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The dairy explosion
Dairy players are cashing in on the rising demand for high-margin value-added milk products

Krishna Gopalan

It is nearing 1pm and you can hear Lata Mangeshkar’s dulcet voice playing on a slightly crude sound system at the sprawling Bhagyalaxmi farm in Manchar, a nondescript town on the Mumbai-Nashik highway. The song is soon relegated to the background as you are captivated by the sight of a huge bovine population of nearly 3,800 trundling towards the milking area in an almost orderly fashion, mooing in consonance. For someone from the city, it’s an exhilarating sight, but for those working at the farm it’s just another day at work. “We play the music to make sure the cows are relaxed. It does make a difference,” says one of the farm workers with a straight face.

The farm is owned by Parag Milk Foods, which also houses Asia’s largest cheese manufacturing facility. For someone who started off as a cattle feed trader in the late 1980s, Devendra Shah is happy to have made the switch into the dairy business in the early 1990s, when the government threw open the sector to private players.  Shah has not done too bad for himself, especially in recent years. Consider this: the company has seen a four-fold increase in revenues from ₹320 crore in FY09 to ₹1,200 crore in FY13.

Shah joins contemporaries such as Heritage, Tirumala, Creamline and Hatsun, which have made impressive progress alongside some state-owned co-operatives. The Gujarat Co-operative Milk Marketing Federation (GCMMF), popularly known as Amul, is in a different league altogether and continues to aim big. That apart, the world’s largest dairy majors such as Nestle, Danone, Fonterra, Kraft and Schreiber are also milking the India story. Sivaramakrishnan Nagarajan, managing director, Mother Dairy, the second-largest player after the Gujarat Co-operative Milk Marketing Federation with revenues of ₹6,000 crore, feels more competition will only help the market grow.

Today, the branded space is not more than 4-5% of the market. If you take liquid milk, unorganised labels will account for a larger share, depending on the city. For example, in the national capital region (NCR), probably 80% of the market is branded as both Amul and Mother Dairy are dominant players. “But if you go to Mumbai or Pune, you will find many labels and unorganised players.

However, as the markets mature over a period of time, unorganised local labels too will be a part of the conversion as by then the market size would have grown to ensure that every big city in the country is able to host more than a couple of big brands,” says Nagarajan. Driving growth in the dairy sector are rising disposable incomes coupled with evolving tastes and preferences in urban India. If the popularity of pizzas and pastas has the cheese market on steroids, the flavoured milk and yoghurt categories are also getting people of all ages hooked. 

The milky way

Production has grown at a healthy rate over the past 20 years

Dairy is already a high consumption item in India. According to the latest consumer expenditure survey by the National Sample Survey Office, rural Indians spend 8% of their food budget on milk and milk products, marginally higher than their urban counterparts, who spend around 7%. And their appetite for all things milky is only growing. Rabobank expects the organised dairy market to more than double from the current $10 billion (approximately ₹60,000 crore) to $24 billion (₹144,000 crore) by 2020. “In the next five years, the rate of growth in India’s formal dairy market is likely to accelerate beyond what we have observed in the past five years,” opines Shiva Mudgil, dairy analyst at Rabobank Group India.  Five years back, milk constituted 70% of the entire dairy market.

Today, its share has come to down to 66%, with value-added products (21%), ghee (clarified butter) (8%) and milk powder (5%) making up for the rest. If estimates by the National Dairy Development Board (NDDB) are anything to go by, the demand for milk is likely to reach 180 million tonne by 2022 from the current 128 million tonne. To supply to the market, an average incremental increase of 5 million tonne per annum over the next 15 years would be needed — a doubling of the average incremental rate that has been seen over the past 15 years. 

Against such a backdrop, one would have expected private domestic and multinational players rushing in to exploit the opportunity. But then, it is not 66% of the market that has got them excited. It’s the 34% — or the over ₹20,000 crore value-added diary products market — where the action is. But first, let’s take a look at the bigger pie.

The 66%

India’s status as the world’s largest producer of milk has largely been due to Operation Flood, which was instrumental in putting in place the country’s dairy infrastructure. Operation Flood was split into three phases between 1970 and 1996. The brief was clear: increase milk production, augment rural incomes and provide a reasonable price to consumers. The village milk producers’ co-operatives were integral to the programme, regarded as one of the world’s largest rural development initiatives.

Phase 1 linked 18 milksheds to consumers in the four metros — Delhi, Mumbai, Kolkata and Chennai. Phase 2 saw the number of milksheds increase to 136, with 43,000 village co-operatives reaching out to 4.25 million milk producers. The third and last phase, which was probably the most critical, allowed dairy co-operatives to expand their infrastructure to procure more milk. 

