, infant milk foods, casein and casein products due to shortages in the domestic market.
India’s dairy export market is dominated by milk, cream and ghee. Milk scarcity in FY11 and
FY12 resulted in milk and cream (average: 45.38%) outweighing the usual import products such as butter and related dairy spreads (30.45%) and whey (19.1%).
5

Public Finance
Figure 8
Yogurt, buttermilk and alike (LHS)
Butter and related dairy spreads (LHS)
Milk and cream (LHS)
Import value (RHS) (m Kgs)
180
150
120
90
60
30
0 a April-November
Source: Ministry of Commerce and Ind-Ra
Figure 9
Whey (LHS)
Cheese and curd (LHS)
Export value (RHS)
(INRbn)
35
30
25
20
15
10
5
0
ALASKA
(USA)
UNITED STATES of
AMERICA
14%
U.K.
6%
DENMARK
8%
FRANCE
21%
SPAIN
3%
ALGERIA
6%
EGYPT
9%
ITALY
6%
TURKEY
7%
SYRIA
3%
PAKISTAN
6%
NEPAL
3%
YEMEN
6%
UAE
9%
Bangladesh
19%
MALAYSIA
5%
SINGAPORE
3%
NEW
ZEALAND
16%
Top Ten Dairy Import Destinations (94%) Top Ten Dairy Export Destinations (72%)
Disclaimer: The presentation of material in the maps in this report is not warranted to be error free and does not imply the expression of any opinion whatsoever on the part of
India Ratings & Research Private Limited (Ind-Ra) concerning the legal status of any country or area or concerning the delimitation of its boundaries. Ind-Ra makes every effort to ensure, but does not guarantee, the accuracy, completeness or authenticity of the information in this information product. The external boundaries of countries in the maps have not been authenticated.
Source: Ministry of Commerce and Ind-Ra
The top 10 export destinations accounted for 72.33% of the country’s dairy export with
Bangladesh (19.17%) topping the list in FY14. Even in case of import, the top 10 countries accounted for 94.15% of the total dairy import as
21.42% of India’s dairy import was from
France alone.
FY16 Outlook: Dairy
March 2015
6

FY16 Outlook: Dairy
March 2015
Public Finance
Figure 10
Year
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exports (000 metric ton) Per capita domestic availability (grams per day)
75.6
45.4
69.4
70.1
34.4
37.4
25.6
87.8
159.3
Source: Agricultural & Processed Food Products Export Development Authority, NDDB
241
251
260
266
273
281
291
297
302
Although India is no longer dependent on imports to meet its demand for dairy and dairy products, it does not feature among the key dairy exporting countries of the world. India’s share in the world dairy export is miniscule (average share 2000-2011: 0.62%). Most of the milk and dairy products are consumed domestically due to dietary habits and the restriction imposed by the government on dairy exports during deficit years. Another reason for muted export is the lower share of organised sector in the marketable surplus of milk and dairy products in India.
Global price movement impacts the quantity of export and imports of milk and milk products. A higher international price incentivises producers to push up the exports and vice versa. A drop in the international price of dairy products in FY10 resulted in dairy exports dropping by 50.99%
(quantity).
Figure 11
(INR per kg)
300
250
200
150
100
50
(Except for FY11 and FY12 due to export ban)
Export (RHS) Import (RHS) Export price (LHS) Import price (LHS)
(m kg)
180
150
120
90
60
30
0 0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
(April-Nov)
Source: Ministry of Commerce and Ind-Ra
The global dairy market is in turmoil. One of the reasons for this turmoil is the new strategy adopted by China lately. Now China instead of importing milk and milk items is increasingly meeting its dairy demand by buying up diary assets in New Zealand. This is similar to the strategy China adopted earlier with respect to sourcing of natural resources to meet its domestic demand. India’s dairy exports haven’t performed well during the first eight months of
FY15 due to a drop in international prices backed by lacklustre international demand, rising domestic prices and the abolition of SMP export incentives taken by the government since July
2014. Though Ind-Ra expects dairy exports to pick up in FY16, these events will continue to impact exports in the first half of FY16. Although the lifting of European milk quotas will increase competition, it is unlikely to impact India’s exports as the international prices continue to be unattractive. However, we expect India to remain a net dairy exporter in FY16 with surplus SMP stocks and the government maintaining its stand on no import duty concessions on dairy.
FY16 is also likely to open up new export markets for India in light of Russia not planning to give up on its import embargo on dairy products from the European Union, the US, Australia,
Canada and Norway in light of the Ukrainian crisis. Gujarat Co-operative Milk Marketing
Federation Limited (Amul), India’s largest DC, is exploring export options to Russia.
7

