Dodla Dairy IPO: What the numbers reveal | Economic Times

ET Intelligence Group: Hyderabad-based Dodla Dairy is an integrated B2C dairy company selling milk and value-added milk products with a presence in south India as well as a small presence in Uganda and Kenya in Africa. The IPO provides a partial exit to private equity players TPG and IFC. The proceeds from the fresh issue will be used for debt repayment.Business and FinancialsAround 73% of the company’s revenues are earned from milk and the remaining from high margin products such as curd, paneer, ice cream and buttermilk. Strong relationships with farmers enable Dodla Dairy to contain costs as well as strengthen the raw milk procurement. The company has 13 milk processing plants with an installed capacity of 1.7 million litres per day. It has a cold storage chain from the procurement stage up to the consumer touchpoints. The company has the second-highest market presence amongst private dairies in south India and operates retail parlours too.The company’s revenues have grown at a CAGR of 14% over the past four years thanks to organic as well as inorganic expansion. Its operating profit margin in FY20 stood at 6.6%. The company is better than its peers in terms of return on capital employed (17% as per the latest available data) and a working capital cycle of 11 days.Higher margins prompted Dodla’s inorganic foray into dairy operations in Africa. However, given the issue of country risk, sales from those operations are limited at 7% of the total revenues. The company plans to invest in brand building, expand its distribution and increase the number of retail parlours. 83525019Valuations & RisksThe annualised profit for FY21 values the company at a price-to-earnings multiple of 16. However, 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 amidst lockdowns. 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.In the past, there have been instances of non-compliance by the company with provisions of 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.Dairy companies are generally exposed to fluctuations in milk procurement and pricing — leading to cash flow issues. Historically, dairy stocks have hardly created long term wealth for investors.Except for Hatsun Agro, the remaining dairy stocks are trading quite below their record-high levels. Long-term investors may want to wait for more signs of strong post-pandemic performance before considering investing in the company’s growth story.