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Public Finance
www.indiaratings.co.in 19 March 2015
Dairy
FY16 Outlook: Dairy Poised for Sustained Growth
Outlook Report
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 co-
operatives (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 GDP1 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.
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
Rating Outlook
STABLE
(FY15: STABLE)
Sector Outlook
POSITIVE
(FY15: POSITIVE)
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
0%
20%
40%
60%
80%
100%
End-FY14 End Feb-2015
Positive Stable Negative/RWN
Rating Outlooks
Source: Ind-Ra
Analysts
Devika Malik +91 11 4356 7259 [email protected] JB Sivakumar +91 44 4340 1714 [email protected] Sunil Kumar Sinha +91 11 4356 7255 [email protected]
Public Finance
FY16 Outlook: Dairy
March 2015 2
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’.
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 further
erosion of the already thin profit margins of DCs could affect their Outlook.
Main Issues
Quasi-Regulated Sector
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.
Diversification and Backward Linkages
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.
International Market Impacts DCs
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.
Government Support
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.
Public Finance
FY16 Outlook: Dairy
March 2015 3
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.
Counting on Rural Inclusion
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.
Thin Margins for Private Players
Figure 1
Figure 2
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.
4.27
41.21
1.49 1.21 1.48
10.42
60.64
1.91 2.21
8.90 4 1
21
10
6
5 1
18
9
6
0
4
8
12
16
20
24
0
10
20
30
40
50
60
70
DCs and units Diversified DCs Milk & value addeddairy products -Private company
Value added dairyproducts - Private
company
Diversified privatecompanies
Median net sales (FY11) (LHS) Median net sales (FY13) (LHS)
Number of observations FY11 (RHS) Number of observations FY13 (RHS)
Dairy Industry: Net Sales Performance
(INRbn)
Source: Industry analysis and Ind-Ra
(No.)
6.63
0.02
5.47
4.90 3.52
1.28 3.03
7.60
7.23
4.99
4 1
21
10
6
5 1
18
9 7
0
4
8
12
16
20
24
0
2
4
6
8
DCs and units Diversified DCs Milk & Value addeddairy products -
Private Company
Value added dairyproducts - Private
company
Diversified privatecompanies
Median EBITDA margins FY11 (LHS) Median EBITDA margins FY13 (LHS)
Number of observations FY11 (RHS) Number of observations FY13 (RHS)
Dairy Industry: Margins
(%)
Source: Industry analysis and Ind-Ra
(No.)
3Is: Investments
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%
3Is: Inclusion
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
Public Finance
FY16 Outlook: Dairy
March 2015 4
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.
Liquidity Crunches and Debt Burden
Figure 3
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.
Strong Market Growth Potential
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
0.45
3.62
0.63 0.79 0.91
5
1
18
9
7
0
4
8
12
16
20
0
1
2
3
4
DCs and units Diversified DCs Milk & value addeddairy products -Private company
Value added dairyproducts - Private
company
Diversified privatecompanies
Median total debt/equity (FY13) (LHS) Number of observations FY13 (RHS)
Dairy Industry: Gearing
(x)
Source: Industry analysis and Ind-Ra
(No.)
0
5
10
15
20
25
India United States ofAmerica
China Pakistan Russian Federation
2005 2008 2012 2013 (P) 2014 (F) 2015(F) 2020(F) 2023(F)
India – Largest Milk Producer
(%)
P: ProvisionalF: ForecastSource: OECD and FAO
Figure 4
Figure 5
0
40
80
120
160
FY92 FY96 FY05 FY14 FY16(F)
Actual Ind-Ra's forecast
Rising Milk Production
(MT)
F: ForecastSource: NDDB and DAHD
CAGR: 4.41%
CAGR: 3.23%
CAGR: 5.11%
0
1,000
2,000
3,000
4,000
5,000
6,000
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
16 (
F)
Dairy products (unregistered)
Dairy products (registered)
Milk
Flourishing Dairy Industry
(INRbn)
F: Ind-Ra's forecastSource: National Accounts Statistics, Ind-Ra
Public Finance
FY16 Outlook: Dairy
March 2015 5
Contribution to Nation’s Growth
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.
Dominant Share of Informal Milk Market Declining
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 Sale of Milk in India through Different Channels Share of marketable surplus Production (%) Use
45 Home consumption 55 Marketable surplus sold in urban and rural markets
(informal and formal) 34.5% 19 Sold in urban markets as loose unpackaged milk 40.0% 22 Sold as processed products through informal markets 14.5% 8 Sold as packaged milk through formal markets 11.0% 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.
Sluggish Export Market
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%).
Public Finance
FY16 Outlook: Dairy
March 2015 6
Figure 8
Figure 9 India’s Top 10 Dairy Export Import Footprints (FY14)
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.
05101520253035
0
30
60
90
120
150
180
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15ª
FY
06
FY
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FY
08
FY
09
FY
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FY
11
FY
12
FY
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FY
14
FY
15ª
Yogurt, buttermilk and alike (LHS) Whey (LHS)
Butter and related dairy spreads (LHS) Cheese and curd (LHS)
Milk and cream (LHS) Export value (RHS)
Import value (RHS)
India's Dairy Trade
(m Kgs)
a April-NovemberSource: Ministry of Commerce and Ind-Ra
(INRbn)
Top Ten Dairy Import Destinations (94%) Top Ten Dairy Export Destinations (72%)
UNITED STATES of
AMERICA
14%
ALASKA
(USA)
U.K.
