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Outlook CY22: Milk prices are expected to increase

As highlighted in our CY21 outlook report, dairy companies under our coverage continued to report life-high margins in CY21. While there was some impact on revenues in H1CY21 due to severe second wave of covid (Apr-Jun), demand returned stronger due to large vaccination drives across the nation in H2CY21. Milk procurement prices increased due to (1) inflation in animal feed prices and (2) revival in demand from B2B customers. Global SMP prices increased c.13% which also impacted milk prices in India. However, we expect milk procurement prices to further increase in H1CY22, leading to price hikes by all dairy companies. In CY22, we model dairy companies to report a decline in margins. We model dairy companies under our coverage to report revenue and PAT growth in the range of 13-17% and 12-44%, respectively, in CY22 YoY. Stock calls: Retain BUY on Heritage and Dodla, HOLD on Hatsun and Parag.

* What happened in CY21: Stock prices of dairy companies (Heritage and Hatsun) increased 32-81%, whereas Dodla’s share price (IPO in CY21) increased c.30%. The revenue growth of dairy companies was in single digits in CY21 YoY (except Hatsun which grew 16.7% YoY), whereas PAT growth was 16-26% YoY. EBITDA margins improved YoY.

* Higher milk procurement prices: Milk procurement prices increased 4.1% in Dec’21 from Dec’20 levels. Key reasons for higher milk procurement prices were (1) rising demand for milk from B2B customers, (2) higher demand for value-added products and (3) inflation in animal feed prices leading to cost pressures.

* Higher global SMP prices: SMP prices increased from US$3,243 in Jan’21 to US$3,676 in Nov’21 due to revival in global economy and increase in consumption of milk and higher HoReCa consumption.

* Inflation in animal feed prices: Animal feed prices started increasing during CY21 and the key reason was inflation in food grains such as soya bean, wheat and maize. Godrej Agrovet’s animal feed prices inflated 28.2% in Q3CY21 YoY.

* What to expect in CY22: We expect milk procurement prices to increase in H1CY22 due to rising food inflation and revival in demand. We also model dairy companies to raise prices in CY22. We expect EBITDA margins to decline YoY in CY22. We model dairy companies under our coverage to report revenue growth of 13-17% and PAT growth of 12-44%, respectively in CY22 over CY21.

* Stock calls: We maintain Heritage and Dodla Dairy as our top picks in the dairy sector with a BUY rating. While we remain structurally positive on Hatsun, we need more comfort on valuations to turn bullish. Hence, we rate Hatsun HOLD. We also maintain HOLD rating on Parag as it generates c.35% revenue from B2B consumers.

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