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Dairy and milk products

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India is the world’s largest milk producer and consumer

124140

2010 2011billion litres

Country wise production of milk

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38 34 31 30 29 23 17 14 12 11 11 10

39 36 31 31 29 2417 13 12 11 11 11

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S FAO ©Source: FAO

Global milk production was around 706 billion litres in 2011

Milk powder segment accounts for the largest share in global tradep g g g

India’s share of global trade of dairy products is extremely low due to :– High domestic consumption and regular export bans on high volume products such as milk powder

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– Imports limited mainly to premium varieties of butter, cheese due to low shelf life of other products

Uttar Pradesh produces the largest amount of milk in India;Punjab has the highest per-capita milk consumption

106Uttar Pradesh17.3%17.6%Uttar Pradesh

State wise per capita milk consumption (2011-12) (litres)State wise share in Indian milk production

.160

134

197

Gujarat

Andhra Pradesh

Rajasthan10.9%

9.2%

7.6%

10.6%

9.5%

7 7%

Rajasthan

Andhra Pradesh

Gujarat

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344

Maharashtra

Punjab

j

7.7%

6.6%

7.7%

7.5%

6.6%

j

Punjab

Maharashtra

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102

105

Haryana

Tamil Nadu

Madhya Pradesh6.2%

5.6%

5.1%

6.4%

5.4%

5 2%

Madhya Pradesh

Tamil Nadu

Haryana ©

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Karnataka

Bihar

Haryana

5.3%

4.2%

5.2%

5.2%

4.3%

Haryana

Bihar

Karnataka

2010-11 2011-12

103

50

India

West Bengal3.7%

10.6%

3.7%

10.5%

West Bengal

Others

Source: National Dairy Development Board (NDDB), Industry and CRISIL Research

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Buffalo milk has the highest share in production

B ff l 51% C 45% G t 4%Share in milk production (per

Total milk: ~124 billion litres

Share of animals in milk production in India (2011-12)

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Buffalo, 51% Cow, 45% Goat, 4%Share in milk production (per cent)

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edBuffalo, 33% Cow, 39% Goat, 28%Share in animal count (per cent)

Total animals: ~115 million

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B ff l C G t

Milk yield and growth in animal count (2011-12)Parameter Buffalo Cow

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1 72.2%

3.1%

Buffalo Cow GoatDomestic milk consumption High Moderate

Global milk consumption Low High 1.71.3

0.2 0.4%

Global milk consumption Low High

Fat content in milk 7-7.5 per cent 3.5-4 per cent

Yield (Tonnes of milk per animal) 5 year CAGR in animal population (per cent)

Source: FAO, Industry and CRISIL Research

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Water content in milk 80-85 per cent 85-90 per cent

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Industry definition, market size and

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Classification of dairy products based on manufacturing process

Milk (124 billion litres produced in 2011-12)

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Unprocessed milk(~50 per cent of production)

Processed milk(~35 per cent of production)

Milk products (~15 per cent of production)

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Whole milk

~70 per cent of processed milk


Toned milk Double-toned milk Skimmed milk



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Milk powder Curd and yogurt/ Butter/ Ghee/ Cheese/ Paneer (skimmed, whole)Buttermilk/ Lassi Ice-cream Cheese/ Paneer

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Indian processed milk and milk products industry at ~Rs. 3,050 billion in 2012-13

30493500

Rs. billionTotal production Milk Used in processed market

billion litres

Market size of Indian dairy products industryMilk production in India

.15881911

2299

2702

2000

2500

3000

109 113 118 124 129

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500

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150052 55 58 62 65

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02008-09 2009-10 2010-11 2011-12 2012-13 E

0

20

2008-09 2009-10 2010-11 2011-12 2012-13 E

Source: NDDB, Industry and CRISIL Research Source: NDDB, Industry and CRISIL Research

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Demand expected to grow by 5-6 per cent per annum over the next 5 years– Historic demand growth for milk has been in the range of 4-5 per cent per annum

f f f– Increase in future demand to result from expected higher consumption of value-added products

Prices of milk surged by around 12-13 per cent CAGR over the last 3-4 years due to increase in the feed costs

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Sharp rise in prices of key feeds led to spurt in milk prices

280 0

Jowar Bajra Maize

Wheat Paddy Sugarcane200.0

Milk prices Fodder Oil cakes Cattle feed

Indexed MSPs of key crops that constitutes FodderIndexed prices of milk and key feed in India

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200.0220.0240.0260.0280.0

140 0

160.0

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100.0

120.0

140.0

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80.0100.0

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-1480.0

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Source: Office of the Economic Advisor, Ministry of Commerce and Industry, Ministry of agriculture

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Prices of all key feeds surged due to a rise in MSPs of key crops

With MSPs of most of the crops showing a rise of around 5-10 per cent in 2013-14 prices of fodder and thereby milk are expected to rise by around 7 8 per cent14, prices of fodder and thereby milk are expected to rise by around 7-8 per cent during the year.

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Market size of dairy and dairy products industry in India Classification Market size Branded market share Growth over next 3 years (per cent CAGR)

Data is as of 2012-13 (Rs billion) (per cent) Volume Realisation Overall value

Overall industry 3050 - 3100 60-65 13-15

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Overall industry 3050 3100 60 65 13 15

Milk 1900-1930 85-90 ~4 7-8 11-12

Curd and Yogurt 190-200 ~10 7-8 10-12 18-20

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edButtermilk and Lassi 100-105 ~5 4-6 10-12 15-17

Ghee 420-425 ~10 ~4 10-12 14-16

Butter 110-115 15-20 ~5 10-12 15-17

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Ice-cream and Frozen desert 35-40 60-65 8-9 ~10 18-19

Cheese 45-50 85-90 8-9 ~10 18-19

Paneer 215-220 10-15 6-8 ~10 16-18 ©

Dairy whiteners and creamers 23-25 90-95 ~5 ~10 ~15

Source: MOFPI, NDDB, Industry and CRISIL Research

Ri i ilk i t d i tl d i li ti th f t t iRise in milk prices to predominantly drive realisation growth for most categories

Overall, dairy and dairy products industry to grow at around 13-15 per cent CAGR over the next 3 years, from around Rs 3,050 billion in 2012-13 to around Rs 4,500 billion in 2015-16

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Government policy – National Dairy Plan I

Development

Fund allocation to different uses Parameter Details

Objective

Improve milk productivity of milch animals so that demand-supply balance is sustained over the long

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Breed improvement

32%Technological

of technical expertise and

project management

21%

Objective run; provide rural milk producers with greater access to the organised sector

Rs 2,242 crores in the first phase (International Development Agency – 70 per cent share,

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Village based milk

procurement

gimprovements

6%Fund

Development Agency 70 per cent share, Government of India – 8 per cent, NDDB and its subsidiaries - 9 per cent, and the rest by the various End Implementing Agencies in every major state)

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.Animal nutrition

19%

procurement systems

22%Plan period 2011-12 to 2016-17 (Phase I)

Coverage 14 major milk producing states in India

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Source: NDDB and CRISIL Research

End Implementing Agencies include:

State Cooperative Dairy Federations District Cooperative Milk Producers Unions Cooperative form– State Cooperative Dairy Federations, District Cooperative Milk Producers Unions, Cooperative form of enterprises such as Producer Companies, State Livestock Development Boards, Central Cattle Breeding Farms, Central Frozen Semen Production and Training Institutes, Regional Stations for Forage Production and Demonstration Registered Societies/ Trusts/ NGOs Section 25 companiesForage Production and Demonstration, Registered Societies/ Trusts/ NGOs, Section 25 companies, subsidiaries of statutory bodies, ICAR institutes and Veterinary/ Dairy institutes/ universities

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Other key government policies

Scheme/ Parameter Details

Priority lending status for banks The sector has this status since 1999

Technology upgradation 40% subsidy in general areas and 50% subsidy in difficult areas for machinery in all segments bj t t i f R 1 f t t l t

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Technology upgradation subject to a maximum of Rs. 1 crore of total cost

Foreign Direct Investment (FDI) 100% FDI permitted in dairy products

Import of equipments 5% customs duty on imports of capital goods/ machinery, including second-hand

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Excise duty exempted products Products manufactured by SSI units (exemption limit raised to Rs 15 crore from Rs 1 crore)

National Mission on Food

State government will set up the large scale food processing units/ parks, and the Centre will provide technological and logistical support.