6%
DENMARK
8%
FRANCE
21%
SPAIN
3%
ITALY
6%TURKEY
7%SYRIA
3%
YEMEN
6%
UAE
9%
EGYPT
9%
ALGERIA
6%
PAKISTAN
6%
NEPAL
3%
MALAYSIA
5%
NEW
ZEALAND
16%
SINGAPORE
3%
Bangladesh
19%
Public Finance
FY16 Outlook: Dairy
March 2015 7
Figure 10 Exports and Per Capita Availability Year Exports (000 metric ton) Per capita domestic availability (grams per day)
FY06 75.6 241 FY07 45.4 251 FY08 69.4 260 FY09 70.1 266 FY10 34.4 273 FY11 37.4 281 FY12 25.6 291 FY13 87.8 297 FY14 159.3 302
Source: Agricultural & Processed Food Products Export Development Authority, NDDB
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
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.
0
30
60
90
120
150
180
0
50
100
150
200
250
300
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15(April-Nov)
Export (RHS) Import (RHS) Export price (LHS) Import price (LHS)
Prices Drives Dairy Trade (Except for FY11 and FY12 due to export ban)
(INR per kg)
Source: Ministry of Commerce and Ind-Ra
(m kg)
Public Finance
FY16 Outlook: Dairy
March 2015 8
Localised Domestic Production and Consumption
Over four-fifths 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 Top 10 Milking States: Milk Production in FY13 (mton)
Figure 13 Top 10 Milk Abundant States (Grams available per capita per day in FY12)
Source: National Dairy Development Board and Ind-Ra Source: National Dairy Development Board and Ind-Ra
Figure 14 Top 10 Milk Consuming States (Rural) (Grams consumed per capita per day in FY12)
Figure 15 Top 10 Milk Consuming States (Urban) (Grams consumed per capita per day in FY12)
Source: National Sample Survey Office and Ind-Ra Source: National Sample Survey Office and Ind-Ra
9.7
7.0
23.3313.9
8.8
6.8
10.3
7.0
8.7
12.8
352
447
720
384
310539
308445
391
945
269.4
313.8
493.0257.7
310.0
182.4
399.8
Delhi
252.53
Sikkim
214.43
Chandigarh
326.7285.9
277.5
367.8224.1
290.4
223.6
359.8
Delhi
282.7
Pondicherry
205.7
Chandigarh
282.1
Public Finance
FY16 Outlook: Dairy
March 2015 9
Figure 16
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).
Milch Productivity Still A Challenge
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).
0
5
10
15
20
25
Bih
ar
Tam
il N
ad
u
Ha
rya
na
Mad
hya
Pra
de
sh
Mah
ara
shtr
a
Pun
jab
Gu
jara
t
And
hra
Pra
de
sh
Ra
jasth
an
Utt
ar
Pra
de
sh
FY09 FY11 FY13
Steady Progression in India's Milking States
(MT)
Source: NDDB
Figure 17
050100150200250300
0
5
10
15
20
>2x >1x but<2x
>0.5xbut <1x
<0.5x
No of states and Uts (LHS)
Average per capita availability(All India = 100) (RHS)
State's Distribution by Per Capita Availability of Milk(Average during FY08-FY12)
(No.)
Note: State's distribution is based on all India per capita availability (x)Source: NDDB
Public Finance
FY16 Outlook: Dairy
March 2015 10
Paucity of Storage and Transportation Facility
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.
Processed Market Gradually Making Its Way
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 value-
added 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.
Growing Consumption and Price Inelastic Demand
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
1,500
2,000
2,500
3,000
0
20
40
60
80
India World
Average protein supply (LHS) Average supply of animal protein (LHS) Dietary energy supply (RHS)
Dietary Protien Supply
(Daily per capita (gms))
Source: FAO
(Daily per capita (Kcal)
Figure 18
Figure 19
-60
-40
-20
0
20
40
60
0
4
8
12
16
20
Jan 11 Dec 11 Dec 12 Dec 13 Dec 14
India (LHS)
Global (RHS)
Milk Price Inflation (% change, yoy)
Source: Office of Economic Advisor and IFCN
0 500
1,000 1,500 2,000 2,500 3,000
2000 2006 2012
Butter and cheese Ghee Skimmed cow milk Dried milk Others
Dairy Processed Market
( 000 tons)
a Others comprise evaporated and condensed milk, whey and fresh cream Source: FAO and Ind - Ra
3Is: Innovation
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
Public Finance
FY16 Outlook: Dairy
March 2015 11
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
Figure 22
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.
-5
0
5
10
15
20
25
30
35
Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14
Milk Fodder Cattle feed(%)
Milk and Input Price Inflation(%, yoy)
Source: Office of Economic Advisor
80100120140160180200220240260
Apr
04
De
c 0
4
Aug
05
Apr
06
De
c 0
6
Aug
07
Apr
08
De
c 0
8
Aug
09
Apr
10
De
c 1
0
Aug
11
Apr
12
De
c 1
2
Aug
13
Apr
14
De
c 1
4
Dairy products Powder milk Ghee Butter
Ice Cream Condensed milk Milk
Milk and Dairy Products Prices(Wholesale price index)
Source: Office of Economic Advisor
Public Finance
FY16 Outlook: Dairy
March 2015 12
Appendix A
Figure 23 Select Dairy Ratings (End-February 2015) Milk Cooperatives Ratings/Outlook
Karnataka Co-operative Milk Producers Federation Limited IND A VRS Foods Limited IND A-/Stable Prabhat Dairy Pvt. Ltd. IND BBB+/Stable The Punjab State Cooperative Milk Producers' Federation Limited IND BBB/Stable Shruthi Milk Products Private Limited IND BB+/Stable Ganga Dairy IND BB-/Stable
Source: Ind-Ra
Public Finance
FY16 Outlook: Dairy
March 2015 13
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