In 2002, the government removed restrictions on setting up new capacity by freeing up milk procurement from all areas and eased quality criteria for dairy farmers. At 70-75%, milk is the only agricultural commodity to fetch a high price realisation for farmers.

In spite of all these efforts, as far as production is concerned, only 20% of milk production comes from the organised channel, with the unorganised sector making up for the rest. This is because India is home to marginal farmers who don’t own more than a couple of cows. That also largely explains why a multinational such as Nestle, which entered the Indian market as early as 1961, still procures milk for its manufacturing facility from 110,000 farmers in Punjab. 

Striking white gold

Recent years have seen a flurry of M&A

and PE activity

The scattered dairy farming structure is compounded by several other factors. The first is inadequate livestock population in India. In 1950s, the cattle population stood at 155 million; six decades later, the number is not significantly higher at 199 million. Secondly, the yield of Indian cows at 1,600 kg per annual lactation is close to negligible compared with the global average of 9,000 per annual lactation. 

The other deterrent is the relatively high investment of around ₹250-300 crore required to set up a plant that can produce 5-6 lakh litre of milk per day. A milk producer has to invest further to have a stable of high-yield cows, which are mostly imported. Take the case of Parag Foods, which chose to get the Holstein Friesian breed that gives 7,200 kg per annual lactation. The average investment per cow is ₹2 lakh and Shah had to incur around ₹100 crore only for the cows. What’s startling about the whole thing is that despite the investment, Parag’s in-house cattle farm barely meets 5% of its total requirement. “It takes more than six-seven years to break even. This kind of economics doesn’t sound attractive at all,” points out Shah.

One would have thought procuring milk from the farmers directly will be the best option, but even that isn’t the case. That’s because though the retail price of milk has more than doubled in the past five years, the dairy players hardly got to keep much of it, given that a chunk of the retail price goes to the farmer. Who should know that better than GCMMF, the biggest co-operative in the country, which has seen a 70% increase in procurement prices to ₹520 kg of fat (the co-operative reimburses farmers on the basis of fat content in the milk). “There is absolutely no malai (cream) in the liquid milk business,” sniggers RS Sodhi, managing director of GCMMF. Besides, transportation costs have increased owing to fuel prices. As a result, a dairy player just about makes 4-5% margin in the milk business. As a natural corollary, all attention is now focused on value-added dairy products, or the 34%.

The 34%

Given the unhealthy margins in milk, existing dairy players — be it co-operatives or home grown players or MNCs — are all chasing the value-added segment. While ghee and skimmed milk powder continues to grow at a healthy clip, it’s the other 21% comprising the likes of cheese (processed and mozzarella), butter, curd and yoghurt that has got all the players excited. “Over the past five years, the value-added dairy products market has grown at a robust 20-30% every year on a small base and will continue to grow at a similar rate in the near future.

Rising consumer interest in high-protein diets, greater affordability owing to increased disposable incomes and increasing awareness and availability of dairy through channels such as organised retail are driving this growth,” points out Mudgil. Every dairy player, therefore, is more interested in high-margin products instead of low-margin raw milk. And unlike Amul, within the value-added product portfolio, every player seems to be focusing on one particular category.

In the case of Parag Foods, five years back, the firm was clocking a turnover of ₹320 crore, with milk under the Gowardhan brand bringing in 45% of revenues and the rest coming from value-added products. Today, the latter accounts for 80% of revenues. When you consider the fact that on an average, Parag makes less than 10% margin on milk and more than 20% on value-added products, it is clear why the company has grown the way it has.

The value-added foray has been spearheaded by the Go brand of cheese, which hit the markets in 2008. This was the result of Shah’s three-month trip across Europe three years ago. “What struck me was how much cheese youngsters were consuming. When international pizza chains started entering India, I knew the opportunity was huge,” he says. When he decided to set up a 40 million tonne cheese plant at Manchar in Pune district, there was a lot of skepticism. “People thought I had gone crazy and gave me no chance,” Shah laughs.

One big gulp

Dairy leads the processed food market in growth terms

Today, cheese brings in at least half the revenues from the value-added segment. Go has 56 varieties of cheese, with flavours such as tangy jalapeno, smoked paprika and fresh garlic. “Cheese has clearly been a turning point for the company,” he admits. In his modest room in Manchar, Shah, who has a 48% market share in the premium cheese segment and 60% in the cow ghee market, points to cheese of several shapes and sizes and says efforts are on to bring in new formats. “Over the next year-and-a-half, we will increase our cheese capacity to 100 million tonne,” he says. Besides cheese, Parag’s portfolio also has ghee, butter and dahi. Recently, the company also forayed into flavoured milk, buttermilk and a gulab jamun mix. Come January, the company will also launch shrikhand.