FY16 Outlook: Dairy
March 2015
Public Finance
Over fourfifths of the country’s milk is produced by 10 states - Uttar Pradesh, Punjab, Haryana,
Gujarat, Rajasthan, Madhya Pradesh, Bihar, Maharashtra, Tamil Nadu and Andhra Pradesh - each contributing more than 5% to the total production. With 17.46% contribution, Uttar
Pradesh was the largest milk producing state over FY09-FY13. Phase-
I of NDDB’s dairy development plan focused on the top 10 along with four other states
– Orissa, Kerala,
Karnataka and West Bengal – which were identified as having higher growth potential. These four states collectively account for 11.4% of the total milk production in the country.
Figure 12
13.9
9.7
7.0
23.33
Figure 13
352
945
447
384
720
539 310
6.8
10.3
8.8
445 308
8.7
12.8
391
7.0
Source: National Dairy Development Board and Ind-Ra
Figure 14
Chandigarh
326.7
269.4
Delhi
252.53
399.8
313.8
493.0
257.7
Sikkim
214.43
310.0
Source: National Dairy Development Board and Ind-Ra
Figure 15
Chandigarh
282.1
285.9
359.8
277.5
367.8
224.1
Delhi
282.7
290.4
182.4
223.6
Pondicherry
205.7
Source: National Sample Survey Office and Ind-Ra Source: National Sample Survey Office and Ind-Ra
8

Public Finance
Figure 16
FY09 FY11 (MT)
25
20
15
10
5
0
FY13
Figure 17
(Average during FY08-FY12)
No of states and Uts (LHS)
(No.)
20
15
10
5
0
Average per capita availability
(All India = 100) (RHS)
300
250
200
150
100
50
0
>2x >1x but
<2x
>0.5x
but <1x
<0.5x
Note: State's distribution is based on all
India per capita availability (x)
Source: NDDB
Source: NDDB
Eight states witnessed a CAGR of over 5% in milk production during FY09-FY13. Nagaland witnessed a CAGR of 10.49% followed by Andhra Pradesh (7.46%). However, Delhi witnessed a 10.64% drop in its production due to rapid urbanisation and declining agricultural area.
India’s per capita availability of milk grew at a CAGR of 3.18% over FY05-FY12 and improved to 296.5gms daily in FY13, higher than the world average of 294gms. On the other hand, per capita milk consumption grew at a CAGR of 1.64% over FY05-FY12 to 144.43gms daily in rural
India and at 0.86% to 180.73gms daily in urban India. The consumption is largely concentrated in the major milk producing states/union territories. Also, though the overall consumption of milk is higher in the urban areas than their rural counterparts, in Haryana, Himachal Pradesh,
Punjab, Rajasthan, Sikkim, Uttarakhand and Chandigarh the rural milk consumption is higher than the urban consumption. Ind-Ra does not expect any change in the consumption pattern in the medium term.
Except for Bihar and Maharashtra, the top 10 milking states have a per capita availability of milk higher than the national average. With 947gms per day (average), Punjab had the highest per capita availability of milk over FY08-FY12, followed by Haryana (665gms). However, the per capita availability of milk in some of the major states such as Odisha, West Bengal,
Meghalaya and Chhattisgarh was quite low at only 85gms per day (0.31x of the country).
Over 2008-2012, India ’s average contribution to global milk production was 16.5%. Globally, cow is the main source of milk, but in India it is buffalo. The country accounted for 67.5% for worlds’ buffalo milk. 51.86% of India’s milk comes from buffalos, followed 44.26% from cows and the remaining from goats.
India houses 15.5% of the world’s milch animals and nearly 64% of the world’s milch buffalos.
Though the country exceeds the world average yield per animal in case of buffalo and goat, it lags far behind in case of yield per cow. This is mainly due to the primitive ways followed for dairy farming and milk collection, and the deteriorating quality of indigenous breed. Although semen production in the country increased to 81 million straws (FY13) from 22 million straws
(FY00) and the number of artificial inseminations increased to 62 million from 20 million, low conception rate (overall conception rate of 35%), low awareness and accessibility issues constrain the breeding of milch animal.
State-level apex co-operative societies are providing quality semen and cattle feed at subsidised rates to their members. The government has launched Rashtriya Gokul Mission in
2014 under the National Program for Bovine Breeding and Dairy Development. This mission focuses on conserving and developing indigenous breeds and improving their productivity through professional farm management, superior nutrition and gradation of indigenous bovine germplasm. The scheme had a total outlay of INR5.5bn in the 12th Five-year Plan (including
INR1.5bn allocated for FY14).
FY16 Outlook: Dairy
March 2015
9

