An analysis of the dairy sector by ICICI Securities expects milk inflation to remain high in FY13. The brokerage has highlighted that in June’22, the wholesale milk prices in India have increased by 5.8 per cent year-on-year. Milk prices in South India have increased by 3.4 per cent year-on-year, while global SMP prices have increased significantly over the previous year, rising by 26.3 per cent year-on-year and 3 per cent month-on-month. ICICI Securities has given buy rating to Heritage Foods, Dodla Dairy and Hold rating to Hatson Agro and Parag Milk Foods in view of rising inflation and high milk prices.
The brokerage, in a note, said that “bulk milk prices continue to rise both in MoM and YoY. We see heat wave, high global SMP prices as well as inflation in animal feed prices as the major reasons for higher milk prices. We model for milk procurement prices to continue to rise in the coming quarters as the economy reopens. Dairy companies have increased the selling prices of milk by 5-8% in the last five months.”
“We believe that dairy companies need to raise prices again in the coming quarters to pass on the higher milk procurement prices. However, we continue to model dairy companies’ EBITDA margins to correct 50-100bps in FY23. However, with higher inflation and potentially better volumes (with higher sales to Horeka), revenue growth is likely to remain strong. From our channel check, we also note that most of the dairy companies had strong ice cream sales in H1FY23. We have a BUY rating on Heritage Foods, Dodla Dairy, and a HOLD rating on Hatsun Agro, Parag Milk Foods,” the brokerage further added.
Rise in prices of key raw materials has resulted in higher cost of food for cattle. We note that corn, wheat and soybean prices are rising, leading to higher feed prices on the dairy farmer’s end. Therefore, we expect farmers to pass through any kind of inflation in key raw materials, ICICI Securities said in a note.
Given the strong return ratio and growth potential, we remain positive on the dairy sector. We also expect that migration from the unorganized sector to the organized sector will continue to generate value. Based on sector view, ICICI Securities said that Heritage Foods and Dodla Dairy are our top picks.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.