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Tuesday, 15 June 2021 
CM RATING 44/100
 

Dodla Dairy

Southern play

Second largest private player interms of market presence in South India with strong procurement network and processing infrastructure and product mix

Dodla Dairy is an integrated dairy company based in south India. The company also has overseas presence with dairy operations in Uganda and Kenya. The company manufactures and markets milk and dairy based value added products in the branded consumer markets under the brands "Dodla Dairy", "Dodla" and "KC+" ( in India) and "Dodla Dairy", "Dairy Top" and "Dodla+" (in overseas markets). The company’s operations in India are primarily across the five Indian states of Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Maharashtra.

The company headquartered in Hyderabad is promoted by Dodla Sesha Reddy and Dodla Sunil Reddy, who each have over 22 years of experience in dairy industry.

The company process and sell retail fresh 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. It also manufacture and sell cattle feed to farmers through its procurement network.

In India its operations are integrated comprising procurement from farmers through 6771 village level collection centres, 232 dairy farms and 3rd party suppliers; transportation of milk collected to its 94 chilling centres which are strategically placed in close proximity to its ram milk procurement locations; processing of milk there by collected from chilling centres into packaged milk and manufacturing of other dairy based VAPs at processing plants; distribution and marketing operations. Its procurement operations are spread across the states of Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra. It maintain a cold storage chain from the procurement stage till the time the milk and dairy based VAPs reach the consumer ensuring quality of the product.

The company currently has 13 processing plants (including two plants at Vedasandur & Batlagundu of KC Dairy acquired in Feb 2019) with an aggregate installed capacity of 1.70 MLPD, which increased from 1.29 MLPD in FY2018. In addition the company 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. Additionally, the company have commissioned a UHT milk processing plant in Rajahmundry in April, 2019 to support its operations. Its distribution and marketing operations consist of distribution of its milk and dairy based VAPs through 40 sales offices, 3,285 distribution agents, 861 milk distributors and 544 milk product distributors across 11 states in India.

Additionally, as of March 31, 2021, its milk and dairy based VAPs are also available through 393 "Dodla Retail Parlours" which commenced operations in 2016 and are spread across the states of Andhra Pradesh, Telangana, Tamil Nadu and Karnataka.

The company has commenced its overseas operations in Fiscal 2015 through the acquisition of the operations of Hillside Dairy and Agriculture through its Subsidiary Lakeside Dairy in Africa. The overseas operations also follows the integrated business model like its Indian operations and procure raw milk from cooperative societies. Packaged milk and dairy based VAPs for retail are produced from its processing plant in Uganda and are distributed in Uganda and Kenya. While its distribution operations in Uganda are conducted through its African Subsidiary Lakeside Dairy through 23 distributors and 11 ‘Dodla Retail Parlours’, its distribution operations in Kenya are conducted through its African Subsidiary Dodla Dairy Kenya, through its 43 distribution agents and 56 distributors as of March 31, 2021.

In Fiscal 2019 the company, through its Subsidiary Orgafeed Private Limited, acquired an 80 MTPD cattle feed and mixing plant in Andhra Pradesh for the purpose of manufacturing and selling cattle feed to farmers through its procurement network. The cattle feed are marketed under the ‘Orga’ brand. The company have successfully integrated its cattle feed operations with its existing procurement network through its subsidiary OPL.

 The Offer

The offer consists of two components i.e. Offer for Sale and Fresh issue. The offer for sale is of sale of 10985444 equity shares consisting of upto 9200000 equity shares by TPG Dodla Dairy Holdings (investor selling shareholders); 416604 equity shares by Dodla Sunil Reddy (Promoter Selling Shareholder); 1041509 equity shares by Dodla Family Trust (Promoter selling shareholders) and upto 327331 equity shares by Dodla Deepa Reddy (Promoter Group Selling Shareholder). The fresh issue consists of issue of equity shares aggregating upto Rs 50 crore.

On post issue expanded equity, the stake of TPG Dodla Dairy Holdings stood declined to 9.8% from 25.77% pre issue. The stake of Dodla Family Trust, Dodla Sunil Reddy and Dodla Deepa Reddy stood declined to 25.39%, 13.2% and 11.95% from 27.68%, 14.18% and 12.75% respectively.

Objects of the offer

The net proceeds of the fresh Issue (i.e. gross proceeds of the Fresh Issue less the offer expenses apportioned to the company) are proposed to be utilised for 1) repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company from ICICI Bank, the Hong Kong and Shanghai Banking Corporation and HDFC Bank amounting Rs 32.264 crore; 2) funding capital expenditure requirements of the company amounting Rs 7.151 crore; and 3 General corporate purposes.The company will not receive any proceeds from the Offer for Sale and the proceeds from the Offer for Sale will be received by the selling shareholders after deducting their proportion of offer expenses and relevant taxes thereon.

The company as of March, 31, 2021, had a total outstanding debt of Rs87.372 crore comprising of long term borrowings, working capital facilities and NCDs.

