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Mumbai, Jun 2 (PTI) Dairy companies are likely to witness 11-13 per cent revenue growth this financial year on strong demand, increasing share of value-added products (VAP) and higher milk prices, a report said on Monday.

The profitability will improve by 20-30 basis points (bps), aided by better realisations, healthy milk supply keeping procurement prices in check and a favourable shift towards VAP, which fetches higher margins, Crisil Ratings said in a report.

The rating agency further stated that to capitalise on the healthy growth momentum, companies will ramp up capital expenditure (capex) by 10 per cent this fiscal.

A sizable portion of this capex will be to enhance capacities for VAP, a segment that continues to outpace the traditional liquid milk category, it added.

Despite the higher capex, credit profiles of dairy companies are expected to remain stable because of improving cash flows and strong balance sheets, the report said.

"The VAP segment is expected to clock a strong 16-18 per cent growth this fiscal, driven by changing consumer tastes, rising nutritional awareness and preference for protein-rich diets. Consequently, its share in the product mix will increase to 45 per cent from 40 per cent a couple of years back. In contrast, growth for liquid milk should be stable at 10 per cent.

"Overall, improved product mix, healthy volumes and rising retail prices are expected to help dairy companies to see a revenue growth of 11-13 per cent in FY26," Crisil Ratings Director Shounak Chakravarty said.

A favourable monsoon forecast is also expected to support the dairies, while stable fodder prices and increased adoption of artificial insemination are likely to boost productivity, which will ensure a steady availability of raw milk, therefore, limiting the increase in procurement prices to a modest 2-3 per cent this fiscal, said the report.

According to Crisil Ratings, profitability will benefit from improving realisations and a modest increase in procurement prices, resulting in a 20-30 bps improvement in operating margin to 5.3 per cent, supporting the overall cash generation.

"Capital expenditure of dairy companies is expected to rise 10 per cent this fiscal to Rs 3,400 crore. The VAP segment will account for more than 60 per cent of the overall capex - a trend seen over the past three fiscals - given its higher growth potential. The balance capex will be for augmenting liquid milk processing capacities and shoring up supply-chain infrastructure," Crisil Ratings Associate Director Rucha Narkar said.

Despite high debt levels owing to the capex, credit profiles will remain stable, supported by strong balance sheets and healthy cash accrual, she added.

Debt protection metrics are also expected to remain comfortable this fiscal, and the capital structure will remain steady, it stated.

Crisil Ratings added that a normal monsoon and timely ramp-up of newly commissioned capacities need to be watched.

(This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)