Change in product mix will lead to better margins
Historically, sales of processed milk have been their primary revenue driver of the company whereby revenue from sale of processed milk grew at a 3 year CAGR of 16.4% to Rs 1551 crore in FY20. However, the revenues from VAPs grew at a 3 year CAGR of 73.4% to Rs 579 crore in FY20. The company’s major focus has shifted to dairy based VAPs over the last few years enabling them to grow further and expand its margins. The company also intends to strike a balance between processed milk and VAPs to optimize their product portfolio. While their current product portfolio includes curd, they propose to introduce new variants of cheese and other products at price points as low as ₹10, to expand their product portfolio and reach a wider variety of consumers. Key drivers of their dairy based VAPs are curd, UHT milk, ghee, butter, flavored milk, paneer, and ice creams for their Indian operations and liquid milk yogurt, ghee, paneer, cheese and UHT milk for their overseas operations.
Inorganic capacity expansion has boosted growth
The company aims to grow domestically and internationally by way of organic and inorganic growth in order to increase their presence and their revenue. In their domestic operations, they have in the past grown both organically by setting up their own processing plants and inorganically by either acquiring processing plants or business units from third parties. In April 2019, the company commenced operations at their new processing plant in Rajahmundry, Andhra Pradesh which provided them access to the markets of coastal Andhra Pradesh. Whereas in FY19 the company, through their subsidiary Orgafeed Pvt. Ltd., had acquired the cattle feed and mixing plant in Andhra Pradesh for the purpose of manufacturing and selling cattle feed to farmers through their procurement network. For their overseas operations, the company entered into the markets of Uganda in FY15 with the acquisition of operations of Hillside dairy and their entry in the Ugandan market allowed them to expand their reach to the East African markets.
One of the leading brands with wide variety of products
Dodla Dairy has developed one of the leading brands in the dairy products industry in south India with strong consumer recognition, particularly in the states of Andhra Pradesh, Karnataka, Tamil Nadu and Telangana. Their Indian operations are undertaken under the brands “Dodla Dairy” (for milk and perishable products such as curd, flavored milk) and “Dodla” (for VAPs such as ghee, butter, paneer, butter milk and ice creams). The company offers a diverse portfolio of dairy based VAPs targeted at various consumer segments and this enables them to cater to the changing preferences of their retail customers. The strength of their brands aid them in many aspects of their business, including expanding to new markets, entering into agreements with distributors and retailers and building relationships with their customers, investors and lenders.
Integrated operations across the dairy distribution chain
The company’s integrated business model enables them to provide end to end capabilities from procurement till distribution and marketing in a cost efficient manner. The company’s procurement operations are spread across the southern regions of India and they procure raw milk directly from the farmers and through third party suppliers. The company has consistently improved their direct procurement from farmers with such direct procurement comprising 92.7% of their total raw milk procurement as of March 31, 2021. The strategic location of their processing plants, chilling centers and VLCCs enables them to minimize the transportation and handling costs, without any loss in quality or nutritional value. As of March 31, 2021 they distributed their milk and dairy based VAPs through 40 sales offices, 3,285 distribution agents, 861 milk distributors and 544 milk product distributors. Their products are also available through 393 “Dodla Retail Parlors” which are operated on a franchise model and spread across the southern regions of India.
Enhance the brand visibility and expand the reach of the products
The company’s brands are recognized by consumers given their presence across the south Indian markets for over 23 years and robust quality of their processed milk. The company aims to increase its brand visibility of their VAPs by undertaking more advertisement campaigns. As part of product outreach program, they intend to actively increase their distribution network and engage with hyper markets, super markets and retailers so that all of their products become more accessible to their consumers. The company also intends to convert their multi-brand dealer network into exclusive suppliers who house only their products in a phased manner to have better control over their brand. The company aims to increase the number of Dodla Retail Parlours in the states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu based on the existing franchise model.
Incorporated in 1995, Dodla Dairy Ltd. (DDL) is an integrated dairy company with a significant presence in the southern markets. The company is the 3rd largest company in terms of raw milk procurement with an average procurement of 1.03 million liters per day (MLPD) as of March 31, 2021 and 2nd largest private dairy player in terms of market presence. It sells fresh milk, ghee, butter, curd, paneer, gulab jamun, doodh peda, basundhi and junnu, which are targeted at consumption at home. The company sells UHT milk, flavored milk, ice-cream and other beverages such as buttermilk primarily for direct home consumption. The company’s Indian operations are mainly undertaken under the brand name of “Dodla Dairy”, “Dodla” and “KC+” whereas its overseas operations are undertaken under “Dodla Dairy”, “Dairy Top” and “Dodla+” brands. It procures milk from ~109,670 farmers through 6,771 village level collection centers, 232 dairy farms and third-party suppliers as of March 31, 2021. Further, its operations also consist of processing the raw milk into packaged milk and manufacturing other dairy-based value-added products (VAPs) at 13 plants with an aggregate installed capacity of 1.7 MLPD
We believe the company shall capitalize on growth opportunities led by i) change in product mix ii) bolstering direct milk procurement iii) expansion in distribution channels and iv) rising acceptance of value added milk. On annualizing 9MFY21 EPS, the P/E ratio stands at 15.4x which seems reasonable valuation, considering its consumer-centric business. If we compare it with its peers, Heritage Food trades almost at par with DDL, however Hatsun Agro trades at 81x of FY21 earnings, a significant premium compared to DDL. Going forward, sustainability of recent improvement in operating performance will be the key for the company’s valuation rerating. We recommend “Subscribe” to the IPO from the long term perspective.
Use of Proceeds:
The proposed issue comprises a fresh issue worth up to Rs 50 crores and an offer-for sale of up to 1.09 crore equity shares by promoters and private equity investors such as TPG. The company will use proceeds from the fresh issue to: Repay and/ or prepay, in full or part, of certain borrowings availed from ICICI Bank, HSBC Bank and HDFC Bank worth Rs 32.26 crore and fund incremental capital expenditure requirements of Rs 7.15 crore.
Book running lead managers:
Axis Capital, ICICI Securities
Dodla Sesha Reddy is the Promoter, Chairman and non-executive Director on the Board of the company. He has been associated with the company for more than 22 years and has dairy industry experience of more than 22 years. Dodla Sunil Reddy is the Promoter and Managing Director of the company. He has been associated with the company since incorporation and has more than 25 years of experience in the dairy industry. He is responsible for setting up their business strategy with a focus on accountability, competitive performance and value creation. Madhusudhana Reddy Ambavaram is the whole-time Director of the company. He joined the company in October, 2006 and has 14 years of experience in the dairy industry. He is in charge of the legal compliance in relation to industrial and labour laws and the human resource functions of the company.
|Yr End March (Rs Cr)||FY18||FY19||FY20||9MFY21|
|Depreciation & Amortization||215.00||195.00||296.00||220.00|
|Interest & Finance Charges||49.00||64.00||86.00||56.00|
|Profit Before Tax - Before Exceptional||515.00||764.00||296.00||506.00|
|Effective Tax rate||2.00%||17.00%||-15.00%||10.00%|
|Net Profit Margin||13.00%||14.00%||8.00%||12.00%|