Ambit Research Report On The Dairy Sector Stocks

While investors have been focusing on companies operating in valueadded category, our analysis suggests fresh dairy products like liquid milk, curd, paneer, butter milk promise higher growth/profitability. We use a competitive advantage framework evaluating companies on their ability to expand direct milk procurement, product portfolio orientation towards fresh dairy products and distribution reach. Hatsun Agro with 2.5mn litres of daily milk procurement directly from farmers, portfolio focus on fresh dairy products and distribution reach across South India is best-placed amongst Indian dairy companies on our framework. This should help it counter the growing presence of Amul and Mother Dairy.

Fresh dairy products have a brighter future than value added products

Government data suggests milk forms ~90% of household dairy consumption (10% CAGR in last 10 years). Demand for fresh dairy products like curd, paneer, butter milk has been rising at 12-15% in the last decade but is largely serviced by unorganised sector. Increasing distribution of dairy players, refrigerator penetration in semi-urban/rural areas and rising income levels will drive 15- 20% growth over FY16-20 for fresh dairy products in organised sector.

Milk procurement and marketing key differentiators in dairy business

High quality milk is essential for making fresh and value-added dairy products (VADP), making direct milk procurement essential for private dairy players. Inability to grow outside home state and political interferences are common issues in scaling milk procurement. As milk is highly perishable, marketing/distribution is equally important to optimise sales without losses. So, procurement and marketing/distribution are the key drivers of dairy business.

Hatsun best placed on our dairy competitive advantage framework

Compared to VADP, fresh dairy products have equal or higher margins, less susceptible to competition from pan-India dairy companies, need low working capital, and can leverage distribution to sell other products. Hatsun Agro with ~2.5mn litres of daily direct milk procurement supported by strong brand and distribution is best-placed to grow and counter threat of co-operatives. Parag Milk Foods also scores high due to strong brand and distribution.

Consolidation inevitable in the Indian dairy industry

Currently, dairy is predominantly a regional business given limitations of milk procurement and distribution. In the long term (5-7 years) we expect increased consolidation driven by: a) regional leaders acquiring smaller competitors to increase scale and counter threat from Amul and Mother Dairy and b) larger Indian players/MNCs like Britannia, ITC, Lactalis and Danone acquiring regional dairies for their direct procurement and distribution network.