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Dairy enterprises are short of breath, under great pressure from raw material prices

2022 is a memorable year for dairy businesses. In the “post-Covid-19” period, consumer demand has improved significantly, but this is also the time when challenges begin to appear for dairy businesses.

Specifically, the high cost of raw materials due to the disruption of supply and demand chains, and the pressure of high exchange rates have directly affected dairy enterprises to varying degrees.

The sharp slide of the “brothers” of the dairy industry

The influence of the market is most evident in the business situation in 2022 Vietnam Dairy Products Joint Stock Company (Vinamilk; HoSE: VNM) with a decline in both revenue and profit. Specifically, according to the newly released financial report on business results in the fourth quarter and the whole year of 2022 net revenue in the fourth quarter recorded VND15,068 billion, down 5% y/y.

In addition, due to the increase in cost of goods sold, gross profit in the period decreased by 15% over the same period. Notably, Vinamilk’s financial expenses increased sharply by 130% to 207 billion dong while selling and administrative expenses recorded a slight decrease. After deducting expenses, Vinamilk reported a profit of VND 1,869 billion, down 15% compared to the fourth quarter of 2021.

In the year 2022, Vinamilk recorded net revenue of 59,956 billion dong, down slightly compared to the same period last year. After tax, Vinamilk earned a profit of VND8,578 billion, down 19% compared to 2021. This is Vinamilk’s lowest profit since 2015.

In 2022, Vinamilk set a revenue target of VND 64,070 billion and a pre-tax profit of VND 12,000 billion, reaching 105% and 93% respectively compared to 2021. With the above results, the company was unable to complete the plan. set out in 2022.

Same fate, International Dairy Joint Stock Company (HoSE: IDP) also recorded the downward trend of profits. Specifically, dairy owner Kun recorded net revenue of VND 1,672 billion, up 37% in the fourth quarter of 2022. Although in the quarter recorded an increase in cost of goods sold at 53%, gross profit in the period was still 19% higher than the same period last year.

Along with the increasing trend of COGS, expenses of International Dairy were also recorded higher than the same period. In which, selling expenses increased significantly by more than 146% to 478 billion dong. Deducting expenses, International Milk’s profit after tax is VND 166 billion, down 41% compared to the fourth quarter of 2021.

Accumulated in 2022, the company recorded VND6,086 billion in net revenue, up 27%. After tax, the company reported a profit of VND 810 billion, a slight decrease compared to 2021.

In 2022, this dairy company has set a target of net revenue of VND 5,500 billion and profit after tax of VND 452 billion. Thus, despite exceeding the revenue target, the company still could not complete the set profit target in 2022.

In the opposite direction, Moc Chau Dairy Cow Breeding Joint Stock Company (Moc Chau Milk, UPCoM: MCM) recorded quite positive signals when completing the production and business plan set out in 2022 despite the cost pressure in the last months of the year.

Specifically, Moc Chau Milk’s net revenue in the fourth quarter of 2022 reached VND 787 billion, up 9% over the same period. Although the quarter recorded a high increase from cost of goods sold, Moc Chau Milk’s gross profit still recorded a growth of 10.6%, reaching VND 253 billion.

However, under the pressure of high expenses, especially selling expenses, increased by 24%, from 146 billion dong in the fourth quarter of 2021 to 181 billion in the fourth quarter of 2022, leading to profit after tax. of Moc Chau Milk decreased by 17.2%, to only VND 72.6 billion.

According to the explanation from Moc Chau Milk, this decrease was due to the fact that in the quarter the company increased promotions, displays, and support for distributors to boost revenue. In addition, in the fourth quarter of 2022, the company incurred a loss in liquidation of fixed assets, leading to a decrease in profit.

However, with positive growth in the first quarters of the year, accumulated in 2022, Moc Chau Milk’s net revenue reached VND 3,133 billion, up 7% compared to 2021. After deducting expenses, the company reported a profit of 346 billion, up 8.6% over the same period. The above results helped the company complete the revenue and profit plan set out in 2022.

Cost of reducing business gray area in 2023

SSI Research forecasts that 2023 will be a key year to test the strength of the Vietnamese economy. Vietnam can achieve GDP growth at 6.2% for this year, which is an encouraging figure in the context of a significant deceleration in the world economic trend.

Commenting on the dairy industry, SSI experts said that corporate profits do not have a strong demand driver in 2023, especially when consumers are increasingly worried about income. Milk consumption in urban markets is mainly driven by product premiumisation, and this process is slowed down or disrupted during economic downturns.

For the rural market, SSI believes that demand is still a bit more stable than in the urban market as there is still room for output growth due to the current low consumption level.

According to SSI, the positive factor comes from lower input costs. Specifically, experts forecast that the prices of whole milk, skim milk powder and anhydrous fat (AMF) have adjusted 28%, 32% and 19% respectively from the peak formed in March 2022, which This could help improve profit margins of dairy companies from the first quarter of 2023, especially for VNM as 65% of raw materials depend on imported powdered milk.

Dairy companies, such as VNM, IDP and MCM, have good balance sheets and healthy cash flows, so they are more resilient to rising interest rates.

Regarding revenue growth, SSI experts believe that smaller companies (MCM & IDP) will have a stronger incentive than VNM due to their smaller size and capacity expansion.

Elsewhere, according to the agricultural industry report 2023, VNDirect experts expect the price of milk powder to continue to fall and trade at 5% lower than in 2022 when China continues its zero-Covid policy. and global milk powder production in 2023 increased by 1.5% over the same period.

Besides, VNDirect believes that lower raw material prices will compensate for the impact of exchange rate fluctuations on gross profit margin in 2023. Besides, businesses are taking short-term loans mainly in USD from banks at banks. with floating interest rates, accounting for 98% of total short-term debt. Therefore, the financial costs of enterprises will increase significantly in the period of 2022-2023.

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