Investors cheer as dairy stocks turn cash cows

As milk prices rise, analysts have an optimistic view on dairy stocks such as Heritage Foods and Dodla Dairy, hoping the companies’ margins will grow in the near to medium term.

From a long-term perspective, they believe that a growing population, increasing disposable income and health consciousness will strengthen dairy consumption in India.

“We are witnessing a price rise after a gap of nearly 16 months.

"Value-added products such as curd, cheese and frozen desserts will witness price increases.

"As procurement prices remain low, margin improvement will happen for dairy stocks,” said Ambareesh Baliga, an independent market analyst, who suggested that investors continue holding related stocks.

Milk prices

Global skimmed milk powder (SMP) prices increased 14.3 per cent year-on-year (Y-o-Y) and around 6 per cent month-on-month (M-o-M) in June.

In India, wholesale milk prices last month increased by 2.8 per cent Y-o-Y to touch record highs in all key regions.

Prices in South India are up 4.6 per cent Y-o-Y, 1.3 per cent in North India, 2.2 per cent in West India, and 1.8 per cent in East India.

Among cooperatives and state-supported enterprises, Mother Dairy, Amul and Karnataka’s Nandini Milk increased prices by Rs 2 per litre in June, a first since February 2023.

Private listed players have not done so and this may help them gain market share and raise prices later, according to analysts.

Dairy companies have adopted a grammage reduction policy rather than raising retail prices.

The trend may continue and price hikes are likely in the last quarter of this financial year (Q4FY25).

Margin expansion

Analysts believe dairy companies may see Ebitda (earnings before interest, tax, depreciation, amortisation) margin expansion continuing in the first half of this financial year (H1FY25).

The expansion would be aided by lower milk procurement prices, which have declined by Rs 1 per litre in most regions, and higher selling prices.

“The accumulation of low-cost SMP inventory in Q4FY24 may aid dairy companies during the cost inflationary period (likely Q4FY25),” said analysts at ICICI Securities led by Aniruddha Joshi and Manoj Menon.

They have a 'buy' rating on Heritage Foods and Hatsun Agro and an 'add' rating for Dodla Dairy.

Dodla Dairy, in the March quarter of FY24, reported an Ebitda margin expansion of 492 basis points (bps).

Hatsun Agro saw 250 bps expansion and Heritage Foods saw 220 bps.

Long-term plays

On the bourses, dairy stocks have largely milked gains in the past one month.

MilkFood’s share price has surged 29.5 per cent, while Dodla Dairy and Hatsun Agro have rallied 13.5 per cent and 6.6 per cent, respectively, according to data from ACE Equity.

The benchmark Nifty50 has advanced 4.9 per cent.

In calendar year 2024, Heritage Foods has rallied 82.8 per cent, followed by Dodla Dairy (24 per cent), and MilkFood (13.6 per cent) as against the Nifty50's 11.9 per cent and Nifty MidCap's 23.3 per cent.

The momentum in dairy stocks will continue as low per capita milk consumption – compared to global standards – implies potential for further growth, said Abhinil Dahiwale, research analyst at Investec.

"With key structural demand drivers in place, private dairy companies are poised for significant growth, especially as the industry shifts towards a more organised sector.

"As we factor in a mix of lower inflation and healthy demand ahead, the earnings for the dairy industry are set to boost," he said, giving a 'buy' rating on Dodla Dairy, Heritage Foods, and Parag Milk Foods.

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