This article first appeared in The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

IT is a fine balancing act for Dutch Lady Milk Industries Bhd’s new managing director (MD), Ramjeet Kaur Virik, as she navigates an environment of high raw material prices and the dairy company’s mission to nourish Malaysians with affordable products.

According to the Global Dairy Trade website, the price of skim milk powder — one of the raw materials used in dairy products — has increased 19% year on year to US$3,401 per tonne on Oct 19, while the price of whole milk powder has increased 25% in the same period to US$3,803 per tonne.

However, 45-year-old Ramjeet — a Malaysian who replaced Indian national Tarang Gupta as Dutch Lady’s new chief since July 2 and is the dairy company’s second female MD to date — says passing on that increase in costs by raising the prices of its products is not a decision that the company takes lightly.

“I call it balancing the triangle. On one hand, we have a business to run and a responsibility to our shareholders to deliver profitability. The second is our purpose, which is to nourish Malaysians with affordable dairy nutrition, and the third is the prices of our products. The core mission of our organisation is to achieve that balance (between the three aspects), so increasing prices is not something that we do lightly.

“It goes back to our company culture. We are owned by FrieslandCampina, which in turn is owned by dairy farmers, and these farmers do not talk about what is their profit for the next quarter, but how they can sustain the business for the next generation. FrieslandCampina has been around for 150 years, and some of the farmers who are owners of the company come from six generations of farmers. The beauty about that is they do things with the long term in mind,” she tells The Edge.

With its long-term focus, Dutch Lady has committed to investing RM400 million to construct a new manufacturing facility in Bandar Enstek, Negeri Sembilan, which is expected to be completed in the next two years. Part of the construction will be funded by the proceeds from the disposal of its Petaling Jaya factory to UEM Land Bhd for RM200 million, which was completed on Oct 1.

Ramjeet says the new Bandar Enstek facility is set to be a game changer for Dutch Lady.

“Bandar Enstek will take us a full two years to develop. We had a bit of delay due to the pandemic, but now the groundwork has kicked off. The land size is three times the size of our Petaling Jaya factory and will allow us to double our capacity and output.

“We are funding [the Bandar Enstek development] from our own internal funds, so that is why we have now started reserving our funds. We are building a factory that is going to help us drive efficiencies, innovation and sustainability. Being sustainable not only helps the environment but helps us to reduce the costs of doing business,” she says.

Dutch Lady currently commands over 40% of the liquid milk market share in Malaysia, and about 24% of the overall dairy market here. Ramjeet is not deterred about competition in the Malaysian dairy space; in fact, she welcomes it.

“There is a global increase in the demand for dairy driven by nutrition, and I am very happy to see that Malaysians are embarking on that journey towards more nutritious [choices]. And by default, since dairy is a nutritious product, it will grow.

“As a market leader, I don’t want to take the narrow view of milk. I want to take the broader definition of nutrition, so I look at the products I can give to consumers based on their taste profiles and how we can innovate from there, and competition will always be there. Competition drives creativity and energy, and with our purpose to nourish Malaysians through trusted dairy nutrition, we are not afraid of the competition; in fact, we embrace them,” she explains.

For the first half of its financial year ended June 30, 2021(1HFY2020), Dutch Lady reported a flattish 0.4% increase in net profit to RM44.16 million in spite of the higher prices for global dairy raw materials, while revenue grew 3.4% to RM542.67 million.

As for how long the spike in dairy raw materials is expected to continue, Ramjeet says prices are not expected to fluctuate that much in the short term.

“We do expect the raw material prices to stay high at least in the foreseeable coming months. This is as the demand for dairy nutrition keeps rising across the globe. The supply needs at least two to three years to catch up to that demand,” she says.

The group declared a first interim dividend of 25 sen per share for FY2021, which was lower than the first interim dividend of 40 sen per share for FY2020.

In an Aug 27 note on Dutch Lady, Kenanga Research says, given that its new manufacturing facility in Bandar Enstek is still a long way off and capex will be funded from internally generated funds, dividend payout could be crimped in the medium term. Nevertheless, the firm upgraded its call on Dutch Lady to “outperform” with a target price of RM40.20, as the brokerage says Dutch Lady should be able to preserve its sales base on the back of fresh product innovations and strategic pricing strategies, in tandem with the gradual reopening of the economy with the successful rollout of vaccines.

Dutch Lady’s shares closed at RM32.90 last Wednesday, giving the company a market capitalisation of RM2.1 billion. Its share price has declined 12% year to date.

Its shares, however, are illiquid, with a mere 64 million shares outstanding. Nevertheless, Ramjeet says that liquidity is not an issue now for Dutch Lady.

“Being part of the global company FrieslandCampina, when executing large investments, the first choice is to do this via internally generated funds or internal loans,” she says.

FrieslandCampina is Dutch Lady’s largest shareholder with a 50.96% stake, while the Employees Provident Fund has an 11.08% stake in the company, followed by Amanah Saham Bumiputera with 7.52%.

For the imminent Budget 2022, which is to be tabled next Friday, Ramjeet hopes the government will be cognisant of milk’s role as a superfood that helps combat malnutrition and non-communicable diseases (NCDs), and not impose any fiscal measures that could impact the industry.

“Help us stay affordable. Also, on sugar tax, which was imposed on beverages before, we feel that this cannot be approached in a myopic manner. What has been the benefits of the sugar tax implementation and how has the government used those funds — we are unclear on that, we should have these statistics before something new is implemented. I would rather have this conversation on a broader perspective. If you want to combat NCDs and change lifestyles, it [should not be done by] just taxing the companies,” says Ramjeet.

“We believe the carrot versus stick approach would be better. Instead of penalising companies for sugar [content], incentivise them to become healthier and drive their sustainability agendas. Lastly, there needs to be more education on nutrition. We feel there should be an allocation in the budget on how we can educate Malaysians, because the level of malnutrition in the country has gotten worse with the pandemic [especially among the lower-income groups]. In the past, we used to have school milk programmes, and we believe these programmes should be brought back, as we have to do right for our future generation.”

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