The Indian Dairy Industry: Value Added Products – the Game Changer

This summer, the change in taste preference towards dairy beverages is more inevitable than ever before. Buttermilk or chaas costing INR 12-14 per 200 ml is cheaper than a 200 ml carbonated drink and perceived as healthier. Sales of buttermilk, lassi, curd etc are growing at an accelerated pace, and we are seeing dairy companies launching a lot many new products, variants to take advantage of the increasing growth.

For example, Parag Milk recently launched a whey protein product under the name of ‘Avataar’, Prabhat Dairy entered the ice-cream segment under the brand called ‘Volup’, North-based Kwality Limited has too launched a host of new value added products. Also, a lot of start-ups have cropped up selling branded milk shakes, organic milk, flavoured paneer etc. Meanwhile, the 800 pound gorilla in the market – the INR 31,000 crore Amul (FY 16) aggressively launched new products too and is expanding its distribution network (e.g increasing its presence in markets like North India), with the goal to double revenues to INR 65,000 crore in revenues by 2020.

Dynamics of the Indian dairy value-added products market

Traditional dairy products like liquid milk, butter, ghee, paneer and curd have a small organized sector comprising only 15-20% of the total market. As the dairy sector evolves, the organized market for traditional dairy products is expected to grow at a CAGR of 15-20% per annum for the period FY 2016-2020. Unlike the developed and matured markets, liquid milk in India is nearly 2/3rd of the market, while growth in value added products will outpace grow in liquid milk, it will still have a major chunk of the market even in 2020.

The modern value added products like flavoured and frozen yogurt, UHT milk, flavoured milk are expected to grow much faster than market, projected to grow at 25-30% per annum for the next 4 years, growing from a small base.

Overall as the dairy market grows at 15%+ over the next few years, there is a transformational shift towards value added products as its contribution is expected to increase to 40% by 2020 with modern value added dairy products becoming a formidable INR 40,000 cr market.

What’s driving this fast growth in value-added dairy products
This frenzied growth in value-added dairy products is being driven on the following counts –
1. Affordability – Dairy beverages like chaas, lassi, flavoured milk are priced lower or equivalent to carbonated drinks, and much cheaper than juices or other health drinks
2. Quality – The overall quality of milk has improved dramatically over the years, as direct milk procurement has increased thus cutting off the middle men, investments in plant and machinery, systems and processes to ensure a high sense of manufacturing hygiene
3. Demand for Healthy foods and beverages growing – The Indian consumers are wanting more healthier food and beverage options to consume, and are also willing to pay a premium ranging from 20%-80%, as per a recent study conducted by research agency Nielson

Conclusion
Indian Dairy Industry is evolving at a fast pace, and dairy companies will need to transform themselves from traditional milk companies to FMCG companies, that have strong procurement/ backend to ensure high quality milk to consumers, nation-wide distribution as ‘localization’ in dairy loses relevance, will need promotional and media spending, and a dynamic and evolving work culture like their FMCG peers. Also, we believe that with the composition of revenues for dairy companies changing towards a more balanced or favourable mix towards value added products v/s liquid milk, EBIDTA margins that today ranges between 6-8% may increase to teens to mid-teens. This will have a strong positive impact on valuations for dairy companies going forward.
In conclusion, dairy companies that embrace this change, and are willing to change the DNA of the company will benefit over the medium and long term.