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Higher milk procurement prices; margin likely to remain under stress in FY23

Timely price hikes, higher revenue share of value-added products, operating leverage and favorable base of Q4FY22 resulted in higher EBITDA margins for Dodla in Q4FY22. However, we continue to believe the dairy companies will face margin pressures in FY23 due to rising milk procurement prices. We believe distribution synergies from SKM will likely boost Dodla sales in northern Karnataka and Goa markets in FY23-24E. We model Dodla to report a PAT CAGR of 15.2% over FY22-24E with: (1) high single-digit growth in milk procurement, (2) market share expansion potential and (3) distribution expansion. We remain structurally positive on Dodla due to its competitive advantages and strong growth opportunity in South India, with a revised DCF-based TP of Rs600 (implied P/E of 20x FY24E EPS).

* Q4FY22 performance: Dodla reported revenue growth of 11.2% YoY. EBITDA and PAT were up 30.4% and 322.3% YoY, respectively. We believe better revenue mix and higher realizations led to gross and EBITDA margins expansion of 19bps and 117bps YoY, respectively. PAT margin improved due to lower effective tax rate.

* Segment-wise data: It reported revenue of Rs1,406mn from value-added products. The share of VAP in overall dairy revenue increased to 24% Q4FY22 YoY. Volume sales of curd were up 15.3% YoY. Outside India business grew 97.8% YoY and contributed 8.4% of total revenues in Q4FY22.

* Distribution expansion: The company added 17 new Dodla retail parlors in Q4FY22. In total, it has added 159 Dodla retail parlors in FY22 to reach a total tally to 563 stores. Further the company increased its milk product distributors from 1,718 in Q3FY22 to 1,800 in Q4FY22. We model Dodla to continue to invest in distribution expansion.

* Acquisition to expand geographical presence: Dodla acquired Shri Krishna Mills (SKM) in Q4FY22, to strengthen its presence in Northern Karnataka and Goa markets. We believe Dodla will benefit from the manufacturing capabilities and established distribution network of SKM in these markets to expand its own portfolio reach.

* Maintain BUY: We model Dodla to report revenue and PAT CAGR of 12.8% and 15.2% respectively, over FY22-24E and RoCE to be upwards of 17% in FY24E. We remain structurally positive on Dodla due to its competitive advantages and strong growth opportunity in South India. We maintain BUY rating with a revised DCF-based TP of Rs600 (implied P/E of 20x FY24E EPS). 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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