Dodla Dairy IPO Review

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Dodla Dairy IPO

7.1

Company Background

7.5/10

Price Band

7.0/10

Financial Health

7.0/10

Industry Situation

7.5/10

IPO Proceeds Usage

6.5/10

Pros

  • Strong Brand Presence
  • Cost Efficient Business Model
  • Strict Quality Controls
  • Regular Financial Growth

Cons

  • Risks of Spoilage
  • Dependence on key personnel

Dodla Dairy Background

Dodla Dairy is an integrated dairy company which is engaged in the sale of milk (full cream, standardised, toned and double toned) and dairy-based value-added products like curd, ultra-high temperature processing milk, ghee, butter, flavoured milk and ice cream amongst others in the branded consumer market.

The operations of the company are in four South Indian states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. They also have their operations in other countries like Uganda and Kenya.

They operate through their two main brands. “Dodla Dairy” brand is operated in India and “Dairy Top” brand is used in international operations.

Their business model consists of procurement of almost 1 million MLPD, it’s processing, distribution and marketing operations. They procure milk from about 220,789 farmers through 3212 procurement agents.

Their Dodla Dairy Collection Centres are spread across 7,598 villages. The raw milk is then transferred to around 78 chilling centres and thereafter to processing plants.

Now, the business is coming up with an IPO with its own specific funding requirements, which we will discuss later in this review.

Dodla Dairy Management Information

As on date, there are 8 Directors on the Board of Dodla Dairy Limited. Dodla Sesha Reddy is the Chairman and Non – Executive Director, Dodla Sunil Reddy is the Managing Director, Madhusudhana Reddy Ambavaram is the Whole Time Director.

Furthermore, Akshay Tanna is the Non – Executive Nominee Director, Kishore Mirchandani, Ponnavolu Divya, Rampraveen Swaminathan and Raman Tallam Puranam are the Independent Directors of Dodla Dairy.

Dodla Sesha Reddy, Chairman and Non – Executive Director

He is a graduate in Arts from Nizam College. He possesses an experience of more than 20 years in dairy the industry. He ensures active engagement of board members and plays an important role in the effective decision-making process to be followed in the Board and committee meetings.

Dodla Dairy IPO Data Points

Dodla Dairy IPO will open on (undisclosed) and close for subscription on (undisclosed).

The IPO size will be of (undisclosed) Equity shares and the face value of each share will be ₹10. The offer consists of a fresh issue of up to (undisclosed) lakh equity shares aggregating up to ₹1500 million or ₹150 Crore and an offer for sale of up to 9,543,770 equity shares by selling shareholders.

Up to 7,820,589 equity shares are being offered by TPG Dodla Dairy Holdings Pte Ltd and the rest 1,723,181 equity shares by Dodla Deepa Reddy. (undisclosed) equity shares will be reserved for market makers and the rest (undisclosed) shares will be issued to investors.

The price band range has been set at ₹(undisclosed) – ₹(undisclosed) per share. The IPO size is expected to be up to ₹150 Crore. The market lot size is of (undisclosed) equity shares and the shares will be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Pursuant to a resolution on July 13, 2018, the fresh issue has been authorised by the Board of Directors and pursuant to a special resolution of the shareholders at the AGM held on July 17, 2018, the offer has been approved by them.

Pursuant to a resolution of the Board of Directors of TDDHPL on July 24, 2018, the offer for sale has been authorised by the Investor Selling Shareholder and by the individual selling shareholder pursuant to a letter dated August 4, 2018.

Dodla Dairy Financial Performance

Let’s talk about money. Let’s quickly see how Dodla Dairy has performed financially in the last few years from multiple spectrums:

 

The company has shown an increase in total assets and revenues consistently over the last few years. The profit after tax in the financial year ended March 31, 2017, dropped in comparison with the previous financial year ending March 31, 2016.

However, there has been an increase in Profit After Tax (PAT) to 543.35 million in the financial year ended March 31, 2018. The Return on Net Worth of the company is 20.96%, 15.88% and 14.84% for the fiscal years 2016, 2017 and 2018, respectively.

