It’s raining IPOs again. After Sona Comstar & Shyam Metalics which we wrote about, now a dairy company is making its debut on the markets.
‘Growth in dairy industry’ had become an oxymoron in the last 3-4 years, as in there hasn’t been much. This company wants to prove it wrong.
Dodla Dairy, the fastest-growing private dairy player is looking to raise 520 Cr. The IPO proceeds mainly provide promoters and TPG Private Equity with partial exits, and the rest will go to reduce debt. On the plus side, it has grown faster than peers and has a healthy product mix. We took a look to see if it makes sense to invest.
About the company
Dodla Dairy is the third-largest company in terms of milk procurement per day in South India. It was incorporated in 1995 with its headquarters in Hyderabad. They operate across the five states of Andhra Pradesh, Telangana, Karnataka, Tamil Nadu & Maharashtra. They also have overseas operations in Singapore, Uganda & Kenya. They market under the brands Dodla Dairy, Dodla & KC+. The company has a wide range of products in both liquid milk and by-product categories.
Source: Company website
- The company procures 1.03 Mn litres of raw milk per day from ~1 Lac farmers across 6k+ villages.
- This milk is processed across 13 plants with an installed capacity of 1.70 Mn litres.
- It has a large distribution of 3000+ agents & 861 milk distributors across southern states.
Value Added Products: The Levers of Growth
Dodla products include Milk, Butter, Ghee, Paneer, Curd, Flavoured Milk, Doodh Peda, Ice Cream & Skimmed Milk Powder.
- 72.8% of the revenue comes from Milk & milk products.
- 27.2% comes from Value-added products like Ghee, Ice creams, Paneer
Milk offers higher ROCE whereas value-added products offer higher margins.
The profitability of dairy companies depends on two factors
- Milk prices in that particular region
- Portfolio of Value Added Products
While the value-added products seem attractive with high margins, the capital expenditure incurred to set up production is high. Hence they fetch lower returns on capital employed.
On the other hand, traditional products like milk & curd have lower EBITDA margins of about ~4-6%, but a high return on capital employed. They also enjoy negative working cycles. Cheese enjoys the highest realizations amongst all products as its manufacturing process is complex.
Dodla has a good mix of products to balance margins, ROCE & growth.
Source: Dodla Dairy DRHP
Financials
In the last 3Y, revenue grew at a CAGR of 15.9% to 2145.6 Cr (as of FY20). 9MFY21 had clocked 1431 Cr of revenue.
EBITDA increased at a CAGR of 11.81% & amounted to 140.9 Cr. EBITDA margins improved from 7% to 14.6% in 9MFY21.
The company hasn’t shown much PAT growth in the last 3Y. It remained flat at ~50 Cr. However, for 9MFY21 it reported a significant jump in profits at 116.3 Cr. PAT margins improved from 2.3% to 8.2% in 9MFY21.
ROE and ROCE stand at 17.4% & 24.4% respectively. Post-IPO, the company will bring down its debt from 82 Cr to 50 Cr.
Why the huge uptick in 9MFY21 numbers?
Towards the end of FY20 (just before Covid), the company had taken a price increase across products. Post-Covid, the procurement prices had fallen. They got the dual benefit of both increases in realization & decreased procurement costs. Hence the margins moved from 7% to 14%. However, management indicated that these margins are not sustainable.
The fastest-growing private diary
Over FY17- 20, Dodla Dairy grew its revenues the fastest, at a CAGR of 14.2%, followed by Heritage (12.8%) & Hatsun (8.3%).
Dodla & Hatsun have a higher contribution of value-added products at 33% & 35% respectively.
The company has the best asset turnover ratio of 4.4 times among its peers.
Growth Triggers
- The management had guided to continue 15% revenue growth for the next few years.
- The company is confident of improving EBITDA margins from current 7% to low double digits.
- Dodla has been a constant acquirer of plants & companies. Since 2001, it had acquired 8 plants in Andhra, Telangana, Karnataka, Tamil Nadu & Uganda.
- Increasing distribution & ad spend. 100% procurement from farmers.
- New launches in value-added products like Curd, Paneer, Ghee etc.
View & Valuation
This IPO is mainly for the exit of promoter group & TPG private equity. Only 9.6% of the IPO proceeds go to the company.
At an issue price of 428/- the company is valued at ~2500 Cr. The company is trading at 50 PE (as of FY20) and 19 PE (as of FY21E). However, the jump in margins & profits we had seen in FY21 is not sustainable.
It had delivered strong growth in both milk-based (3Y CAGR 16.4%) & Value-added products (3Y CAGR 13.4%) compared to its peers.
Overall the company looks good from a valuation and growth perspective. If the management walks the talk, it can be a good long-term bet.
We think it makes sense to subscribe to this IPO.
Other recent IPO’s we reviewed
This article is for information only, and should not be considered as a recommendation to buy or sell any stocks. Stocks discussed might be part of Capitalmind Portfolios
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