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Acquisition of Sri Krishna Milks to strengthen footprint in Karnataka and South Maharashtra

We believe acquisition of Sri Krishna Milks to be value accretive in medium term as (1) Sri Krishna operates in key region of Dodla i.e. South India and same products where Dodla has strong understanding i.e. milk and curd, (2) While Sri Krishna was loss making, it has Gross margin of ~22% over FY18-21 which indicates strong consumer acceptance of the brand and (3) post acquisition Dodla will be able to consolidate its position in North Karnataka, South Maharashtra and Goa. However, we believe the acquisition will be earnings decretive in FY23 and also likely in FY24 as the interest income on acquisition value of Rs500mn will be likely higher than profits generated by Sri Krishna. We remain structurally positive on Dodla due to its competitive advantages and strong growth opportunity in South India, with a DCF-based TP of Rs615 (19.4x FY24E EPS)

Acquisition of Sri Krishna Milks: Dodla has acquired Sri Krishna Milks for a cash consideration of Rs500mn on a slump sale basis. We note Sri Krishna Milks operates in milk and milk products in Karnataka and Goa. The acquisition is likely to strengthen Dodla’a presence (the procurement and sales) in North Karnataka, Goa and south Maharashtra. Sri Krishna Milks has one milk processing unit at Kirwatti with capacity of 0.15mlpd and has also created investments in milk procurements

Gross margin of ~22% over FY18-21 indicates acceptance of Sri Krishna brand: Sri Krishna was loss making in five years out of FY16-21. However, we note it was generating healthy gross margin of ~22% and the losses were largely attributable to higher depreciation (likely lower capacity utilization) and high interest costs.

Strong presence in value added products: Apart from milk, Sri Krishna also sells value added products such as curd, flavored milk and mithai products. Its key brand is Sri Krishna but it also sells flavored milk under the brand Sri Krishna MUST

Details of capacity and procurement: Sri Krishna has milk handling capacity of 150,000 lpd, It also has production capacity of sterilized flavored milk capacity of 3,000lpd. It also has strong production capacity to manufacture paneer, ghee and sweets. It has 5 chilling centers and 9 bulk milk chilling centers.

Maintain BUY: We model Dodla to report revenue and PAT CAGR of 13.7% and 14.3% respectively, over FY21-24E and RoE to be upwards of 16% 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 DCF-based TP of Rs615 (implied P/E 19.4x FY24E EPS). Key risks: Delay in distribution and procurement expansion, and failure of some of the new products.

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