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Muted flush season impacts margin; we model recovery in H2FY24

Muted flush season and heat wave have impacted the milk production and milk procurement prices. While Dodla reported healthy growth of 9.8% in milk procurement, we note the steep increase in input prices contracted the gross margins by 416bps YoY to 21.4%, lowest level in past 12 quarters. With correction in global SMP prices and stable cattle feed prices, we model the milk procurement prices to correct in H2FY24 and also model margin recovery in H2FY24. We model EBITDA margin of 8.4% in FY24E (vs 6.8% in FY23). We model Dodla to report PAT CAGR of 31.4% over FY23-25E with: (1) high singledigit growth in milk procurement and market share gains and (2) distribution expansion. We remain positive on Dodla due to its competitive advantages and strong growth opportunity in South India. Maintain BUY with a DCF-based revised TP of Rs600 (implied P/E of 17x FY25E; Earlier TP: Rs620).

* Q4FY23 results: Dodla reported revenue growth of 22.8% YoY but EBITDA and PAT declined 28.1% and 44.3%, respectively YoY. Higher milk procurement prices resulted in gross and EBITDA margin contraction of 416bps and 330bps YoY, respectively. Other income was up 47.7% YoY due to cash accumulation on balance sheet.

* Segment-wise performance: Milk procurement was up 9.8% whereas milk sales (volume) were up 11.3% YoY. Value added product sales were up 20.9% YoY. We believe the price hikes were ~10% YoY. While India sales were up 23.1%, Africa revenue increased 19.6% YoY. Cattle feed revenues were up 26% YoY.

* Higher milk procurement prices to hurt margin in H1FY24: We model the steep increase in milk procurement prices led by muted flush season and heatwave in CY23 to continue to hurt margins in H1FY24. However, we model the margin recovery in H2FY24 as the global SMP prices have corrected and cattle feed prices have also stabilized. We model the EBITDA margin to normalize in FY24 at ~8.4%.

* Strong growth in Value added products: We note with normalization of economy and opening up of HoReCa sales, the VAP sales are likely to be strong (>15%) in FY24-25. We model higher revenues of curd are likely to be RoCE accretive.

* Maintain BUY: We model Dodla to report revenue and PAT CAGR of 14.6% and 31.4% respectively, over FY23-25E and RoCE to be ~18% in FY24-FY25. We maintain BUY rating with DCF-based TP of Rs600 (implied P/E of 17x FY25E EPS). Key risks: Delay in distribution and procurement expansion, and failure of some of the launches.

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