The initial public offering of Dodla Dairy will open for subscription today, June 16. Analysts have ascribed a ‘subscribe’ rating to the IPO citing the strong financials of the company amid expectations of a rise in demand for packed & branded milk products post-pandemic.
The company in consultation with merchant bankers has fixed a price band for the offer at Rs 421-428 per equity share.
The offer comprises a fresh issue of Rs 50 crore and an offer for sale of over 1.09 crore equity shares by TPG Dodla Dairy Holdings Pte Ltd and promoter selling shareholders. The issue will close on June 18.
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“With rising health awareness post-pandemic, changing demographics and rising preferences for packed & branded milk products, the demand of milk & milk products are likely to continue to be strong. Additionally, the improved demand from hotels, restaurants and cafes post-pandemic would further aid the growth of the dairy sector,” said Choice Broking which has a subscribe rating to the issue.
In terms of valuations, 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), said Angel Broking.
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Further, the brokerage said Dodla Dairy has shown improvement in the operating margin with an efficient working capital cycle. Going forward, Angel Broking expects the company to perform better on the back of an increase in value-added product mix. It recommends a subscribe rating on the issue.
Anand Rathi also believes Dodla Dairy is available at fair valuations considering the opportunity size lying ahead of the company in the dairy industry that is constantly in the process of evolution from raw milk to focus towards value added milk and milk products.
Anand Rathi also expects Dodla Dairy to fair well given its diversified product basket, strong brands and wide distribution network. According to the brokerage, the company will continue to perform well on both the topline and the bottomline. It recommends investors to subscribe to the issue from a longer-term perspective.
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Dodla Dair is an integrated dairy company based in south India. Its primary source of revenue is the sale of milk and dairy-based value-added products (VAPs) in the branded consumer market.
Among private dairy players with a significant presence in the southern region of India, it is the third-highest in terms of milk procurement per day and second-highest in terms of market presence across India among private dairy players, CRISIL said.
Its operations in India are spread across five Indian states Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Maharashtra, while overseas operations are based in Uganda and Kenya.
As of March 2021, its procurement operations consisted of 6,771 village-level collection centres (VLCCs), 232 village dairy farms and third party suppliers and 94 chilling centres.
Dodla Dairy delivered consistent growth during FY18-FY20, both in terms of financial and operational metrics, with revenue from operations growing at a CAGR of 15.98 percent and EBITDA at a CAGR of 11.81 percent in the same period.
Revenue, EBITDA and profit for nine months period ended December 2020 were Rs 1,413.5 crore, Rs 206.5 crore and Rs 116.38 crore respectively. Higher profitability in FY21 was mainly due to the lower cost of revenue. Nevertheless, Choice Broking feels that this higher profitability is not sustainable in the medium to long term.
But after sharp gains in FY21 due to cost-cutting measures post-pandemic, the management guided towards normalisation going ahead.
“Despite the lack of earnings growth over the forecast period (given the high base effect of net earnings for FY21), we expect a re-rating of the valuations given the market leadership, strong sectoral growth trends, improved efficiencies (by eliminating market intermediaries), thrust on expanding retail footprint, debt free status, completion of capex cycle, and high return ratios,” said Ventura Securities which feels valuations look reasonable as compared to peers.
The brokerage valued the stock at Rs 580 (25x FY24E) representing a potential upside of 35.4 percent from the IPO higher band price of Rs 428 over the next 24 months.
Dodla Dairy has a debt to equity ratio of 0.17 as of December 2020 which has come down from 0.35 in FY20, 0.39 in FY19, and 0.37 in FY18.
Among other brokerages, Marwadi Financial Services, and Arihant Capital Markets also advised subscribing to the public issue.
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