Indian dairy industry is still predominantly unorganized: Ashutosh Maheshwari, CEO, Motilal Oswal Investment Advisors

ET Now 07-May-19
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ET now in an exclusive chat with Ashutosh Maheshwari, CEO, Motilal Oswal Investment Advisors discuss the global and domestic appetite for M&A in the niche dairy sector. Excerpts:

ET now: We have seen a paradigm shift in the way dairy & dairy products are consumed, shifting slowly from loose milk towards Tetra pack, value added products like flavored milk, cheese, curd etc. Do you see this as an opportunity for multi national players to tap this market?

Ashutosh Maheshwari: A key feature of the Indian dairy industry is that it is still predominantly unorganized. Of the total milk produced in India, only 18-20 per cent is channelized through the organized segment. Hence it is evident that the unorganized segment has not yet participated into modern processing infrastructure in India.

A positive development is that there is a clear shift towards the share of organized segment, increasing from 13 per cent in 2005 to 20 per cent currently. This is driven by an increasing demand for packaged milk and value added products and is now attracting multinational players to India. Even on the supply side, farmers prefer organized channels due to higher price realization.

ET now: How has the consumption of dairy products changed in India that would give a ready market to the foreign entrant?

Ashutosh Maheshwari: Indians have been consuming dairy products in loose form, especially milk and curd from time immemorial. Increasing health & safety concerns have propelled the penetration and consumption of packaged milk in the market. The consumption of packaged liquid milk has increased from 21 per cent to 28 per cent of the total liquid milk in the past 5 years.

Another important trend has been lifestyle and dietary changes, with consumption shifting towards value added products. Products such as Dahi which were predominantly made at home are now getting into a branded play. Variants like lassi, flavored or low fat yogurt, and milk based beverages are further additions to the product line and are now part of daily consumption due to health benefits and convenience.

The development of processing and packaging technology along with improvement in retail and cold storage infrastructure has increased the shelf life of dairy products. UHT milk is gaining popularity primarily because of convenience and is witnessing high growth in NE India and hilly areas where loose milk is not easily available. Overall, industry growth is at an inflection point and value added branded business with tight procurement system will reward the players.

ET now: What are the major challenges for organized players in India?

Ashutosh Maheshwari: While there are favorable consumption dynamics, the dairy sector faces many challenges primarily in sourcing and logistics. Procurement of fresh milk is the most crucial element for any dairy player. Based on industry benchmarks, it is not feasible to transport/procure milk beyond 170-200 km radius. The perishability and associated transportation costs forces processors to have multiple sourcing, processing and distribution points.

Some players are keenly looking at maintaining their own dairy farm for better sourcing. Another challenge is on account of low productivity and yield. The productivity of New Zealand is more than 3 times the current Indian average and presents a clear opportunity for productivity improvement. The cold storage and supply chain infrastructure also needs to be developed to penetrate tier-2 and tier-3 centers.

ET now: Who are the international players you see entering India in the near future?

We recently saw France based Lactalis entering India by acquiring Tirumala dairy in South India. While Nestle has been an early entrant, other large European and American dairies like Danone, Fonterra, Freisland Campina, Borden may actively look at entering India.

ET now: Do you see large Indian Conglomerates venturing into the dairy sector?

Ashutosh Maheshwari: ITC has already shown keen interest and has made progress towards the dairy space given their strong rural focus. Other big corporate connected to rural India would find this sector a good opportunity to venture into.

ET now: How do you see the demand-supply dynamics shape up as new players look to step in?

Ashutosh Maheshwari: India’s per capita dairy consumption levels are significantly lower than developed markets and with a large consumer base of 1.3 billion people, demand will never be a challenge which gives sufficient opportunity to manufacturers and retailers. India with 134 Mn metric tons of production is world’s largest liquid milk producer, which accounts for 18 per cent of total global milk production. Most of the milk production .