India's milk drink boom lifts Varun, Parag with 40% growth

Varun Beverages and Parag Milk Foods have ridden a boom in India's packaged milk drinks segment, posting revenue growth above 40% as the country's branded dairy market deepens.

The two companies saw their top lines expand by 41% and 44% respectively in the latest fiscal year, according to exchange filings. That pace puts them ahead of the broader packaged food sector, where most listed consumer goods firms are growing revenue at 8-14%.

The milk drink category has become a bright spot for larger dairy players like Mother Dairy and Amul as well, but Varun and Parag show how two focused operators can grab share in a fragmented market. Varun's growth came from distribution expansion into new states and higher sales of its flavoured milk and lassi. Parag, known for its Gowardhan and Go brands, cited capacity additions and deeper penetration in South India and the east.

Category growth is being driven by three structural shifts. Urban consumers are switching from loose unbranded milk to packaged variants. Rural demand for affordable protein is rising, and smaller pack sizes of milk drinks and buttermilk are becoming popular as an on-the-go snack. Industry estimates from the Indian Dairy Association put the branded milk beverages segment at roughly $1.8 billion, growing about 18% per year.

Joshi, an analyst at ICICI Securities who tracks the sector, said the tailwind is likely to persist. "Packaged milk drinks have low penetration relative to urban household consumption. There is room for further growth of 15-20% annually for the next three years," he said.

Varun Beverages, the larger of the two, operates a network of 23 plants and distributes to over 1 million retail outlets. The company has been adding cold-chain infrastructure to push its milk drinks into smaller towns. Parag Milk Foods has focussed on higher-margin products like paneer, ghee and cheese alongside the drinks line.

Both companies face a common set of risks. Input costs for milk powder and packaging have been volatile. A rise in fodder prices or a drought in key milk-producing states of Gujarat, Uttar Pradesh and Punjab could squeeze margins. Parag's filings show that raw material costs account for about 65% of its total expenses.

Competition from Amul and Nestle is also intensifying. Nestle entered the flavoured milk segment with its Milo brand in select cities last year. Amul has been expanding its "Amul Kool" franchise with new variants including lassi and buttermilk.

The milk drinks boom is part of a larger shift in India's dairy sector. Per capita milk consumption, at roughly 430 grams per day, is still below the World Health Organization's recommended intake of 500 grams. The gap is largest in the eastern states and among lower-income households.

Pramod S, who manages a consumer-focussed fund at Kotak Mahindra, said the growth trajectory for packaged milk looks different from other staples. "Unlike biscuits or noodles, where per capita consumption is already high, milk drinks in packaged form still have a long runway in India. That is why the multiples on these stocks are high," he said.

Varun Beverages trades at about 52 times trailing earnings. Parag Milk Foods trades at about 28 times. Both are above the 10-year median for Indian consumer staples, reflecting the market's willingness to pay for growth.

The Reserve Bank of India's April policy rate at 6.5% and steady rural demand have kept sentiment positive. The next quarterly sector data from the dairy board is due in July.

A risk worth tracking is how the 2023 southwest monsoon shapes up. India's milk production growth slowed in 2022 to about 4% after a decade of 6% annual expansion, partly on fodder shortages from a patchy monsoon in parts of the south and west. Any repeat this year would push up milk procurement prices for processors and may slow the category's growth rate.