Strength

The company’s product offering is wide with good mix of both processed fresh milk as well as value added products. Its product basket also included products with relatively (compared to fresh milk) longer shelf life products such as ghee, flavoured milk etc. While the fresh milk, ghee, butter, curd, paneer, among other dairy products are targeted at consumption at home, the UHT milk, flavoured milk, ice cream and beverages such as buttermilk marketed under its brand are primarily for direct consumption. Sales of milk and dairy based VAPs constituted 72.81% and 27.18% respectively of its FY20 revenue. Of the VAP mix of 27% about 22-23% is from curd, 2-3% from ghee and balance are from other VAPs. In 9mFY21 the share of VAP has increased marginally to 24.68% with fresh milk stand at 75.32%. The company continue to focus on VAPs and it has launched ice cream two years back. But with COVID impacting the recent two summers the company could not aggressively push in the market. It also tweaking lot more products in-terms of packaging in case of lassi, flavoured milk etc.The company sells long life products such as ghee in 11 states.

 The company is the third largest (amongst private dairy players with a significant presence in the southern region of India) 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 has established robust raw milk procurement network/relationship comprising approximately 109,670 farmers across 7,003 villages through 6,771 VLCCs and 232 dairy farms as of March 31, 2021. As on March 31, 2021, the company operate more than 283 milk procurement routes, which have a regular procurement plan with timely pick up of raw milk from VLCCs and dairy farms and transport to company’s nearest chilling centres, which numbers 94.

Apart from its robust procurement network the company is having focused engagement and long term relationship with dairy farmers by supplying cattle feed, manufactured by its subsidiary upfront through its procurement network, which is adjusted against the value of the raw milk supplied to it by such farmer. Moreover the company also pay the farmers once every 10 to 15 days either by direct credit of farmer’s bank account or by way of cash payments. As of Mar 31, 2021 about 77% of its farmers are paid through bank and balance 23% through direct cash payment.

The company is also second largest in terms of market presence across all of India amongst private dairy players with a significant presence in the southern region of India. It sells its milk and dairy based VAP products (under the "Dodla" and "Dodla Dairy" brand in India) through 40 sales offices, 3,285 distribution agents, 861 milk distributors and 544 milk product distributors as of March 31, 2021. Its products are also available through about 393 ‘Dodla Retail Parlours’ across the states of AP, Telangana, Tamilnadu and Karnataka as of March 31, 2021.

The company is also increasingly opting for direct milk procurement from farmers as opposed to procurement through agents. The company have eliminated third party suppliers from its procurement network in Tamil Nadu and Andhra Pradesh and plan to implement this throughout its procurement network. Third party suppliers purchasing raw milk from farmers charge a commission which results in increasing the cost of primary raw material, raw milk and also leads to farmers being paid lesser compared to direct procurement. Now direct procurement stands at 95% up from 50% earlier

Incurred a capex of Rs 264.486 crore in the past 3 years including Rs 65 crore in FY21 towards inter alia, commissioning a new processing plant at Rajahmundry, acquisition of the processing plants of KC Dairy products, acquisition of the cattle feed and mixing plant by Orgafeed at Kadapa and establishment of new VLCCs etc.

Weakness

Availability and procurement of adequate raw milk is crucial for the growth of dairy business. Indian dairy industry with presence of strong farmer cooperatives both national and state level, private players and milkman is highly competitive. The company has to compete with all these players to procure raw milk. Direct subsidies and condition to supply milk to cooperative societies by various state government makes the market more competitive. For instance, subsidies are provided in states such as Karnataka under the government’s Pashu Bhagya Scheme to members of milk cooperatives, which may not be available to the company. 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. Further cooperatives compete with private players on the basis of milk procurement prices. Higher price offered by cooperatives due to non economic reasons might drift the farmers away some-times forcing the company to increase its procurement prices affecting its margin. Thus the company has to make prompt or upfront payment to farmers and other measures such as engage with farmers to enhance yield/production of their cattle etc.

The supply of raw milk is subject to seasonal factors, and does not necessarily match the seasonal change in demand for its products. Raw milk procurement and production usually will be higher in the second half of the financial year during the winter as cows and buffalos generally produce more milk in temperate weather and extreme cold or hot weather lead to lower than expected production. However the demand for curd and ghee will be higher in summer and festival period respectively.

The company do not have long term agreements with suppliers for its raw materials other than raw milk such as skimmed milk powder and ghee. And an increase in the cost of or a shortfall in the availability of such raw materials could have an adverse effect on its business, results of operations and financial condition.

The company does not have uniform presence across all states in South India. It have no presence in Kerala and have just a marginal presence in deep south of TN and Northern Karnataka. In AP also the company does not have strong presence in the districts of Srikakulam, Rajahmundry and Vizag. The company with its acquisition of KC Dairy has started strengthening its TN market presence.

