10 things you must know about Dodla Dairy IPO

NEW DELHI: Hyderabad-based Dodla Dairy hit the market with its Rs 520 crore initial public offering (IPO) on Wednesday. On the block is a fresh issue of up to Rs 50 crore worth of shares and an offer for sale of up to 10,985,444 shares, which will be sold in the Rs 421-428 price band. Out of this, the dairy company has raised Rs 156 crore from anchor investors at Rs 428 apiece.Here are 10 things you should know about before taking an investment decision:Domestic business: Dodla Dairy is an integrated South India-based dairy company, primarily deriving all of its revenue from milk and dairy-based value-added products. The company also manufactures and sells cattle feed to farmers through its procurement network.Overseas business: Dodla commenced its overseas operations in FY15 through the acquisition of the operations of Hillside Dairy and Agriculture in Africa. The company produces packaged milk and dairy-based VAPs at a processing plant in Uganda and distributes them through 23 distributors and 11 “Dodla Retail Parlours”. In Kenya, distribution is done through 43 distribution agents and 56 distributors.Size: Dodla Dairy is the third-largest player in terms of milk procurement per day, with an average procurement of 1.03 million litres of raw milk per day (MLPD) as of March 31, 2021. The company’s processing operations are spread across 13 processing plants located in the states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu in India, with an aggregate installed capacity of 1.70 MLPD. It also has two skimmed milk powder (SMP) plants in Nellore and Vedasandur, which have an aggregate installed capacity of 15,000 and 10,000 kgs per day, respectively.Earnings: Over FY18-20, Dodla's revenues rose 16 per cent annually and Ebitda by 12 per cent annually. PAT fell 6 per cent annually during the same period. Value products that accounted for 27.18 per cent of total revenues in FY20 commanded 24.68 per cent of the revenue pie in the first nine months. That said, Editda margin for the nine-month period soared to 14.6 per cent from 6.6 per cent in FY20. Analysts said maintaining such high margins is difficult as it was achieved on cost-cutting measures. The management too has guided towards normalisation of margins.Valuations: The company is demanding a post-issue annualised FY21 PE of 16.4 times, which is lower than Parag Milk Foods' 32.7 times. The asking valuations are at par with Heritage Food while at a good discount to Hatsun Agro that trades at 81 times FY21 earnings. Except for Hatsun Agro, the remaining dairy stocks are trading quite below their record-high levels.Recent deals: As Choice Broking points out, the dairy has on February 2 this year executed a private placement, allocating 26.5 lakh shares to International Finance Corporation at Rs 377. On June 11, a few members of promoters transferred 9.7 lakh shares to SBI Mutual Fund at Rs 411.50. The price band of Rs 421-428 is a bit higher than the recent deal prices.Capex: The company has incurred cumulative captive expenditure of Rs 264.48 Crore over the past three years towards commissioning a new processing plant at Rajahmundry in Andhra Pradesh, acquisition of the processing plants at Batlagundu and Vedasandur in Tamil Nadu (from KC Dairy Products), acquisition of the cattle feed and mixing plant at Kadapa in Andhra Pradesh and establishment of new village-level collection centres (VLCCs).Risks: FY21 has been an exceptional year for the company with an unprecedented increase in profit (due to higher realisations and decline in expenses) despite lower sales volumes. The company is yet to build strong visibility for its brands and increase the ratio of the high-margin milk products in its product mix. Besides, dairy stocks have hardly created long-term wealth for investors.Non-compliance: In the past, there have been instances of non-compliance by the company with provisions of the Factories Act, FSSAI, Electricity Act, Pollution Control Act, Hazardous Waste Management Rules. The company’s audit report is qualified with remarks concerning, among other things, breach of financial covenants required to be maintained by the company.Outlook: Brokerage Ventura Capital sees Ebitda to fall 4.9 per cent annually and PAT by 4.4 per cent by FY24. RoE is expected to fall 611 bps to 20.5 per cent and RoIC by 345 bps to 33.9 per cent by FY24. Investors may want to wait for more signs of strong post-pandemic performance before considering investing in the company’s growth story. Analysts mostly have 'subscribe for the long-term' rating on the issue.

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