Deflation in fodder prices leading to lower milk procurement prices
Wholesale milk prices have risen in Oct’20 YoY (flattish sequentially) in-spite of lower milk procurement prices. Key reasons for higher wholesale prices: (1) supply chain disruption and (2) price hikes of c.5% in Feb’20 by dairy companies. Milk procurement prices have continued to remain at lower levels as (1) the demand from HoReCa, value added products is still lower, (2) commencement of flush season and (3) lower fodder prices and availability of green fodder. Dairy companies have not raised prices post Feb’21 and we do model them to raise prices till Q4FY21. However, they also have not reduced prices as consumers still prefer branded packaged products. We have a BUY rating on Heritage Foods with a TP of Rs400 (12x FY22E) and HOLD on Hatsun Agro with a TP of Rs830 (49x FY22E).
* Wholesale milk prices continue to remain at elevated levels: The wholesale milk prices remained at elevated levels and have risen in Oct’20 YoY. However, they have remained flattish MoM. Key reasons for higher wholesale prices are (1) supply chain disruption post covid and (2) Price hikes (c.5%) by dairy companies in Feb’20.
* Global SMP prices moving upwards: The global SMP prices had corrected from US$3,036/MT in Jan’20 to US$2,238/MT in April’20. But, SMP prices have increased again to US$2,851/MT in Oct’20. We had expected correction in global SMP prices to lead to correction in SMP / milk prices in India. However, (1) INR depreciation and (2) upward trajectory in SMP prices will arrest any such benefit.
* Correction in milk procurement prices: Milk procurement prices continue to remain at lower levels with (1) lower demand for value added products, (2) lower off-take by HoReCa segment and (3) increased productivity during flush season.
* Milk procurement prices to remain at lower levels: We expect milk procurement prices to remain lower due to (1) increase in productivity driven by strong availability of green fodder (good monsoon season) and (2) commencement of flush season. However, we believe the opening up of economy and increase in demand from institutions may lead to higher milk prices post Feb-Mar’21.
* No pricing action by dairy companies: We do not expect dairy companies to raise prices due to (1) deflation in milk procurement prices and (2) weaker economic outlook post lockdown. Companies have also not reduced selling prices as they are not facing competition pressure from unorganised players with consumers still preferring branded packaged products due to hygiene concerns.
* Impact on companies: We expect all dairy companies to benefit due to lower milk procurement prices. As Hatsun and Heritage generate 60%+ revenues from liquid milk they will benefit more.
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