Parag Milk Foods Initiating Coverage Report By Motilal Oswal

India’s dairy market at 146m tons and sales of INR4,061b (USD61b) has been growing at a CAGR of 15% in the last 5 years and is expected to grow to INR9,300b (USD140b) by 2020. The industry is not just growing rapidly in size but also improving from a profitability perspective due to significant increase in the proportion of value added dairy products, owing to a combination of factors like low base, favorable demographics, rise in aspiration & income levels and change in consumption habits.

Shift from unorganized to organized segment provides growth visibility

Of the 146m tons of milk produced in India, around half is consumed at source. Of the marketable portion of milk, only 30% is procured by organized players. The organized segment is growing at 20% CAGR, faster than the 14% CAGR growth of the unorganized segment and is expected to maintain this pace of growth thereby increasing in salience. Within the organized component, half of the milk is procured by cooperatives and the rest by private players. Private players are particularly strong (a) in states like Maharashtra, where the cooperatives are weaker and do not operate under a single umbrella which means that milk procurement prices are much lower than other states; (b) in value added products like cheese, where investment in capacities and branding require substantial investments and expertise, which is beyond the reach of cooperatives and (c) due to savvy marketing ability and technology investment in cold chain which aids shift towards organized and branded products.