Ind-Ra assigns positive outlook for dairy
India Ratings & Research (Ind-Ra) has assigned a positive outlook to the dairy sector for FY15.
The agency expects reasonable growth in the sector's market size and milk production and strong growth in dairy products exports. The positive outlook also stems from increasing Indian government's initiatives on improving rural income.
Ind-Ra has also assigned a Stable Outlook to its rated dairy cooperatives (DCs) for FY15 due to their stable financial performance although with some liquidity issues.
Consequently, the agency expects rating affirmations to remain high with low probabilities for either an upgrade or a downgrade in FY15.
On the back of likely favourable monsoons and strengthening farmer base of the cooperative model, National Dairy Development Board (NDDB) expects 5.47% yoy growth in milk production in FY15.
Milk production growth (132.43 million tonnes (mt)) slipped to 3.54% yoy in FY13 from 5.01% yoy in FY12. India's milk sector is regarded as one of the world's fastest growing market and Ind-Ra expects it to expand by 16.3% in FY15.
Exports opportunities have opened up as milk production (average growth FY10-FY13: 6.1mt) is higher than domestic demand (average growth FY00-FY10: 6mt). Ind-Ra believes milk surplus and low production cost coupled with rupee depreciation augur well for exports.
Additionally, a demand upsurge in Nepal, an embargo on milk imports from China and untimely drought in New Zealand will favour the dairy sector in FY15.
Although the proportion of low-margin liquid milk sales is high in DCs' revenue mix, milk federations' (MFs) solid revenue offer a strong interest cover. Strong brands like Amul, Nandini and Mother Dairy lead in sales and are likely to dominate.
Consequently, Ind-Ra expects revenue to be robust for large MFs and their associated unions in FY15. Notwithstanding NDDB's financial assistance to augment capacity, MFs manoeuvre expansion plans prudently to maintain adequate debt service. The agency expects this trend to continue in FY15.
Absence of strong cash accumulation in the past and slow product diversification plans fail to reverse weak liquidity.
By virtue of being nodal agencies, MFs also provide assistance to their associated milk unions, erasing cash accretion in its balance sheet. Ind-Ra expects liquidity to remain tight; nonetheless, working capital sanctioned limits will provide some relief.
What Could Change the Outlook
Fall in Demand: Reduced milk and milk products demand in the domestic and global markets could derail milk production plans and weaken the pricing of dairy products. Ind-Ra rated DCs have sufficient rating headroom to absorb reasonable demand downsides.
Substantial Changes in Regulations: A material change in regulations leading to higher operational costs could impair the credit profile of DCs. Although the current regulations are mainly for price discovery, Ind-Ra does not expect any significant change in governmental intervention in the sector.
Quality Issues: Dairy products like any other food products are hugely sensitive to quality issues. Any shortcoming on quality could jeopardise the dairy sector.
(Posted on 18-02-2014)