Dodla Dairy IPO Objectives

The proceeds of the offer for sale by selling shareholders will be received by them and not by the company. However, the proceeds of the fresh issue will be used for the following purposes:

  • For repayment or prepayment, in full or part, of certain borrowings taken by the company
  • For buying certain types of equipment
  • For meeting expenses related to general corporate operations

Other than these objectives, the company will benefit from Dodla Dairy IPO through enhanced brand image and increased visibility.

Dodla Dairy IPO Events

Dodla Dairy filed the Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) on August 9, 2018, for the 100% Book Built Offer.

The offer will open on (undisclosed) and close on (undisclosed). The finalisation of basis of allotment is expected to happen by (undisclosed) and the initiation of refunds is expected to start by (undisclosed).

The transfer of shares to demat accounts is expected to start on (undisclosed) and the expected listing date will be (undisclosed).

Dodla Dairy IPO Recommendation

Now, let us try to understand various strengths and risks related to the business of Dodla Dairy Limited.

According to CRISIL Report, in terms of procurement, Dodla Dairy is the third largest company in South India and second highest in terms of market presence. They have a very strong brand presence in their industry.

Their business model that comprises of procurement of raw milk from lakhs of farmers and then, processing, distributing and marketing of the milk-based products is quite cost-efficient.

Their policies are farmer friendly and continuous engagement with the help of welfare programs are the reasons why the company has been able to maintain good and long-standing relationships with them.

Since milk and milk products are perishable products, they need to be maintained with strict quality control procedures. thus, the business focuses on the quality of products and has received many quality certifications from FSSAI for their products, the ISO 22000:2005 for food management systems, export inspection certification and BIS certification for SMP production and AGMARK registration for ghee production facilities at Nellore and Hyderabad.

The experience and skill set of their management team and Board is an added advantage for the company as they have the expertise to grow organically as well as inorganically.

The company has also shown decent financial growth in the last few years. The consolidated revenues have shown a CAGR of 17.24% during the last five years. The CAGR of EBITDA and PAT for the same period has been 28.7% and 21% respectively.

Now, let us see some risks related to Dodla Dairy.

The most important risk factor is the inability to procure enough amounts and good quality of raw milk at competitive prices.

Also, the supply of raw milk is dependent on seasons but the demand for their products is not seasonal in nature.

The concentration of procurement of raw milk centres, processing and chilling centres, etc. is mainly in South India. Any adverse developments in this region may affect the financial health of the company.

There is also the risk of spoilage of milk and its products due to improper storage, processing or handling of milk.

There are certain ongoing criminal proceedings against their Promoter, Dodla Sunil Reddy. Any adverse ruling in the proceedings may affect the brand image of the company and hence have a negative effect on the business. There are also certain outstanding legal proceedings involving the company, Directors and Promoters of the company.

Any contamination of their products, actual or alleged, could result in legal liabilities and also a negative publicity.

The industry of dairy products in India is highly competitive and any existing or new players in the market may result in the decrease in the market share of the company.

Failure in compliance with the environmental laws and regulations could result in unforeseen environmental litigation against the company which may affect the earnings of the company.

Inability to manage inventory and forecast demand accurately for some products may also affect the financial health of the company. If a disruption in transportation arrangements arises due to many potential reasons, it will affect the profitability of the company.

There is also a risk of inability to maintain, renew or obtain licenses required for smooth functioning of the company. If they are unable to service their debt obligations which amount to  ₹909.02 million as of Jun 30, 2018, the profitability of the company may be affected.

Dependence on key personnel, third party agents, etc. also pose some risks for the company. Also, it needs to be seen if the company is able to show consistently rising profits in the future years.

After analysing various aspects of the company, it may be said that investors may invest in the Dodla Dairy IPO for long-term although such investors need to have a bit of risk appetite. 

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Dodla Dairy IPO Advisors Information

Edelweiss Financial Services and ICICI Securities are acting as Book Running Lead Managers to the issue. Karvy Computershare Private is acting as the Registrar for the Dodla Dairy IPO.

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Dodla Dairy IPO
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