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.National Mission on Food Processing

p g g pp

Also plans to setup various nodal agencies that will test quality of the dairy product and ensure that any food processing unit will have to register with it, in order to operate

MRTP FERA regulations MRTP (Monopolies & Restrictive Trade Practices Act) rules and FERA (Foreign Exchange ©MRTP, FERA regulations Regulation Act) are relaxed to encourage investment and expansion by large corporates

Source: Ministry of Food Processing Industries (MOFPI)

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Segment wise business opportunities and

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Milk market in India at ~Rs. 1,930 billion in 2012-13

49 513000

Market size (Rs. billion) Market size (billion litres)billion litresRs. billion

45 502500

Market size (Rs. billion) Market size (billion litres)billion litresRs. billion

Market to grow at around 11-12% CAGRPast trend

.19302152

23992675

45 47 49

30

40

50

2000

2500

3000

17301930

37 3941

43 45

3035404550

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1930

10

20

30

500

1000

1500

10501250

1490

510152025

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002012-13 E 2013-14 P 2014-15 P 2015-16 P

05

02008-09 2009-10 2010-11 2011-12 2012-13 E

Source: Industry and CRISIL Research

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Growth expected at around 11-12 per cent; with volumes expected to grow at around 4 per cent.

Major brands include Amul Paras Mother dairy Britannia Gowardhan NestleMajor brands include Amul, Paras, Mother dairy, Britannia, Gowardhan, Nestle, Aarey, Gokul, Vadilal, etc.

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Curd and yogurt market in India at ~Rs. 190 billion in 2012-13

225265

315

250300350

Rs. billion

135160

190

150

200Rs. billion


.

190225

50100150200250

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135

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02008-09 2009-10 2010-11 2011-12 2012-13

Overview of the curd market in India

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80-85% 15-20%Share of varieties (per cent)

Regular curdOther varieties of curd (Flavoured, Frozen)

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~40% ~25% ~35%Share of branded market (per cent)

Amul Nestle Others


Growth expected at 18-20 per cent in value terms, with volumes expected to grow at 7-8 %‒ Increase in urbanisation leading to changing consumer lifestyles and higher nuclear families, rise in the number

of working women and good taste and quality are expected to drive demand

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of working women, and good taste and quality are expected to drive demand

Branded players like Dabur and CavinKare are entering the dairy market through curd and yogurt segment.

Ghee market at Rs. 420-425 billion in 2012-13;Butter at Rs. 110-115 billion

370

420

400

450 Ghee ButterRs. billion

622700

Ghee ButterRs. billion


.

240275

320

370

200

250

300

350

400

420479

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600

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50

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200

110 127 145 167

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02012-13 2013-14 P 2014-15 P 2015-16 P

Parameter Ghee Butter

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Major market Rural Urban

Usage type In the kitchen On the table

Demand per annum ~1.1 million tonnes 55,000-60,000 tonnes

Growth in value 14-16 per cent 15-17 per cent

Key demand drivers Mithai, at-home, spiritual activities Increase in urbanisation, changing consumer lifestyles

Share of brands 20-25 per cent 60-65 per cent

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Ice-creams and Frozen desert market in India at Rs. 35-40 billion in 2012-13

East65-70% 30-35%Share of regions

Urban Rural

Demand share across regionsOverview of the ice-cream market in India

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East~10%

West~40%30% 25% 10% 35%

Share of brands

(per cent)

(per cent)

Kwality Walls (HUL) Amul Vadilal Others

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60% 10% 5% 25%Share of flavours

(per cent)

(per cent)Vanilla, Chocolate,

StrawberryKesar Pista, Butterscotch

Premium

Others

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North~25%60-65% 35-40%

Share of markets

(per cent)

Premium flavours

Branded Unbranded ©Branded Unbranded

Source: CRISIL Ratings, Industry and CRISIL Research

Segment expected to grow at around 18-19 per cent annually in value terms, withSegment expected to grow at around 18 19 per cent annually in value terms, with volumes expected to grow at 8-9 per cent

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Cheese market in India at Rs. 45-50 billion in 2012-13

55-60% 40-45%Share of buyers (per cent)

Retail Institutional

Overview of the cheese market in India

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65-70% 20-25% ~10%Share of regions (per cent)

(p )

Urban – Metros RuralUrban – Others

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~60% ~20% 5-10% 5% 5-10%Share of brands (per cent)

Amul Britannia Parag Imports Others

Processed Mozarella Gouda

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85-90%

~60%

10-15%

~20% ~10% ~5% ~5%

Share of markets (per cent)

