Dodla Dairy IPO Everything you need to know! About Dodla Dairy

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Dodla Dairy IPO – Everything you need to know!

About Dodla Dairy

Incorporated in 1995, Dodla Dairy Limited is an integrated dairy company in South India that is engaged in the procurement, processing, distribution, and marketing of milk and other dairy products. It processes and sells milk including standardized, toned, and double toned milk, and produces dairy products like curd, butter, ghee, ice cream, flavoured milk, etc. Its Indian operations are mainly undertaken under the brand name of "Dodla", "Dodla Dairy", and "KC+" whereas it serves overseas market under the brand name of "Dodla Dairy", "Dairy Top", and "Dodla+". Telangana, Andhra Pradesh, Karnataka, Tamil Nadu, and Maharashtra are the key Indian market segments served by the company while in the overseas market; it mainly serves countries like Uganda and Kenya.

The firm has a distribution network of 40 sales offices, 3336 distribution agents, 863 milk distributors, and 449 product distributors across 11 states in India. As of March 31, 2021, they employed 2,551 whole time employees and 2,840 contract employees across various facilities in India and Africa.


Capacity Utilizations

Management and Board of Directors

About the Offer

Dates – June 16 to 18, 2021

Pricing – Rs 421 to Rs 428

Size – 520.18 Cr (Fresh Issue Rs 50 Cr+ OFS 470.18 Cr)

Quota – QIB 50% , NII 15%, Retail 35%


Market Cap Post Listing – Rs 2547 Cr (58,324,511 Equity Shares – existing, 11.68 L new shares =

594.68L total shares, 594.68L total shares * 428 = 2547 cr mcap post listing diluted)

Objects of Issue

OFS money will not be received by the company

Strengths

Consumer focused dairy company with a diverse range of products under the “Dodla Dairy” and

“Dodla” brands

Integrated business model with well-defined procurement, processing and distribution

capabilities

Focused engagement and long term relationship with dairy farmers

Stringent quality control procedures

Financial Growth and operational efficiencies

Experienced Board and senior management team

Strategies Ahead


Selling Shareholders

Total shares owned by the Selling Shareholers

Risks

No formal arrangements with farmers and therefore they are not obligated to supply their milk

to Dodla and they may choose to sell their milk to competitors.

They own and operate 13 processing plants located in the states of Andhra Pradesh, Telangana,

Tamil Nadu and Karnataka and procure raw milk from these states. For Fiscal 2020, they derived


approximately 98.75% of revenue from operations, which amounted to Rs 19,542.35, million,

from the sale of milk and dairy based VAPs in southern India.

They have, in the past, breached covenants in relation to a term loan facility availed from Standard Chartered Bank. These breaches were due to (i) an increase of Debt/EBITDA number which exceeded the threshold of 2.75, which they were required to maintain, to 3.52, in Fiscal 2015; and (ii) a loan condition breach that included shortfall in cash flow. The breaches of the Aforementioned covenants have been subsequently waived by Standard Chartered Bank. Additionally, they have failed to maintain a financial ratio in relation to a loan facility availed from The Hong Kong Shanghai Banking Corporation Limited (“HSBC”). This non-compliance has been subsequently condoned by HSBC. Further, they had failed to maintain a financial ratio as on March 31, 2019 and March 31, 2020 as required by debenture trustee and International Finance Corporation (“IFC”). This non-compliance has been subsequently waived. They have also failed to maintain a current ratio for March 31, 2020 as required by a facility taken from ICICI Bank Limited (“ICICI Bank”). ICICI Bank has subsequently condoned and waived the covenant breach. Additionally, they had failed to maintain a current ratio required under the term loan from HDFC Bank Limited Bank in the past, this non-compliance has been waived and condoned by HDFC Bank Limited

There have been instances of non-compliances with certain compliance centric provisions of legislations such as the Factories Act, 1948, FSSA, Electricity Act, 2003, Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2008 and Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

Their Subsidiary DDKL had defaulted with respect to its PAYE income tax obligations in Kenya for the period December 1, 2017 to December 31, 2017 pursuant to which DDKL paid the resulting penalty with respect to the default for the respective period.

In addition to large multinational companies and regional and local companies in each of the regions in which they operate, they also compete with large dairy cooperatives that also procure milk from farmers in the regions where Dodla procures its milk, and any grants, financial assistance or other incentives by the GoI or State governments to such dairy cooperatives would benefit such entities, and could adversely affect Dodla’s direct milk procurement model and registered milk vendors. For instance, subsidies are provided in states such a s Karnataka under the government’s Pashu Bhagya Scheme to members of milk cooperatives, which may not be available to Dodla (Source: CRISIL Report).

According to the CRISIL Report, cooperatives compete with private players on the basis of milk procurement prices, however, private players offer (a) prompt and upfront payment to farmers, (b) often engage with farmers to enhance yield/production of their cattle, and (c) increasingly opting for direct milk procurement from farmers as opposed to procurement through agents. Additionally, the state of Andhra Pradesh through its YSR Cheyutha Scheme provides support to farmers who purchase cattle and supply certain milk cooperatives operation in the state with raw milk.

There are certain remarks and qualifications, from the auditors in their audit report and annexure to the auditor’s report under the Companies (Auditor’s Report) Order, 2016 for the last three Fiscals and nine months period ended December 31, 2020 pertaining to (a) irregular deposit of professional tax with the relevant authorities, and (b) breach of financial covenants required to be maintained in terms of the debt facilities availed by our Company and the debt securities issued by our Company.

Of their Promoters, Dodla Sunil Reddy and Dodla Sesha Reddy, have been named as a respondents in certain criminal proceedings. For instance, two criminal complaints have been filed before the Court of Civil Judge and JMFC, Koppal against Dodla Sunil Reddy and Dodla Sesha Reddy before the Court of Civil Judge and JMFC, Koppal under Section 22 (A) of the Minimum Wages Act, 1948. The aforementioned proceedings against Dodla Sunil Reddy and Dodla Sesha Reddy are currently pending,


The dairy products industry in India is highly competitive, especially the markets for pasteurized milk, UHT milk, flavoured milk, curd and ice cream. These products are experiencing rapid development and increasing competition.

Their competitors with a significant presence in South India include Hatsun Agro Products Limited, Heritage Foods Limited, Tirumala Milk Products Private Limited and Creamline Dairy Products Limited (Source: CRISIL Report).

Pursuant to the business transfer agreement dated February 8, 2019 between Company, KC Dairy Products Private Limited and its shareholders including Chellamuthu Sureshkumar, we have acquired two processing plants at Vedasandur and Batlagundu in Tamil Nadu (“BTA”). The sale deeds for transfer of land on which the two new processing plants operate from Chellamuthu Sureshkumar to KC Dairy Products Private Limited are untraceable and they may be subject to adverse claims on such land in this regard

As on the date of this Red Herring Prospectus, the Company had received 350 notices from various regulatory authorities, including State Pollution Control Boards and FSSAI, and paid an aggregate of Rs 0.15 million for some of these notices.

Their brand “Dairy Top” is not registered in India as this mark is currently conflicting with certain registered trademarks in India.

Additionally, their brand “Dodla +” under which they market products in Kenya and Uganda is currently unregistered and they have applied for registering it in Kenya on March 17, 2020. Further, while marks acquired from KC Dairy under the KC Dairy BTA have been assigned to them through assignment deed dated July 6, 2020, they have not been processed by the Trademark Registry.

Peer Comparison

Above Data shows Dodla performing well compared to Peers.


Let’s stretch the data to FY21 as well now

Note – In recent times, Dodla has beaten margins of listed players. Management on BQ Interview and IPO meet said their margins jumped as they increased prices. They said margins will increase from here and NPM will be also double digit. Comparison on operational parameters (FY2020)



Financials

Reiterating - In recent times, Dodla has beaten margins of listed players. Management on BQ

Interview and IPO meet said their margins jumped as they increased prices. They said margins will

increase from here and NPM will be double digit.

Cash Flow Statement

CFO and FCF have been good.


Valuations & Conclusion

At upper price band of Rs 428, it is priced at 15.4x P/E, 4.33x P/BV, 1.8x P/S (9mFY21 sales) and 1.35x

P/S (FY21A Sales).

The valuations are good when compared to Heritage who has 13.2x P/E, 0.80x P/S, 3.31x P/BV and

Hatsun who has 81.1x P/E, 3.59x P/S, 19.6x P/BV. At the same time management has guided for

more Value added products, more OPM and more NPM growth.

Thanks to good valuations, the IPO may see a good subscriptions and good listing. The company

management themselves have said they are a fairly new company. On the long term, we have no

view as we would want to monitor this more as FY21 seems to be an aberration with other milk

players also clocking in EBITDA growth.

Closing Thoughts and IPO Meet Notes

How do you compete with Amul?

We are youngest in Dairy, growing consistently for the last 20 years. We are also innovating.

9MFY21 sharp margin expansion – temporary? (My Question)


Dec 2019 to March 2020, increased prices as milk prices were at highs. Post covid price of milk

procurement also went up. This Covid numbers will continue to be there as glut in market. If milk

prices go back also, will maintain double digit margins.

FY21 is like 9mFY21

Profit margins will go to double digit from single digit

Improvement in product mix, revenue mix also to help

Current year we will maintain profit, same year as last year

BQ Interview

FY22 can be same as FY21 , bottom line will be also same , margins will be same

Strong absolute number will grow – Mgmt Said

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Dodla Dairy IPO Everything you need to know! About Dodla Dairy