Published on 26/10/2021 10:28:26 AM | Source: ICICI Securities

Buy Dodla Dairy Ltd For Target Rs.700 - ICICI Securities

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Strong competitive advantages; initiate with BUY

Dodla Dairy has created multiple competitive advantages in the fast growing dairy industry. Apart from cluster approach in South India, it has developed (1) strong brands, (2) 100% direct milk procurement network and (3) direct distribution model. The company also focusses on products that generate RoCE in excess of cost of capital such as milk and curd, and has negligible/nil presence in cash burning products like ghee, cheese and whey.

Milk procurement in South India is growing at ~10% per annum. Dodla has expanded its market share from 0.6% in FY08 to ~1% in FY21. Considering market growth and market share expansion potential, we model Dodla to report mid-teens revenue growth in medium term. We forecast 14.2% and 17.6% CAGR in revenue and PAT, respectively over FY21- 23E. We initiate coverage on the stock with a BUY rating and DCF-based target price of Rs700 (24x FY23E). Key risks: Potentially higher competitive intensity in South India and delay in distribution expansion.


* Cluster approach: Dodla focusses largely on South India. Its milk procurement, all the plants as well as distribution network are established in South India and has a small business in Africa. It also created strong brands via brand building spends in regional languages. The company is steadily penetrating smaller towns and semiurban markets. Considering steady growth potential in South India, we believe cluster approach will continue to be a key competitive advantage for the company.


* Creation of competitive advantages: Dodla’s competitive advantages include: (1) Strong brands like Dodla Dairy, Dodla+ and KC+. The company has steadily increased ad-spend to sales to strengthen its brand equity, (2) it procures ~100% milk directly from farmers which eliminates middle men and helps in providing superior quality milk to consumers, (3) it has also created strong distribution network for selling milk and curd to consumer households. We also note Dodla has created a distribution structure of 1,510+ milk and milk product distributors and 455 Dodla parlors.


* Focus on products that generate RoCE > cost of capital: The company plans to focus on key products that generate healthy return ratios such as packaged milk and curd. These products require negligible investments in working capital and also limited capex and hence, they continue to generate return ratios in excess of cost of capital. It also plans to steadily expand its ice cream portfolio but does not plan to expand aggressively in low RoCE products like ghee, whey and cheese.


* Initiate coverage with BUY: We model revenue and PAT CAGRs of 14.2% and 17.6%, respectively, over FY21-FY23E. We forecast RoE to be upwards of 17% in FY23E. We initiate coverage on the stock with a BUY rating and DCF-based target price of Rs700 (24x FY23E). Key risks: Delay in distribution and procurement expansion, and failure of some of the new products and potentially higher competitive intensity in South India.


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