Cut to Hyderabad. Heritage Foods, which has been in the dairy business for over two decades, is singing the same tune. The Chandrababu Naidu-owned company is looking to reduce its dependence on milk and focus more on ice-cream and other value-added products. For FY13, it clocked revenues of ₹1,602 crore, with a profit of around ₹50 crore. Much of that can be attributed to the dependence on the milk segment, which accounted for a hefty 77% of its revenues.

However, president M Sambasiva Rao wants the contribution of milk to reduce to 65% of revenues in the coming years. “While the milk business is growing at 7% each year, value-added products are growing by about 15-18%. Besides, the margins in the value-added segment are upwards of 15%, while milk brings just about half that number,” he points out.

Heritage is looking to up its capacity as it eyes a higher share of the value-added market, especially from ice-cream. The firm is adding capacity and targeting a five-fold increase in ice-cream sales to 50,000 litre a day over the next three years. Incidentally, Heritage is no longer a pure dairy; it has venture beyond the sector.

Besides milk and milk products, it has also started selling bread, bakery products, eggs, fruits and vegetables through its retail chain, Heritage Fresh. “Since we had an understanding with farmers, it was possible for us to source fruits and vegetables from the same set of people. We did not want our association with customers to end with just milk; we wanted to engage more with them,” explains Rao. Started in 2006, currently, the company operates over 68 stores across Hyderabad, Chennai and Bangalore. In FY13, the retail business fetched it revenues of ₹326 crore.

The same story can be seen with other state co-operatives. While Amul continues to grow from strength to strength charting out taller targets for the future (see: The co-operative corporate), other co-operatives are  also re-thinking their current product portfolios thanks to the changing market dynamics. 

The Andhra Pradesh Dairy Development Co-operative Federation, which clocked a turnover of ₹567 crore for FY13, is looking at doubling that number comfortably over the next five years, mainly by launching ice-cream and moving to other states. Plans are afoot to operate on a franchisee model across Andhra Pradesh and in some parts of Maharashtra.

In addition, Mohammed Ali Rafath, vice-chairman and MD, Andhra Pradesh Dairy, has just inked a deal with Haldiram’s to sell its products at its outlets across India; in return, Andhra Pradesh dairy will stock Haldiram’s products in its retail stores. Currently, AP Dairy has a milk handling capacity of 14.25 lakh litre per day. Rafath’s confidence about winning in Maharashtra stems from the fact that in Mumbai, the co-operative’s Vijaya brand of ghee clocks sales of about ₹5 crore each month. “We are the second-largest in the city,” he says. “If we have got it right with ghee, we will also do well with ice-cream.” 

But that’s a big, big challenge. Sunil Paliwal, managing director, Tamil Nadu Co-operative Milk Producers’ Federation, which operates under the Aavin brand name, confesses that changing existing consumer perception is a tough task. Despite being the only co-operative in Tamil Nadu and accounting for half the milk procured in Chennai each day (11.5 lakh litre), Aavin has been unable to make much headway into value-added products.

Even with a daily total milk procurement of 22 lakh liters, the ₹3,000 crore co-operative earns 90% of its revenues from milk. “We have to change that proportion if we have to increase our profitability,” says Paliwal. Best known for its milk sweets, Aavin’s woes are largely because of its stodgy perception. Now, it’s jumping into the ice-cream business. “To stay relevant, we need to tap into the younger generation,” comments Paliwal, adding that the co-operative is putting up a new plant in Chennai, which will manufacture ice-cream and paneer. 

It’s precisely by amusing the young audience that foreign companies such as Danone are quickly capturing their share of the market. Danone entered the Indian market in 2010 and has already created a splash in the yoghurt market. The world’s second-largest dairy player’s flavoured yoghurts and improvisations such as mishti doi and lassi have been big hits. Although competition in that segment is catching up, Danone is banking on low per capita consumption of yoghurt to propel its growth.

Jochen Ebert, managing director, Danone Foods & Beverages India, says, “The per capita consumption of curd here is barely 2-3 kg, with only 0.2 kg in a packaged form. Our focus is on increasing the per capita number to 5 kg,” Ebert outlines. “The easy part in India is that there is a culture of milk consumption, unlike in a market such as Indonesia, where there is no tradition.” That voice is echoed by Hamish Gowans, general manager, Fonterra India, “Unlike other large countries such as China, dairy is a traditional part of the Indian diet, which presents a case for strong growth,” he says. Fonterra, a $15-billion international dairy major from New Zealand, is still figuring out its overall strategy after its joint venture with Britannia disintegrated in 2009. 