Share of varieties (per cent)

Spreads Others

©(per cent)

Branded Unbranded


Growth expected at 18-19 per cent in value terms, with volumes expected to grow at 8-9 per cent

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Indian paneer market at Rs. 215-220 billion in 2012-13

Demand share across regionsShare of brands in the domestic paneer market

SouthEast

5-10%

.Other brands5 7%

South15-20%

West15-20%

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Amul8-10%

5-7%Branded10-15%

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North55-60%

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Growth expected at 16-18 per cent in value terms, with volumes expected to growGrowth expected at 16 18 per cent in value terms, with volumes expected to grow at 6-8 per cent

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Key success and risk factors

Key success factors

Parameter

Efficiently source raw materials

.

y

Level of value-addition/ diverse product portfolio

Presence of a recognisable brand, and ability to manufacture, price and promote products across market segments

Ability to manage input costs such as power labour and packaging materials

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edAbility to manage input costs such as power, labour and packaging materials

Geographical diversity including breadth and size of operations

Relationships with suppliers and distributors

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Key risks

Parameter

©Volatility in raw material prices due to adverse environmental conditions, such as weak monsoons, and cattle-related diseases

Sharp rise in MSPs of major crops which constitute feed and fodder for cattle

Larger proportion of sales accounting for low value-added products

Increase in pasteurised milk prices by cooperatives leading to pressure on margins

Sales restricted to one geography, resulting in intense competition from other regional and national brands

Adverse government regulations such as ban of export of milk powder etc

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Margins to remain flat in 2013-14

selling and distribution,

7% Others, 18%

Distribution of costsAggregate financial parameters

Parameter Units 2009-10 2010-11 2011-12 2013-13 E

.

raw material,

64%Power and fuel, 3%

Employees, 5%

18%Sales Rs million 204,074 249,372 295,748

Sales growth Per cent 22.2% 18.6%

Op margins Per cent 6 5% 5 8% 6 1% 5 5 – 6%

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Rating distribution

Op. margins Per cent 6.5% 5.8% 6.1% 5.5 6%

Net margins Per cent 1.3% 1.7% 2.1%

Gearing Times 2.20 2.11 2.20

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Median rating : BBNumber of companies : 39PBDIT/ Interest Times 3.07 2.98 3.90

RoCE Per cent 15% 14% 15%

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2 1 1

7

1 0

AAA AA A BBB BB B C D

Net working capital Days 60-70

Number of cos Nos 25

Source: CRISIL Ratings Prowess Industry and CRISIL Research AAA AA A BBB BB B C DSource: CRISIL Ratings, Prowess, Industry and CRISIL Research

Milk which is the key raw material, to see a price rise of around 7-8 per cent in 2013-14 on account of rise in MSP of key crops.

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Operating margins to remain flat at around 6 per cent in 2013-14 as the players are expected to pass on the price rise to the end consumers

Aggregate investments of Rs. 750 - 850 billion expected by 2015-16

Parameter Units Value

Market size (2012-13) Rs billion 3,050

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Parameter Units Value

WC Investment Rs billion 450 500 (for next 3 years)

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Fixed capital investment Rs billion 300-350 (for next 3 years)

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Aggregate investment Rs billion 750-850 (for next 3 years)

Source: CRISIL Ratings, Industry and CRISIL Research

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Interest from PE and VC funds

Timeline Target Acquirer Deal size Stake

August, 2013 Prabhat dairyIndian Agribusiness Fund & French development finance institution Rs. 1,400 million -

.

g , y pProparco

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May, 2013 Parag Milk Foods International Finance Corp. (IFC) $ 17 million -

September 2012 Parag Milk Foods IDFC Private Equity Rs 1 600 million 15 20%

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edSeptember 2012 Parag Milk Foods IDFC Private Equity Rs 1,600 million 15-20%

February 2011 Milk Mantra Dairy Aavishkar Venture Mgmt Services - -

May 2010 Tirumala Milk Products Carlyle Asia Growth Capital IV Rs 1,100 million -

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.May 2010 Tirumala Milk Products Carlyle Asia Growth Capital IV Rs 1,100 million

June 2008 Parag Milk Foods Motilal Oswal Private Equity Rs 600 million 10-12%

September 2006 Nilgiris Dairy Farms Actis Capital LLP Rs 2,900 million 65% ©g y


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