12 Jun , 2022 By : Kanchan Joshi
ICICI Securities has analysed the dairy sector, expecting milk inflation to continue high in FY23. The brokerage has highlighted that in June'22, wholesale milk prices jumped 5.8 per cent year on year in India. Milk prices in South India are up 3.4 per cent year on year, while global SMP prices have risen significantly over the last year, they are rising 26.3 per cent year on year and 3 per cent month on month. ICICI Securities has assigned a BUY rating to Heritage Foods, Dodla Dairy, and a HOLD rating to Hatsun Agro and Parag Milk Foods on the back of increasing inflation and high milk costs.
The brokerage has said in a note that “Wholesale milk prices continue to increase both MoM and YoY. We note heatwave, higher global SMP prices as well as inflation in cattle feed prices as key reasons for higher milk prices. We model the milk procurement prices to continue to rise in coming quarters with re-opening up of the economy. The dairy companies have raised milk selling prices by 5-8% in past five months."
“We believe the dairy companies need to raise prices again in coming quarters to pass on higher milk procurement prices. However, we continue to model EBITDA margins of dairy companies to correct 50-100bps in FY23. However, with higher inflation and likely better volumes (with higher sales to HoReCa), the revenue growth is likely to remain strong. From our channel checks, we also note most 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 has further added.
Rise in prices of key raw materials has resulted in higher cost of food for bovines. We note the prices of maize, wheat and soybean are rising, which will lead to higher feed prices at the dairy farmer end. Hence we expect farmers to pass on any further inflation in key raw materials, ICICI Securities said in a note.
Considering the strong return ratios and growth potential, we remain positive on the dairy sector. We also expect migration from unorganised to organised sector to steadily generate value. Heritage Foods and Dodla Dairy are our top picks, said ICICI Securities based on sector view.
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