Urge to splurge 

With growth raging in the dairy market, foreign companies are looking to buy out smaller private players even as private equity funds hunt for opportunities to provide growth capital. Media reports suggest that French dairy major Lactalis is acquiring a 70% stake in Tirumala Milk Products, a private dairy player based in Andhra Pradesh. 

Established in 1998, Tirumala has seven milk processing centres spread across Andhra Pradesh, Karnataka and Tamil Nadu with a cumulative milk processing capacity of 15 lakh litre a day and FY13 revenues of ₹1,500 crore. It is looking to increase capacity to 19 lakh litre and venture beyond south India. Currently, its four farmer-promoters own a 80% stake, while PE major Carlyle holds the rest. Carlyle bought its stake in 2009 valuing the company at ₹600 crore and is now looking for an exit. 

Yet another Hyderabad-based company, Creamline Dairy Products, is up for grabs. With a turnover of ₹700 crore, Creamline owns the Jersey brand and has been growing at over 15% a year. According to managing director Bhasker Reddy, the company has a capacity to process 7 lakh litre of milk every day, with operations spread across Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. “Our geographical strength is south and central India. We want to increase capacity to 12 lakh litre per day by expanding to states like Chhattisgarh and Orissa.” Currently, Godrej Agrovet has a 26% stake in Creamline, with another 60% held by four families. The balance 14% is with Creamline’s associates. The company is now looking to raise ₹250 crore to set up three milk processing facilities in Visakhapatnam, Madurai and Karnataka. 

On its part, Parag Foods has already raised ₹200 crore through private equity and has laid out a total investment plan of ₹700 crore. Coming up first is a ₹100 crore plant in Manchar, followed by manufacturing facilities in the north and east. 

As things stand today, the total milk processing capacity in India is around 75 million litre, with co-operatives accounting for 40 million litre and private dairies accounting for the rest. Driven by the consumption boom, industry estimates peg an additional 50 million litre increase in capacity over the next four-five years to around 125 million litre.

Seller of last resort

Under normal circumstances, AP Dairy’s Rafath should have been thrilled about the uptake in milk procurement last year. Against an average procurement of 3.5 lakh litre per day, the milk intake shot up to six lakh litre a day. Rafath says that being a co-operative meant he would necessarily have to take charge of the situation. “Private players did not come ahead and absorb the additional supply. As a co-operative, we were forced to buy the supply and incur a loss,” he points out. The co-operative had to convert most of the supply into milk powder and despite its best efforts, was saddled with stock worth ₹20 crore. But in doing so, Rafath says, “We didn’t lose the faith of the farmers.”

Unfortunately, only the co-operatives seem to be sensitive to the needs of the farmers — perhaps because that’s their prime purpose. Mukesh Sharma, managing director of the Rajasthan Co-operative Dairy Federation, which operates in the second-largest milk producing state and sells products under the Saras brand name, plans to widen the co-operative’s reach among farmers and increase milk sourcing from 25 lakh kg per day from the current 20 lakh today. That also means that the co-operative, which has annual sales of ₹2,500 crore, will add four more dairy plants to its current 17. Ditto for Maharashtra’s Warana Dairy, which plans to increase its daily sourcing from 3.5-4 lakh litre to five lakh litre. Managing director CN Gulave believes that  the best way to up your game is to get the best out of farmers. “Once they trust you, they will not work with anyone else,” says Gulave emphatically. 

Even smaller private players understand the need to be up, close and personal with farmers. “We have to go to the villages and establish a network. Farmers have to be convinced that we add value. You cannot put in ₹100 crore and expect to have 2 lakh litre the next morning,” cautions Heritage’s Rao. 

But MNCs are focusing steadfastly on launching new products and capturing market share rather than investing in procurement. Danone, for example, has outsourced the bulk of its manufacturing to Schreiber Dynamix in Baramati, Maharashtra. “We are working with only a handful of farmers in Haryana to procure milk. India needs a slow and steady approach and this is a learning process for us,” justifies Ebert.

At their current scale of operation, MNCs can do without an elaborate direct sourcing arrangement. Hence, the burden of milk procurement by default continues to be borne by the co-operatives. They aren’t complaining for now, but how long can the trend persist? Alaknanda Dayal of Milkfed Punjab Co-operatives, which clocked revenues of ₹1,950 crore last fiscal, puts it aptly, “Margins in fresh milk are low, but value-added products depend on fresh milk. If everyone is going to get into value-added products and no one is going to produce fresh milk, can you imagine what will happen?” 

Unless other co-operatives emulate Amul or Nandini and get market-savvy, they run the risk of being saddled with low-margin raw milk, while the smarter private players and multinationals lick away all the cream. Co-operatives are recognising the changing dynamics, but will they manage to keep enough of the cream is the question.  

 

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