Dodla Dairy
Dodla Dairy is coming out with a 100% book building; initial public offering (IPO) with face value of Rs 10 each in a price band Rs 421-428 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on June 16, 2021 and will close on June 18, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 42.10 times of its face value on the lower side and 42.80 times on the higher side.
Book running lead manager to the issue are ICICI Securities and Axis Capital.
Compliance Officer for the issue is Ruchita Malpani.
Profile of the company
It is an integrated dairy company based in south India primarily deriving all of its revenue for Fiscal 2020 and for the nine months period ended December 31, 2020 from the sale of milk and dairy based VAPs in the branded consumer market. Amongst 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 with an average procurement of 1.03 million litres of raw milk per day (MLPD) as of March 31, 2021 and second highest in terms of market presence across all of India amongst private dairy players with a significant presence in the southern region of India.
The company’s operations in India are primarily across the five Indian states of Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Maharashtra. Its overseas operations are based in Uganda and Kenya. Its Indian operations are undertaken under its brands “Dodla Dairy”, “Dodla” and “KC+”. Its overseas operations are undertaken under brands “Dodla Dairy”, “Dairy Top” and “Dodla+”. It processes and sells 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. It also manufactures and sell cattle feed to farmers through its procurement network. Its integrated business model in India consists of procurement, processing, distribution and marketing operations. Its procurement operations are spread across the states of Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra.
Proceed is being used for:
Repayment and/ or pre-payment, in full or part, of certain borrowings availed by company from ICICI Bank Limited, the Hongkong and Shanghai Banking Corporation Limited and HDFC Bank Limited.
Funding capital expenditure requirements of company.
General corporate purposes.
Industry overview
The Indian dairy market industry has grown at a CAGR of 10% between fiscal 2015 and 2020 to reach Rs 6.7 trillion in fiscal 2020. This growth has come on the back of a 6-7% increase in volumes and 3-4% increase in price realizations. The dairy industry includes milk, traditional value added products (include Butter, Ghee, Paneer, Khoa, Curd & Skimmed milk powder) and embedded value products (flavoured milk, ice cream, yoghurt, cheese and whey). Over the last five years, the growth in the industry has been driven by the value-added products (35% of the industry in value terms) which have witnessed a growth of 12 -14% between fiscal 2015 and 2020. Amongst the value added products, emerging value added products has grown at a faster rate of 18% (owing to 12% increase in volumes and 6% increase in prices) as compared to 12 -13% for traditional value added products. The fastest-growing products during this five-year period were ice cream at 21%, followed by paneer (19%) and cheese (14%). Milk was classified as an essential item and hence the industry wasn’t severely impacted despite supply and demand -side challenges due to Covid-19. In the initial months of lockdown, however, the dairy industry faced challenges in last-mile customer reach, availability of labour at plants, logistical issues such as availability of vehicles for transportation, and adhering to COVID19 safety protocols for all employees.
The ice-cream industry which has grown at a fast pace in the past was severely hit in fiscal 2021. With the nation -wide lockdown coinciding with the peak consumption season of ice-cream, sales fell by over 40% in Q1 FY21 and is expected to fall by 26-27% in FY21. The demand for products like butter milk and curd was also lost due to the pandemic induced lockdown. In addition, with slower income growth and insecurity, rising health concerns, some people moved back to making curd and curd related products at home, affecting demand for curd. Whey protein, largely marketed and consumed in health clubs, also saw a sales decline of 30% in H1 FY21. With customers expected to only gradually return to gymnasiums and health clubs, demand is expected to remain sluggish and revenue from whey protein is expected to decline by 18 -20% in FY21.
Pros and strengths
Consumer focused dairy company with diverse range of products: The company has developed one of the leading brands in the dairy products industry in south India with strong consumer recognition, particularly in the States of Andhra Pradesh, Karnataka, Tamil Nadu and Telangana. Its Indian operations are undertaken under its brands “Dodla Dairy” (for milk and perishable products such as curd, flavoured milk) and “Dodla” (for VAPs such as ghee, butter, paneer, butter milk and ice creams). It primarily derived all of its revenue in Fiscal 2020 and nine months period ended December 31, 2020, from sale of milk and dairy based VAPs in the branded consumer market. The company offers a diverse portfolio of dairy based VAPs targeted at various consumer segments and this enables it to cater to the changing preferences of retail customers. It sells fresh milk, ghee, butter, curd, paneer, gulab jamun, doodh peda, basundhi and junnu, which is targeted at consumption at home. It sells UHT milk, flavoured milk, ice -cream and beverages such as buttermilk under its brand, primarily for direct consumption.
Focused engagement and long term relationship with dairy farmers: The company’s farmer friendly policies and continuous engagement with them with welfare programs have strengthened its relationships with farmers which in turn has strengthened its raw milk procurement process. It offers a variety of initiatives for the farmers from whom it procure raw milk. As part of its diversified procurement network, it relies on third party suppliers and farmers. In order to ensure transparency, it tests the quality and quantity of the raw milk collected from the farmers with electronic milk analysers. Its VLCCs are equipped with GPRS enabled milk analyzers and weigh scales which provide a transparent acknowledgement for quantity and quality components for the milk supplied by the farmers.
