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Higher margins in case of restrictions (if any) post second covid wave and fall in procurement prices

The possibility of higher restrictions / lockdown post second covid wave may impact HoReCa sales but is likely to drive margins of organised dairies upwards. Key expected trends in dairy sector in case of higher restrictions post second covid wave: (1) Organised sector to continue gain market share, (2) lower consumption of impulse products such as ice cream, butter milk, flavoured milk, (3) higher revenues of milk packaged in tetra packs and dairy whitener, (4) lower milk procurement prices and better margins of organised dairies, (5) higher support to trade by organised dairies (e.g. reimbursement of electricity bills by ice cream companies) to grab market share, and (6) decline in market potential of new categories like whey protein powder, custards, premium cheese variants. Likely beneficiaries: Hatsun and Heritage. Key risks: Failure of new products and steep increase in competitive pressures.

* Structural market share gains: The supply chain network (procurement as well as distribution) of unorganised sector was hurt post the outbreak of coronavirus. Unorganised sector was also hurt due to weaker balance sheet. We model dairy companies to continue to gain market share from unorganised players even in FY22.

* Possibility of lower milk prices and better margins: If the demand from HoReCa segment declines, it will result in surplus milk in market resulting in lower milk procurement prices. It can drive the profitability margins of dairy companies upwards.

* Higher usage of tetra packs and dairy whitener: There is an increase in the consumption of milk packaged in tetra packs and dairy whiteners. Some consumers are expected to continue with the habit of buying tetra packs. Higher revenue of tetra packs is revenue and margin accretive for dairy companies.

* Lower consumption of out-of-home products: The consumption of milk-based beverages such as buttermilk, lassi and flavored milk will also remain lower due to reduction in the number of visits to retail outlets. The consumption of ice cream (single serve packs) is also likely to be impacted.

* Own distribution network: Some dairy companies have started distributing milk and milk products directly to large housing societies offering a bulk discount. This will allow them to bypass distributors as well as retailors. We believe this trend to accelerate. While the logistics cost increases, it reduces the investment in debtors and ensures high market share in some pockets.

* Decline in consumption of some dairy segments: Consumption of new dairy segments such as whey protein powder, custard, premium cheese variants will continue to be lower even in FY22 as consumers are likely to focus on essentials. We believe the investments done by dairy companies to create these segments over the past 2-3 years may prove to be futile.

* Impact on dairy sector in case of lockdown (if any): As organised dairies supply milk for home consumption, there will be negligible impact on demand. However, the HoReCa segment will be impacted in case of strict lockdown or weekend lockdown. Impact on HoReCa demand will be negligible in case of night lockdown.

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