Dodla Dairy Ltd. share price target

Three observations: (1) The gross margin expanded with correction in milk procurement prices. We model the margin recovery to continue in H2FY24 with likely normal flush season in FY24, (2) the company plans to set up new plant in Maharashtra. We view it as a positive development considering geographical expansion just next to current cluster of South India, (3) There is healthy growth in value added products (Curd) partially led by muted monsoon and higher temperatures in Aug’23.

Highlights from Dodla’s Q1FY24: (1) Milk procurement prices have corrected and it has led to gross and EBITDA margin expansion YoY. We model margin expansion to continue even in rest of FY24 led by correction in input prices, (2) volume growth was healthy at ~6.7% YoY; we model it to be in mid-high single digits in rest of FY24, and (3) the company has potential to gain market share considering additional profitability.

Muted flush season and heat wave have impacted the milk production and milk procurement prices. While Dodla reported healthy growth of 9.8% in milk procurement, we note the steep increase in input prices contracted the gross margins by 416bps YoY to 21.4%, lowest level in past 12 quarters.

We believe milk procurement prices are closer to the peak levels and may correct post commencement of flush season in H2CY23. We model the EBITDA margins of Dodla Dairy to decline 50-100bps YoY in H1CY23. However, we model strong recovery in margins in H2FY24 led by (1) price hikes and (2) likely correction in milk procurement prices.

In-spite of multiple macro headwinds such as higher milk procurement prices, higher SMP prices and muted flush season, Dodla reported sturdy performance in Q2FY23. Considering the peer group performance, we believe Dodla has likely gained market shares in Q3FY23.

Dodla’s revenues increased 22.8% YoY compared to Hatsun (6.9%) and Heritage (21.8%) led by strong 11.7% growth in milk procurement and 19.7% higher revenues from VAP.

We believe acquisition of Sri Krishna Milks to be value accretive in medium term as (1) Sri Krishna operates in key region of Dodla i.e. South India and same products where Dodla has strong understanding i.e. milk and curd, (2) While Sri Krishna was loss making, it has Gross margin of ~22% over FY18-21 which indicates strong consumer acceptance of the brand and (3) post acquisition Dodla will be able to consolidate its position in North Karnataka, South Maharashtra and Goa.

Key takeaways from Q2FY22 results are: (1) Dodla registered healthy revenue growth of 22.9% YoY, (2) steady launch of new products continued during the quarter and (3) EBITDA margins declined 544bps YoY due to higher input prices, increase in freight costs and ad spends.

Dodla has an integrated business model consisting of procurement, processing, distribution & marketing operations. Its procurement operations are spread across Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra with average procurement of 1.03 million litre per day (MLPD) from ~1.09 lakh farmers through 6,771 village level collection centres (VLCCs) and third party suppliers. The processing operations are spread across 13 processing plants in south India with aggregate installed capacity of 1.70 MLPD. It also runs two skimmed milk powder (SMP) plants in Nellore...

Public issue of 12,153,668 Equity shares of Face value Total Public Rs. 10 each, (Comprising of fresh issue of 1,168,224 Equity Shares* (Rs. 50 cr.) and Offer for Sale of...

Dodla Dairy Limited (DDL) was incorporated on May 15 1995 at Hyderabad. The company sell fresh milk, ghee, butter, curd, paneer, gulab jamun, doodh peda, basundhi and junnu, which are targeted at consumption at home. They sell UHT milk, flavoured milk, ice cream and beverages such as buttermilk under their brand, primarily for direct consumption.

Dodla Dairy Limited IPO Note Issue Open: June 16 June 18, 2021 Price Band: Rs. 421 428 *Issue Size: 12,153,668 eq shares (Fresh issue of 1,168,224 eq sh +offer for Sale of 10,985,444 eqs h ) Issue Size: Rs.511.7 520.2cr Reservation for: QIB Upto 50% eq sh Non Institutional atleast 15% eq sh Retail Upto 35% eq sh

IPO NOTE