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Likely levy of 5% GST on curd: No material impact

We believe the likely levy of 5% GST on curd and lassi (Link) is unlikely to have any material impact on the financials of dairy companies. Curd and lassi account for 15- 25% of revenues of dairy companies. We believe most dairy companies will be able to avail input tax credit on the costs incurred such as packaging material, freight & transportation and ad-spend. Hence, we believe the effective impact of the likely GST levy will be 2-3% on the financials of dairy companies. We model most dairy companies to pass on the impact via price hikes. As consumers boil the milk before consuming, they are still ready to accept unorganised milk but as they consume the curd directly, they prefer buying packaged curd. Hence, we do not expect any material impact. We remain positive on the dairy sector and have a BUY rating on Heritage Foods and Dodla Dairy, and a HOLD rating on Hatsun and Parag.

* GST rate of 5% on curd and lassi: The GST rate on curd and lassi is expected to be levied at 5% from nil currently. Considering the rising milk procurement prices as well as new likely levy of 5%, we believe dairy companies need to pass on additional costs to end consumers via price hikes.

* Benefit of input tax credit: As of now, both major products of listed dairy companies such as milk and curd are GST free. With the likely levy of 5% GST on curd, dairy companies will be able to achieve input credit (packaging material, some raw materials, ad-spend, transportation & freight costs etc). We believe the net impact of GST levy will be in the range of 2-3%.

* Limited impact on volumes: As most consumers boil milk before consuming it, they might still continue to buy unorganised milk. However, as consumers consume curd directly, they will prefer to continue buying organised curd, in our view. Hence, we see low possibility of losing curd volumes to unorganised players even with higher difference in pricing of organised vs unorganised.

* Levy of GST on all major value-added products: Dairy products like ice cream, cheese, ghee and paneer are already under the ambit of GST. Now with the likely levy of GST on curd and lassi, we believe most products are under the ambit of GST. However, there is still no levy on packaged milk.

* Curd and lassi revenue share: We note curd is a major product for most dairy companies. Curd and lassi account for 15-25% of revenues of dairy companies under our coverage. However, we do not expect any material impact on any dairy company.

* Sector view and top picks: Considering the strong return ratios and growth potential, we remain positive on the dairy sector. We also expect migration from unorganised to organised sector to steadily generate value. Heritage and Dodla are our top picks. Key risks: Higher-than-expected rise in milk prices, delay in price hikes and irrational competitive pressures.

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