Dairy - Higher wholesale prices but lower procurement prices - ICICI Securities

Wholesale milk prices have risen in Sept'20 and Q2FY21 (YoY) in-spite of lower milk procurement prices. Key reasons for higher wholesale prices: (1) supply chain disruption, (2) some spoilage of milk and labour shortage and (3) price hikes of c.5% in Feb'20 by dairy companies. Milk procurement prices have continued to correct sequentially as the demand from HoReCa, value added products is lower and commencement of flush season. Dairy companies were supposed to raise prices in H1FY21 but it was differed due to lower procurement prices. Inclusion of milk in mid-day meal may lead to increase in demand for liquid milk. We have a BUY rating on Heritage Foods with a TP of Rs370 (15x FY22E) and HOLD on Hatsun Agro with a TP of Rs650 (43x FY22E).

- Wholesale prices continue to remain at elevated levels: The wholesale milk prices remained at elevated levels and have risen in Q2FY21 compared to prices in Q1FY21 and Q2FY20. We believe the key reasons for higher wholesale prices are (1) supply chain disruption (2) Price hikes (c.5%) by dairy companies in Feb'20 and (3) shortage of labour and some spoilage of milk.

- Global SMP prices back to upward trajectory: 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$2,889/MT. We expected correction in global SMP prices may lead to correction in SMP / milk prices in India. However, Rupee depreciation and now upward trajectory in SMP prices will arrest any such benefits.

- Correction in milk procurement prices: Milk procurement prices continue to be under pressure with lower demand for value added products, lower off-take by HoReCa segment, and increased productivity during flush season.

- Inclusion of milk in mid-day meal may lead to increase in demand for liquid milk: Mr. Vice President of India has suggested that milk could be included in either in breakfast or mid-day meal in order to increase nutritional levels of children. This can lead to increase in demand for liquid milk. Further, government is providing an interest subvention of 2% p.a. to co-operatives on working capital loan and additional incentive of 2% subvention in case of timely repayment.

- Pricing action deferred by dairy companies: Dairy companies raised milk selling prices by 10% in FY20 (5% in Jun'19 and 5% in Feb'20). They were expected to raise prices again in H1FY21. However, considering the (1) deflation in milk procurement prices and (2) weaker economic outlook post lockdown, dairy companies have deferred price hikes.

- 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.

Source : Equity Bulls

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