Dairy - Higher Global SMP prices and increase in out-of-home consumption driving milk prices upwards - ICICI Securities

Global SMP prices increased almost 20% in Mar'21 vs Nov'20. We believe higher global SMP prices will result in higher exports of SMP and the milk procurement prices in India may also move upwards. Reopening of the economy has led to higher demand for value added products. The demand from HoReCa is also rising. However, with rising covid cases, there is possibility of lockdown which may reduce milk demand with stable supply resulting in lower procurement prices. Our channel checks suggest minor increase in milk procurement prices in Dec'20-Mar'21. Dairy companies have not raised prices post Feb'20 and we do not model them to raise prices till Q2FY22. Re-migration of labour and professionals to cities as well as re-opening of schools is expected to result in higher demand for milk in FY22. We have a BUY rating on Heritage Foods with a TP of Rs400 (10x FY23E) and ADD on Hatsun Agro with a TP of Rs800 (46x FY23E).

- Global SMP prices inching upwards: Global SMP prices had declined from US$3,036/MT in Jan'20 to US$2,380/MT in April'20. But, SMP prices have now increased again to US$3,350/MT in Mar'21. We believe sharp increase in global SMP pries to result in higher SMP prices in India too. It may also lead to higher milk procurement prices in coming months.

- Wholesale milk prices increase MoM: Wholesale milk prices have inched up 0.9% MoM (8.4% YoY). We believe the increase in wholesale prices is attributable to (1) increase in global SMP prices and (2) reopening up of the economy. With re-opening up of the economy, there is revival in demand from HoReCa.

- Possibilities of lockdown may impact demand again: With rising covid cases, the out-of-home consumption is likely to be impacted. Lower demand but stable supply of milk may result in reduction in milk procurement prices.

- Milk procurement prices likely to move upwards soon: Milk procurement prices are expected to inch upwards in next 3-4 months due to (1) rising demand from HoReCa, (2) commencement of summer which hurts animal productivity and (3) higher global SMP prices. From our channel checks, we note there is a increase in milk procurement prices in Dec'20-Mar'21.

- No pricing action by dairy companies: We do not expect dairy companies to raise prices in near term even if milk procurement prices move upwards. However, we expect dairy companies to raise prices in H2FY22. Dairy companies may also reduce some of the trade schemes before raising selling prices.

- Impact on companies: We expect all dairy companies to benefit due to lower milk procurement prices in Q4FY21. As Hatsun and Heritage generate 60%+ revenues from liquid milk, they will benefit more.

Risks

Sharp increase in input prices

Any major increase in commodity prices will result in downside to our estimates.

Supply chain disruption

Any major disruption in supply chain of milk products will result in downside to our estimates.

Source : Equity Bulls

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