Published on 15/06/2021 5:22:18 PM | Source: GEPL Capital Ltd

IPO Note - Dodla Dairy Limited By GEPL Capital

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Company Background

Dodla Dairy Limited (Dodla Dairy ) was incorporated on May 15 1995 at Hyderabad. Dodla Dairy is an integrated dairy company based in south India primarily deriving all of their revenue for Fiscal 2020 and for the 9 months period ended December 31, 2020 from the sale of milk and dairy based Value Added Products (“VAPs”) in the branded consumer market.

The company sell fresh milk, ghee, butter, curd, paneer, gulab jamun, doodh peda, basundhi and junnu, which are targeted at consumption athome. They sell UHT milk, flavoured milk, ice cream and beverages such as buttermilk under their brand, primarily for direct consumption.

Dodla Dairy is the 3rd 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 2 nd highest in terms of market presence across all of India amongst private dairy players with a significant presence in the southern region of India.


Strengths & Strategies

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

As on March 31, 2021, Dodla Dairy operates more than 283 milk procurement routes. These routes have a regular procurement plan with timely pick up of raw milk from VLCCs and dairy farms and transport to the nearest chilling centres. They have introduced automated processing lines, along with semi-automated processing lines, which led to efficiencies in their processing operations. Their processing infrastructure, with fully automated processing lines, is designed in a manner to ensure efficient operations and high product quality standards.

Long term relationship with dairy farmers

Their 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. They also work with regional banks and facilitate sanctioning of loans to farmers which they utilise to invest in their cattle.

They have also diversified into an ingredient input providing company by supplying upfront cattle feed under the “Orga” brand, manufactured by their Subsidiary Orgafeed Pvt. Ltd., directly to their farmers through their procurement network which is adjusted against the value of the raw milk supplied to them by such farmers. They have tied up with various veterinarians to provide services to farmers for their milch animals. They also organize various training camps with veterinarians for farmers to educate them about the best ways to prevent common ailments for their milch animals.

Increase the revenues from dairy based VAPs

Historically, sales of processed milk have been their primary revenue driver. In order to grow further and also increase margins, over the last few years they have focused on dairy based VAPs. They intend to supplement their revenue by increasing the sales of their VAPs and strike a balance between processed milk and VAPs to optimise their product portfolio. While their current product portfolio includes curd, they propose to introduce new variants of cheese and other products at price points as low as ₹10, to expand their product portfolio and reach a wider variety of consumers.

Further strengthen the procurement and processing operations

They intends to continue to (i) adopt more efficient production process to decrease milk reprocessing and reduce their water use; (ii) decrease the electricity consumption due to refrigeration by refining the current plant and machinery; and (iii) switch from conventional to non-conventional sources of energy. Further, they continue to invest in modern technology and equipment to address changing customer preferences as well as to improve operational efficiencies.

They have acquired plants, including, in Fiscal 2016, a processing plant in Dharmapuri, Tamil Nadu which provided them access to the markets in central and southern Tamil Nadu. In Fiscal 2013, they acquired a processing plant in Kurnool. They commenced operations at their new processing plant in Rajahmundry, Andhra Pradesh, in April, 2019, which provided them access to the markets of coastal Andhra Pradesh.

Dodla Dairy entered into a business transfer agreement with KC Dairy Products Pvt. Ltd. and Chellamuthu Sureshkumar on February 8, 2019 (“BTA”). Pursuant to the BTA, the company has acquired 2 new processing plants at Vedasandur and Batlagundu in Tamil Nadu and 1 SMP plant at Vedasandur. In Fiscal 2019 they, through their Subsidiary Orgafeed Pvt. Ltd., acquired the cattle feed and mixing plant in Andhra Pradesh for the purpose of manufacturing and selling cattle feed to farmers through their procurement network

COVID 19 Impact & Risks

* December 31, 2019 to December 31, 2020, such as a decrease in sales of their products such as processed milk, ice cream, curd and butter milk in the metro cities of Bengaluru and Chennai.

* This was primarily because of the migration of their retail customers to their base home town and an adverse impact on their sales to commercial establishments.


Valuation & Recommendation

The issue is priced at a post issue annualized PE of ~16.5x on FY21 EPS. We believe that the uptick in margins in 9MFY21 will normalize to around 10 – 11% as guided by the management.

The focus on VAP (Value Added Products) also is a positive sign. The unorganised / smaller dairies are also impacted due to liquidity issues and weaker balance sheet. The organized sector will continue to structurally gain market share.

The key downside risk, however, include a sharp rise in raw material costs.

We recommend a SUBSCRIBE rating to the issue.


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