Dodla Dairy Limited IPO whose issue opens up today, had been accredited by majority brokerage research firms as a company with good valuation, strong balance sheet with steady working capital management, lower debt and improving cash flows with strong OCF yield according to the IPO note released. Angel Broking has given subscribe recommendation on the issue as company showcased an improved performance in operating margin with efficient working capital cycle.
Dodla Dairy Ltd is an integrated Dairy company based in South India, primarily deriving all of its revenue from process and selling retail milk (full cream, standardised, toned and double toned) and produce dairy based value added products (“VAPs”) such as curd, Ultra-High Temperature processed (“UHT”) milk, ghee, butter, flavoured milk and ice cream amongst others. The Company also manufacture and sell cattle feed to farmers through its procurement network.
Analyst believes that the company is well posed to gain from overall growth in Indian diary industry. Amongst private dairy players with a significant presence in the southern region of India, the company is the third highest in terms of milk procurement per day and second highest in terms of market presence across all of India amongst private dairy players. Angel Broking believes that company would perform better on the back of increase in value added product mix going forward.
According to Asit C Mehta, the Indian dairy industry is expected to grow at a CAGR of 10-11% between FY21 to FY25. Within this, embedded value products (which includes flavoured milk, ice cream, yoghurt, cheese and whey) is expected to outpace other segment and grow faster at 14 -16% between FY21 and FY25. The company plans to add more milk products going forward makes it good investment avenue and have recommended subscribing the issue from a long term perspective.
The focus on VAP (Value Added Products) also is a positive sign according to Gupta Equities. The unorganised / smaller dairies are also impacted due to liquidity issues and weaker balance sheet as a result the organized sector will continue to structurally gain market share which creates an advantages position for the company, it further added.
The demand outlook remains positive, with rising health awareness post the pandemic, changing demographics and rising preferences for packed & branded milk products, the demand of milk & milk products are likely to continue to be strong according to Choice Securities. Additionally, it believes that improved demand from hotels, restaurants and cafes post pandemic would further aid growth of the dairy sector. The Company aim to continue investing in existing manufacturing technologies to build new capabilities to support milk processing operations and for the automation of its Kurnool processing plant.
On valuation, Canara Bank Securities is of the view that the company plans to increase the share of VAP (Value Added Products) along with procurement expansion which would be margin accretive with improving topline. The company has grown topline at a 2 year CAGR of 16% with EBITDA Margin of average 6-7% and decent ROCE on account of efficient working capital. The company has grown faster in terms of revenues against its peers despite of high competition in southern region.
We believe company is fairly valued at 15.35x P/E based on its FY21 annualized EPS. It too has recommend this issue a ‘SUBSCRIBE’ for long term. According to Gupta Equities, the issue is priced at a post issue annualized PE of 16.5x on FY21 EPS. It believe that the uptick in margins in 9MFY21 will normalize to around 10 – 11% as guided by the management.
Sharekhan Research is of the view that the company has a strong procurement policy as it directly procures ~93% of total raw milk directly from farmers avoiding any middlemen. It has a strong balance sheet with steady working capital management, lower debt and improving cash flows. Its return profile of mid-to-high teens is better as compared to some of the closes peers. It focuses on further expanding its penetration in southern markets by tying up with hyper markets, super markets and retailers to improve the shelf visibility of its products. The strategy largely hinges towards achieving profitable growth by achieving higher sales volumes in key product categories. It has summarised its IPO review on the company with its note titled “STRONG PRESENCE WITH DECENT BRAND EQUITY”
On peer comparison, In terms of valuations, the post-issue 9MFY21 annualised PE works out to 16.4x (at the upper end of the issue price band), which is low compared to Parag Milk Foods (trading at 32.7x) says Angel broking. Another broking firm Sharekhan is of the view that the IPO is valued at 16.5x of FY21 earnings, which looks to be reasonably valued. While its close peer Heritage Food trades at par with DDL, Hatsun Agro trades at 81x of FY21 earnings, a significant premium compared to the company. The Company enjoys relatively stable performance compared to peers, consistent cash generation and robust return ratio (24% RoE) enabled Hatsun Agro to command such premium valuation.
The company is raising the fund through initial public offering for (i) Repayment and/ or pre-payment of debt, and (ii) Funding capital expenditure requirements of the Company. The company has already raised Rs 156.05 crore from anchor investors ahead of its initial share-sale yesterday.