Public Finance

New design of milk wagons finalised

30 new specially designed milk tankers with 11.5% higher capacity being added

Three dedicated milk trains added between Gujarat and Uttar Pradesh
Figure 18
Butter and cheese
Ghee
Skimmed cow milk
Dried milk
Others
( 000 tons)
3,000
2,500
2,000
1,500
1,000
500
0
2000 2006 2012 a Others comprise evaporated and condensed milk, whey and fresh cream
Source: FAO and Ind Ra
Figure 19
(% change, yoy)
India (LHS)
Global (RHS)
20 60
40
16
12
20
0
8
4
-20
-40
0 -60
Jan 11 Dec 11 Dec 12 Dec 13 Dec 14
Source: Office of Economic Advisor and
IFCN
Of the total milk production, about 80% falls under the perishable category due to the inadequate storage/cold chain facility. Despite being the largest producer of milk in the world,
India has the maximum quantity of milk being classified under perishable category due to the paucity of cold storage. Only about 0.3% of the existing cold storage capacity in India is being used for storage of milk and milk products. To augment the transportation of milk, Indian
Railways is adding three more dedicated trains to the existing three between Palanpur and
Baraut. Indian Railways is adding 30 specially designed, higher capacity milk tankers of 44,600 litres each (present capacity: 40,000 litres) for NDDB and Amul. It also plans to add another 30 milk tankers over the next three years. Indian Railways has also identified locations to refrigerate milk and other perishable dairy produce before transportation.
India is a meagre player in the processed dairy product market (2012: 5.37MT). According to
Food and Agriculture Organisation of the United Nations (FAO), it accounted for only 3.05%
(average) of the world’s dairy processed market over 2000-2012. The low share is attributed to the different consumption pattern of dairy products in India than its western counter parts. The consumption is more inclined towards home-derived traditional dairy products.
However, both private players and DCs have started capitalising on the higher-margin valueadded dairy product segment. Consumers are being lured by their strong marketing drive largely focusing on the products’ nutritive benefits along with taste. This, along with increasing disposable income and rapid urbanisation, is gradually changing the consumption pattern of
Indians. The processed dairy products’ market in India picked up at a much faster pace of
2.68% (CAGR) than the world’s (0.79%) over 2000-2012. Ind-Ra estimates this market to grow to INR128.32bn by FY16. However, its contribution to the dairy market is expected to remain around 2%.
Ghee, skimmed milk and butter are the major dairy products in India and account for about
97% of the processed dairy market. India’s share in world’s ghee market was 77.19%
(average) and it grew at a commendable CAGR of 3.84% during 2000-2012. The production of butter and fresh cream has also increased at an impressive CAGR of 6.80% and 21.15%, respectively, during the same period.
Milk constitutes 4.8% (2014) of dietary energy supplies available to Indians and plays a special role in their diet. It is a major source of protein in the predominantly vegetarian population.
However, India, with an undernourished population of 190.7 million in 2014 (FAO estimates), is still one of the lowest milk consumers among the top milk producers of the world. Also, India’s daily average protein dietary supply of 58gms per capita is much lower than the world’s (79gms per capita).
Figure 20
Average protein supply (LHS) Average supply of animal protein (LHS) Dietary energy supply (RHS)
(Daily per capita (gms))
80
(Daily per capita (Kcal)
3,000
60
2,500
40
2,000
20
0 1,500
India World
Source: FAO
FY16 Outlook: Dairy
March 2015
10

FY16 Outlook: Dairy
March 2015
Public Finance
Since 2013, a rapid rise in milk prices has been constraining its consumption in the Indian households, especially in rural regions where malnutrition remains a cause of concern. Milk inflation has been quite high lately. The average inflation in milk during the current fiscal was
10.4% up to January 2015. Fruits, and condiments and spices are only two commodities from the food group where the inflation has been more than milk inflation. The volatility in wholesale milk prices impacts the prices of the dairy derived products. The sharply rising milk inflation has forced the government to withhold export incentives. The Indian milk prices are acting against international milk price movements which have been dropping since March 2014. Fodder and cattle feed, being the key inputs for milk production, have also witnessed a double digit price growth lately and are being held responsible for the sudden upsurge in milk prices.
Figure 21
(%, yoy)
(%)
35
30
25
20
15
10
5
0
-5
Dec 11 Jun 12
Milk
Source: Office of Economic Advisor
Dec 12
Fodder
Jun 13
Figure 22
260
240
220
200
180
160
140
120
100
80
(Wholesale price index)
Dairy products
Ice Cream
Powder milk
Condensed milk
Dec 13
Ghee
Milk
Cattle feed
Jun 14
Butter
Dec 14
Source: Office of Economic Advisor
However, despite the steep increase in milk prices, the demand for the milk and dairy products has not declined due to the inflexible consumption habits, making these products relatively price inelastic. The prices are likely to rise further after the FY16 budget proposal of applying excise duty (2% without CENVAT and 6% with CENVAT) on condensed milk.
Milk and milk products accounted for 15.2% and 16.4% of the rural and urban household’s monthly per capita consumption expenditure on food, respectively, in 2011-2012. Ind-Ra believes besides population growth, the changes in the domestic consumption pattern due to rising disposable income will remain the key driver of rising the consumption of milk and milk products in the coming years.
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Public Finance
Figure 23
Milk Cooperatives
Karnataka Co-operative Milk Producers Federation Limited
VRS Foods Limited
Prabhat Dairy Pvt. Ltd.
The Punjab State Cooperative Milk Producers' Federation Limited
Shruthi Milk Products Private Limited
Ganga Dairy
Source: Ind-Ra
Ratings/Outlook
IND A
IND A-/Stable
IND BBB+/Stable
IND BBB/Stable
IND BB+/Stable
IND BB-/Stable
FY16 Outlook: Dairy
March 2015
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Public Finance
FY16 Outlook: Dairy
March 2015
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