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    Should you place bets in dairy sector? Stocks climb up to 87% in about four months

    Should you place bets in dairy sector? Stocks climb up to 87% in about four months

    Should you place bets in dairy sector? Stocks climb up to 87% in about four months
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    By Mousumi Paul   IST (Published)

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    As the consumption rose in the last four months, the dairy producers saw high demand for milk and milk-related products. It remained the least impacted sector, said Elara Capital in its report. However, the report also highlighted out-of-home (OOH) consumption was affected for dairy companies as restaurants, cafes and hotels were shut during the lockdown. Heritage Foods jumped 84 percent while Parag Milk Foods climbed 87 percent in about 4 months.

    The nationwide lockdown has been proved to be a boon for some of the niche sectors including dairy space. As the consumption rose in the past four months, the dairy producers saw high demand for milk and milk-related products. It remained the least impacted sector, said Elara Capital in its report.
    However, the report also highlighted out-of-home (OOH) consumption was affected for dairy companies as restaurants, cafes and hotels were shut during the lockdown. This will directly impact 12 percent of Parag Milk's sales, said the brokerage.
    The stocks witnessed a V-shaped recovery followed by a consolidation phase. Heritage Foods jumped 84 percent, while Parag Milk Foods climbed 87 percent in about 4 months. Prabhat Dairy also surged 58 percent to current levels during the same period.
    According to the brokerage, the benefits of low milk prices will flow into gross margin from Q2FY21 when high-cost inventory is liquidated. Gross margin for dairy companies will erode by 200-250 bps YoY. "Overall, our dairy universe will report sales decline of 1 percent YoY and EBITDA decline of 29 percent YoY," it added further.
    The report also said that Heritage Foods will report 8 percent YoY growth, due to high liquid milk salience (65 percent), whereas Parag will decline by 11 percent due to hotel, restaurants and catering (HORECA) impact.
    Despite factoring in all the negative impact of the dairy companies, the brokerage remains bullish on Heritage Foods and Parag Milk Foods, and sets their target prices at Rs 571 and Rs 112, respectively.
    Meanwhile, CARE Ratings has estimated milk production to have increased by about 3.9 percent in FY20 to reach 195 million tonnes. Also, between FY19 and FY23, milk production is expected to increase at about 4.8 percent CAGR to reach 226 million tonnes by FY23, while the per capita availability is expected to witness a CAGR of about 4.6 percent during the period to cross 470 grams per day by FY23.
    With the gradual relaxations in lockdown starting June 2020 and opening of various sweet shops, restaurants and hotels in the country, the demand for dairy products is expected to pick up slowly, said the ratings agency report.
    Also earlier, the government, in its Rs 21 lakh crore economic stimulus package announced an allocation of Rs 15,000 crore to bolster India’s animal husbandry and livestock sector, with an interest subvention of up to 3 percent to private players for setting up of dairy, poultry and meat processing units.
    This will help in increasing milk production, boost exports and create 35 lakh jobs in the country, said Prakash Javadekar at the Cabinet meeting.
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