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Salient features of the IPO:

* Dodla Dairy Ltd. (DDL), one of the largest dairy companies in India is planning to raise up to Rs. 520cr through an IPO, which opens on 16th Jun. and closes on 18th Jun. 2021. The price band is Rs. 421 - 428 per share

* The issue is a combination of fresh issue and OFS. The company will not receive any proceeds from the OFS portion. Of the net proceeds from the fresh issue, Rs. 32.3cr will be utilized to repay or prepayment of debt availed by the company and Rs. 7.2cr will be used to fund incremental capex requirement. Residual funds will be used for general corporate purposes

* On 2nd Feb. 2021, the company executed a private placement, allocating 0.265cr shares to International Finance Corporation at Rs. 377. Further, on 11th Jun. 2021, few members of the promoter group transferred 0.097cr shares to SBI Mutual Fund at a price of Rs. 411.5.

Key competitive strengths:

* Consumer focused dairy company with a diverse range of products under the “Dodla Dairy” and “Dodla” brands

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

* Focused engagement and long term relationship with dairy farmers

* Stringent quality control procedures 

*Financial growth and operational efficiencies

* Experienced Board and senior management team

Risk and concerns:

* Unfavorable government policies

* Subdued institutional sales post Covid-19 pandemic

* Unfavorable movement in the raw milk prices

* Difficulty in improving the VAP sales

* Competition

Peer comparison and valuation:

At higher price band of Rs. 428, DDL is demanding a P/E multiple of 51.1x (to its FY20 earnings of Rs. 8.4 per share), which is at discount to the peer average of 57.7x.

Below are a few key observations of the issue:

* India is the global leader in milk production, contributing around 30% of milk production in 2020. Over FY15-20, domestic dairy market has grown by 10% CAGR to reach a size of Rs. 6.7lakh crore in FY20. This growth was on the back of a 6-7% increase in volumes and 3-4% increase in price realizations. Dairy product includes milk, traditional value added products (VAP) like butter, ghee, paneer, khoa, curd & skimmed milk powder) and embedded value products (flavored milk, ice cream, yoghurt, cheese and whey).

* Milk was classified as an essential item and hence the sector was not severely impacted by the pandemic led lockdown and restrictions. Thus in FY21, the sector is expected to grow at a much slower pace. With economic growth expected to gradually pick up, demand from the hotels, restaurants and cafes return, the sector is anticipated to grow at 10-11% CAGR over FY21-25.

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