Concerns over milk shortages amid soaring temperatures, when peak summer demand has just started to kick in, have given a fillip to dairy stocks over the last one month.
Shares of Heritage Foods have rallied 23% while those of Parag Milk are up 10% in anticipation of further price hikes, which could boost the margins of these companies. Moreover, it is a given that the demand for milk and milk-related products, especially ice cream, will rise during the summer season.
“The recent uptick in dairy stocks is due to rising milk prices. In the last year, we have seen more than a 10% price hike in milk, and now ahead of the hot summer, the nation is suffering from some shortage in milk production as heat waves could impact dairy production,” Anubhuti Mishra, Equity Research Analyst at Swastika Investmart told ETMarkets.
The demand for dairy products such as ice cream tends to rise during the summer months, which ultimately benefits the organized sector and listed dairy companies, Mishra added.
In the post-Covid era, consumers have shown a preference for packaged dairy products and this could spike as mercury is expected to heat up.
Most parts of India, except northwest and peninsular regions, are likely to experience above-normal maximum temperatures from April to June, the India Meteorological Department (IMD) had said earlier this month.
“Historical financial data suggests the dairy companies’ profitability and margins have declined on a YoY and QoQ basis. If the dairy companies continue to increase the prices of their products in upcoming quarters, it will improve their margins and profitability in the long run,” said Palka Arora Chopra, Senior Vice President, Mastertrust.
Tough Competition
Several large unlisted players in the dairy industry in India, such as Amul, Mother Dairy, and Nandini pose stiff competition to the listed players. These large unlisted players have significant market share and brand recognition.
The listed players are generally placed well, as they have access to capital markets that can provide them with funding for growth and expansion, said Mishra suggesting that listed companies must innovate, expand, and differentiate themselves from their competitors.
Time to buy?
Despite sharp gains seen by some of the dairy stocks, analysts largely suggest investors to steer clear of them for the long run.
“Some kind of bottom fishing is happening in the market. The money flow has been checking for stocks that are fairly or undervalued and also chasing those stocks and sectors which have short-term momentum,” said Kranthi Bathini of Wealth Mills Securities.
As dairy stocks could remain a seasonal play given the soaring temperatures in India, Bathini believes some outperformance in the short-to-medium-term is likely.
Mishra, meanwhile, said aggressive investors can benefit from the current rally by choosing the right stock. He, however, cautioned that the sector is cyclical and highly volatile.
“Though we are not very bullish about this sector due to the uncertainty involved in it, if one wants to take advantage of the current rally, then Heritage Foods can be a good pick,” she added.
Source : The Economic Times April 21st 2023 (Data Inputs: Ritesh Presswala)