Dairy stocks rally up to 7% in volatile market; here’s why

Shares of dairy companies such as Umang Dairies, Parag Milk Foods, Dodla Dairy, Heritage Foods, and Hatsun Agro surged up to 7% on Tuesday after Mother Dairy hiked milk prices. Mother Dairy, one of the major suppliers of milk in Delhi-NCR, has increased milk prices by ₹2 per litre, effective from today, citing a rise in input costs. Following the price hike by Mother Dairy, other dairy companies across the country are likely to follow suit.

Umang Dairies, one of the largest sellers of branded dairy creamers in consumer packs, was the top performer in the dairy space by rising as much as 6.6% to hit a high of 63.4 on the BSE. While shares of milk producers Parag Milk Foods and Dodla Dairy gained 3.6% and 3.5%, respectively, Heritage Foods and Hatsun Agro added 3.3% and 3.1%, respectively, during the first two hours of day’s trade so far. In comparison, the BSE Sensex witnessed volatile trade and swung between gains and losses. At the time of reporting, the 30-share Sensex was trading 81 points higher at 60,647 levels.

In this year, dairy companies, including Amul, Mother Dairy, Sudha, have increased milk prices four times so far. The hike comes at a time when rising cattle feed prices and labour costs have further pushed up milk procurement prices.

With the fresh hike, Mother Dairy raised the price for the 5th time, previously in the months of March, August, October, and November. The price hike is applicable on full-cream, toned, and double-toned milk variants.

Mother Dairy has increased the prices of full-cream milk by ₹2 to ₹66 per litre, while the rate of toned milk has been revised to ₹53 per litre from ₹51 per litre. Double-toned milk will now cost ₹47 per litre, up ₹2 from ₹45 per litre.

Rising cattle feed prices and transportation costs had earlier forced dairy companies to increase milk procurement prices in FY22 to support farmers.

ICICI Securities in a recent report said that steep inflation in milk prices continues as dairy companies have raised milk selling prices by 8-10% in the past ten months due to sustained rise in milk procurement prices. “While we note the global SMP prices are down YoY, weak flush season as well as inflation in cattle feed prices are chief reasons for the higher milk prices,” the agency said in a report released on December 14.

The brokerage said in its report that dairy companies need to raise prices again in H2FY23, and focus on increasing the share of Indian value-added products to protect their (the companies’) profitability. However, with higher inflation and likely better volumes (higher sales to HoReCa), revenue growth is likely to remain strong, it said.

The agency has maintained “BUY” ratings on Heritage Foods and Dodla Dairy, and “HOLD” on Hatsun Agro and Parag Milk Foods.

Considering the strong return ratios and growth potential,ICICI Securities remains positive on the dairy sector, expecting migration from unorganised to organised sector to steadily generate value. However, higher-than-expected rise in milk prices, delay in price hikes, and irrational competition remain key risks for the sector.