Is it time to sell dairy stocks?

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The openness of the economy helped dairy companies record strong revenue growth in the April-June quarter. But the long-standing pressure on their profitability remained unchanged.

Hatsun Agro, Heritage Foods and Dodla Dairy reported annual revenue growth of 27-40% thanks to strong demand. However, their respective EBITDA margins fell 530 basis points in the quarter.



The industry attributed the lackluster earnings performance to rising milk supply prices, rising raw material and logistics costs.

Additionally, livestock feed inflation and cyclical production shortages compounded the underperformance, experts said.

According to Punit Patni, Research Analyst at Swastika Investmart, “The dairy production cycle has not experienced a normal season since 2015, mainly due to weather impacts such as excessive flooding or drought and other factors such as fluctuating skim milk powder prices, and we expect current high milk prices to continue due to high food, fuel and feed inflation.”

Against this backdrop, analysts remain cautious on the sector and believe that investment strategy should be guided by a company’s supply network, contribution of value-added products and working capital intensity.

AK Prabhakar, head of research at IDBI Capital, says milk margins are extremely low. Companies dependent on milk cannot absorb price increases. Investors should evaluate the management strategy before buying and look for companies with higher market share and focusing on value-added products.

Value-added products such as paneer, cheese, frozen desserts and ice cream are products with generally higher margins, and in some cases even double those of milk.

The industry took price increases of 5-8% in the first half of 2022, but more price increases in the second half are expected to follow, analysts said.

Management at Dodla Dairy, for example, said it aims to mitigate rising raw material and freight prices by raising its selling prices in the coming quarters. Overall, experts expect margin pressures to persist in the near term despite some respite with the start of the harvest season.

Today, US retail price inflation figures for July will determine the mood of markets as first quarter corporate earnings enter their final leg.

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