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Lower margins but likely market share gains; DCF accretive strategy

Dodla’s revenues increased 40% YoY led by strong 20.3% growth in milk procurement and 51% higher revenues from VAP. While the company’s EBITDA margin was lower by 367bps, we believe it has gained market shares in its core regions. In our view market share gains are more DCF accretive than losing margins in 1-2 quarters. We also note the company has increased the prices in June’22 and plans to raise prices again in Q2FY23. We model the margins to improve in H2FY23 led by price hikes, cost saving initiatives and operating leverage. We model Dodla to report PAT CAGR of 17.6% over FY22-24E with: (1) high single-digit 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 revised DCF-based TP of Rs620 (implied P/E of 20x FY24E; earlier TP- Rs600).

* Q1FY23 performance: Dodla reported revenue growth of 40% YoY. However, EBITDA and adj. PAT declined 11.6% and 30.9% YoY, respectively. Higher milk procurement prices and packing costs coupled with delayed price hikes resulted in gross and EBITDA margin contraction of 509bps and 367bps YoY, respectively. PAT margin also declined 357bps YoY.

* Segment-wise performance: Dodla reported revenues of Rs2,290mn (up 51.1% YoY) from value-added products. The share of VAP in overall dairy revenue increased to 32.5% in Q1FY23 YoY. Volume sales of curd were up 44.8% YoY. Africa business registered strong growth of 150.3% YoY and contributed 8.4% of total revenues

* Distribution expansion: The company continues to invest in widening and deepening its customer reach and as a result has strong distribution network of 558 dodla retail parlors 1,700 milk and milk product distributors. We note ~2% of the company’s growth was led by geographical distribution expansion in Q1FY23. We model strong volume growth from distribution expansion for Dodla.

* Expect margin recovery in H2FY23: With commencement of flush season and price hikes in H1FY23, the company is likely to see revival in profitability margins in H2FY23. We believe with revenue growth, Dodla will also benefit from operating leverage.

* Maintain BUY: We model Dodla to report revenue and PAT CAGR of 17.1% and 17.6% respectively, over FY22-24E and RoCE to be upwards of 18% 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 Rs620 (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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