Stringent quality control procedures: The company is committed towards quality and food safety of its products. Its determination towards quality and food safety is demonstrated by well-defined quality and food safety procedures at various stages from procurement to distribution of its products. It maintains a cold storage chain from the procurement stage till the time the milk and dairy based VAPs reach the consumer. All quality checks are documented in a quality manual to ensure that it only procure raw milk which meets its standards for further processing. Its VLCCs are equipped with GPRS enabled electronic milk analysers which test for the fat and solid not fat (SNF) content of the raw milk. It also conduct tests including for colour and smell which enables it to segregate poor quality of raw milk at its VLCCs. At its chilling centres it conducts adulteration tests and neutralizer tests. At its processing plants, the raw milk undergoes, adulteration tests and neutralizer tests to detect contaminants in the raw milk. Quality and food safety forms a part of its policy which is one of the main drivers of its business.
Experienced Board and senior management team: The company is led by an experienced Board of Directors, who have extensive knowledge and understanding of the dairy business and have the expertise and vision to organically and inorganically scale up its business. Its Board has led company through sustained period of growth and has also taken initiatives to improve its processes and efficiencies, implementation of enterprise resource planning system in the year 2000 and replication of its India business model in Uganda and Kenya which led to its overseas operations turning profitable. Further, since 2012, the company has benefited from marquee investors being shareholders of the company and represented on the Board of the company by undertaking a number of initiatives such as, inter alia, formulating a future growth strategy, further strengthening its corporate governance standards, entry into new line of VAPs, internal processes and controls including migration to SAP and introducing KPI based formal appraisal systems for the management.
Risks and concerns
Operations depend on supply of large amounts of raw milk: The Indian operations are dependent on the supply of large amounts of raw milk, which is the primary raw material used in the manufacture of all its dairy products. It does not have any formal arrangements with farmers and therefore they are not obligated to supply their milk to it and they may choose to sell their milk to its competitors. Interruption of, or a shortage in the supply of raw milk may result in its inability to operate its production facilities at optimal capacities or at all, leading to a decline in production and sales. While it has developed a strong relationship with these dairy farmers over the years, through continuous engagement and provision of cattle feed at cost price, it has not entered into any formal supply contracts with such dairy farmers. Also, the amount of raw milk procured and the price at which it procures such supplies, may fluctuate from time to time in the absence of a formal supply contract. The availability and price of raw milk is subject to a number of factors beyond its control including seasonal factors, environmental factors, general health of cattle in the regions in which it operates and Government policies and regulations.
Supply of raw milk subject to seasonal factor: The supply of raw milk is subject to seasonal factors. Cows and buffalos generally produce more milk in temperate weather, and extreme cold or hot weather could lead to lower than expected production. The company’s raw milk procurement and production is therefore higher in the second half of the financial year during the winter months with temperate climate in its milk procurement region. In contrast, the demand for its products such as curd is higher in the first half of the financial year during summer months and the demand for ghee is higher during festive seasons. As a result, comparisons of its sales and operating results over different quarterly periods during the same financial year may not necessarily be meaningful and should not be relied upon as accurate indicators of its performance.
Face competition: 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. It currently competes, and in the future will continue to compete, with large multinational companies as well as cooperatives, regional and local companies in each of the regions in which it operates. It competes not only with widely advertised and established branded products, but also with non-premium dairy producers as well as private and economy brand products that are generally sold at lower prices. Its competitors with a significant presence in South India include Hatsun Agro Products, Heritage Foods, Tirumala Milk Products Private and Creamline Dairy Products. Many of its competitors may have substantially greater financial and other resources and may be better established with greater brand recognition than it.
Rely on third party logistic providers to transport raw milk: The company rely on third party logistic providers to transport raw milk to chilling centres and processing plants and its finished products to customers, distributors and a large number of retail outlets. Transportation of raw milk and finished products require specially insulated and refrigerated vehicles. It does not have any long-term arrangement with such third party logistic providers. It may be affected by transport strikes, which may affect its delivery schedules or procurement processes. If it is unable to secure alternate transport arrangements in a timely manner, or at all, its business, results of operations and financial condition may be adversely affected. Raw milk and finished products may be lost, damaged or subject to spoilage and may result in or delivery of products of sub-standard quality, if specific transportation conditions, including specified temperatures, are not maintained by such transportation providers.
Outlook
Incorporated in 1995, Dodla Dairy 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 integrated business model enables it to provide end to end capabilities from procurement till distribution and marketing in a cost-efficient manner. It is committed towards quality and food safety of its products. Its determination towards quality and food safety is demonstrated by well-defined quality and food safety procedures at various stages from procurement to distribution of products. It maintains a cold storage chain from the procurement stage till the time the milk and dairy based VAPs reach the consumer. On the concern side, the company’s processing plants require a significant amount and continuous supply of electricity, firewood and water and any shortage or non-availability may adversely affect its operations. Particularly, all of its processing plants require a significant amount and continuous supply of electricity and fuel and any shortage or non-availability of electricity and fuel may adversely affect its operations. It is exposed to the risk that entities in India and elsewhere could pass off their products as its products, including spurious or imitation products.
The issue has been offered in a price band of Rs 421-428 per equity share. On the performance front, the company had total income of Rs 21,456.49 million in Fiscal 2020, an increase of 26.25% over its total income of Rs 16,994.59 million in Fiscal 2019. Its profit for the year decreased by 20.54% from Rs 627.62 million in fiscal 2019 to Rs 498.71 million in fiscal 2020. As part of company’s product outreach program, it intends to actively increase its distribution network and actively engage with hyper markets, super markets and retailers so that all its products become more accessible to its consumers. It also intends to convert its multi-brand dealer network into exclusive suppliers who house only its products in a phased manner to have better control over its brand. It also intends to increase the number of Dodla Retail Parlours in the states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu based on the existing franchise mode.