Relating to its acquisition of KC Dairy in Feb 2019, the sale deeds for transfer of land on which the two new processing plants of KC Dairy operate from its original promoter (Chellamuthu Sureshkumar) to KC Dairy is untraceable and may lead to adverse claims on such land.

Contingent liabilities of the company as of Dec 31, 2020 stand at Rs 16.555 crore.

Its subsidiaries, Orgafeed (cattlefeed subsidiary) and Dodla Dairy Kenya have incurred losses in the past and may incur losses in the future.

Promoters, Dodla Sunil Reddy and Dodla Sesha Reddy, have been named as a respondent in certain criminal proceedings. Two criminal complaints have been filed before the Court of Civil Judge and JMFC, Koppal against the promoters (Dodla Sunil Reddy and Dodla Sesha Reddy) under Section 22 (A) of the Minimum Wages Act, 1948 and these complaints are currently pending. Moreover 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. Additionally, certain of these notices from regulatory authorities have resulted in litigation, including criminal litigation against the Company.

The company did not have an adequate controls for managing its historical secretarial records and compliances as a result of which there have been certain inaccuracies and non-compliances with respect to certain provisions of the Companies Act and applicable FEMA regulation

Many of its financing agreements also include various conditions and covenants that require the company to obtain lender consents prior to carrying out certain activities or entering into certain transactions such as change in the capital structure, amendment of constitutional documents, any merger, reorganization or similar action. Further, during any period in which the company is in default, it may be unable to obtain further financing or any refinancing of its debt could be at higher rates of interest with more onerous covenants. In addition, lenders may be able to sell its assets charged under such financing arrangements to enforce their claims. The company 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 it 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, it 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, it had failed to maintain a financial ratio as on March 31, 2019 and March 31, 2020 as required by its debenture trustee and International Finance Corporation ("IFC"). This non-compliance has been subsequently waived. It 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, it 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.

Valuation

Consolidated sales for the fiscal ended March 2020 was up by 26% to Rs 2139.37 crore. But with OPM contract by 130 bps to 6.6%, the growth at operating profit was restricted at 5% to Rs 140.93 crore. The PBT was down by 12% to Rs 81.86 crore hit by lower other income, higher interest and depreciation. With taxation up by 5% to Rs 32 crore, the PAT was down by 21% to Rs 49.87 crore.

For nine month ended Dec 2020, the sales was Rs 1413.51 crore, an annualised de-growth of 12%. The Operating profit was Rs 206.51 crore, an annualised growth of 95% with OPM stand expanded at 14.6%. Strong margin expansion was largely due to the price hike the company has effected in Q4FY20 which increased the per unit realisation and with covid impact the procurement prices were subdued. The consolidated net realisation for 9mFY21 was Rs 48.79/litre compared to Rs 44.98/litre but the cost of goods sold for 9mFY21 was Rs 31.26/litre compared to Rs 32.98/litre. Thus sustainability of 9mFY21 margin is doubtful once the normalisation returns in post covid world. Eventually the PAT was Rs 116.39 crore, an annualised growth of 211%.

The EPS for FY20 was Rs 8.4 and that of 9mFY21 annualised was Rs 26.1. Thus on FY20/annualised 9mFY21 EPS the PE works out to about 51 times and 16.4 times respectively. In comparison the Hatsun Agro quotes at a PE of 180.4 times and 82.2 times of its FY20/FY21 EPS. The Heritage Foods quotes at 13.4 times of its FY21 EPS.

Dodla Dairy: Issue Highlights

Fresh Issue (in Rs. Crore) 50
Offer for sale (in Rs. Crore)  
in Upper price band 470.2
in Lower Price Band 462.5
Price band (Rs.)  
Upper 428
Lower 421
Post-issue equity (Rs crore)  
On upper price band 59.49
On Lower price band 59.51
Post-issue promoter (including promoter group) stake (%) 48.70
Minimum Bid (in nos.) 35
Issue Open Date 16-06-2021
Issue Close Date 18-06-2021
Listing BSE, NSE
Rating 44

 

Dodla Dairy : Financial Results

  1803 (12) 1903 (12) 2003 (12) 2012 (9)
Sales 1590.48 1691.67 2139.37 1413.51
OPM (%) 7.1 7.9 6.6 14.6
OP 112.72 134.15 140.93 206.51
Other income 6.54 7.79 6.28 3.52
PBIDT 119.26 141.94 147.20 210.03
Interest 10.89 11.57 16.14 9.68
PBDT 108.37 130.37 131.06 200.35
Depreciation 27.93 37.09 49.19 38.22
PBT 80.44 93.28 81.87 162.13
EO Exp 0.00 0.00 0.00 0.00
PBT after EO 80.44 93.28 81.87 162.13
Tax 23.59 30.52 32.00 45.74
PAT 56.85 62.76 49.87 116.39
EPS (Rs)** 9.6 10.6 8.4 26.1
** on post issue equity (on upper price band) of Rs 59.49 crore. Face Value: Rs 10
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate database