BMI View: A recent wave of expansion plans from various key global players reinforces our positive view on the Indian dairy industry. Following a trend set in previous years, expansion will continue to be mainly led by local and foreign private investors as well as cooperatives. However, milk production in India will remain constrained by deeply rooted issues, such as low yields and poor quality standards, posing downside risks to our bullish production outlook.
Top multinational dairy companies have expressed interest in increasing their presence in India via acquisitions of existing businesses, the construction of new production plants or the setting up of milk pools. Strong producer prices, a promising outlook for dairy consumption and government incentives have been attracting robust investments to the dairy processing sector. Moreover, the instability of India's trade policy regarding dairy products is pushing foreign companies to increase production within the country.
According to industry sources, Fonterra, which just opened an office in Delhi, and Danone are considering the purchase of a controlling stake in Hyderabad-based Tirumala Milk Products, the second-ranked private supplier of liquid milk in the country's southern states. In July 2012, Danone bought Wockhardt Nutrition, India's leading baby food group, for US$355mn. Wockhardt sells popular brands such as Dexolac, Farex and Nusobee, and Danone is very likely looking to tap the promising infant nutrition segment. Danone's Indian nutrition division plans to double sales in the next three years.
|India - Liquid Milk Production, Liquid Milk & Butter Consumption ('000 tonnes)|
Nestlé India, which is one of the largest foreign dairy companies and runs seven factories in the country, is also looking into new investments. The company plans to double its production capacity by expanding existing dairy plants and could be eying a foray into India's north-eastern states. Its factory at Tahilwal in Himachal Pradesh is expected to be commissioned in 2013.
Gujarat Cooperative Milk Marketing Federation, which is the country's largest dairy cooperative and manages and markets the Amul brand, has planned to invest INR30bn (US$546.6mn) in the next five years in capacity expansion and to create cooperative farms in several states. In September 2012, it expressed its willingness to acquire the Delhi milk scheme, which is a subordinate office of the agriculture ministry. The federation is poised to handle 12,500,000 litres of milk per day in 2012/13 and increase it to 20,000,000 litres by 2020.
This wave of investment reinforces our positive view on the Indian dairy market. We forecast the country's liquid milk production to grow by 26.1% between 2011/12 and 2016/17 to 151.5mn tonnes, ousting the EU as the world's largest producer. Foreign investment in advanced production methods is likely to occur following Nestlé's entrance strategy in India, which brought in vets, agronomists and other dairy experts in order to improve production quality and quantity. The improvements in cattle genetics, semen production, ration-balancing and animal vaccines are likely to propel output growth in the coming years. This will also largely come from income and population growth, which will push per capita milk consumption to 46.4kg in 2017, compared with 39.6kg in 2012, and will fuel demand for high-value dairy products, such as cottage cheese and yoghurt. Processed milk sales are forecast to rise by 24.7% between 2012 and 2017 to 61.0mn tonnes.
|India Challenging The EU As Largest Producer|
|Select Countries - Liquid Milk Yields (kg/head) & Production (% of total, RHS)|
Risks To Outlook
We see two significant risks to our view. First, we see downside risks to output growth, as Indian milk production still stands at very low levels by world standards and could stagnate. The government has pushed to bring external expertise into the market and foster increases in yields, but these plans are still at early stages. We also believe productivity is unlikely to increase unless we notice a significant increase in investment and use of better farming technology. Second, even if medical scares such as the melamine scandal in China have yet to affect India, health and safety risks for Indian milk production remain a risk. This is linked to fragmented supply chains and existing quality concerns, which could indirectly impact global dairy markets (for import substitution reasons) in case of a crisis.
|Notes: f BMI forecasts. Sources: 1 National Dairy Development Board, FAPRI, BMI; 2 FAPRI, BMI.|
|Milk Production, '000 tonnes 1||120,100.0||f||125,000.0||f||130,500.0||f||137,000.0||f||143,900.0||f||151,500.0||f|
|Liquid Milk Consumption, '000 tonnes 2||49,769.5||f||52,095.6||f||54,970.6||f||57,246.1||f||59,665.9||f||62,240.2||f|
|Notes: f BMI forecasts. Sources: 1 FAPRI, BMI.|
|Butter Production, '000 tonnes 1||4,646.2||f||4,962.1||f||5,407.0||f||5,782.3||f||6,158.2||f||6,534.0||f|
|Butter Consumption, '000 tonnes 1||4,622.9||f||4,946.5||f||5,284.7||f||5,642.2||f||6,014.6||f||6,401.7||f|