IPO update: Dodla Dairy

Dodla Dairy came out with its IPO about ten weeks ago. Value Research's analysis of the IPO can be found here. In this follow-up article, we focus on the IPO's performance, post-IPO events and changes in its valuation since then.

Our analysis of the IPO
We gave a score of 17 out of 28 to this South India-based integrated dairy company when it came out with its IPO. The score was based on the company's vast reach, as it is the third-largest dairy company in terms of milk procurement, with an average procurement of 1.03 million litres of raw material per day. It is also the second-largest dairy company in terms of market presence in India. The company generates 75 per cent of its revenues by selling fresh milk, while the rest comes from other dairy-based value-added products, such as curd, ghee, butter, flavoured milk and ice cream, among others.

The company's products are mainly marketed under the brand names of 'Dodla', 'Dodla Dairy' and 'KC+'. It has a very strong distribution and marketing channel across Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Maharashtra. However, at the time of IPO, our primary concern for the company was its stiff competition with unorganised players, other private players and co-operatives societies.

India is the largest milk producer in the world and has a very large and fragmented milk industry. Moreover, cooperative societies get government grants and subsidies, which help them offer high procurement prices to farmers, thereby posing a threat to the company.

Our rating of the company was based on the following:

• Out of the 11 business metrics, the company did well on five
• Out of the six management-quality-related metrics, it did well on four
• Out of the eight financial metrics, the company did well on seven
• Out of the three valuation-related metrics, it did clear just one metric

Stock performance since listing
The company came out with its IPO alongside Shaym Metalics, which was oversubscribed by more than 120 times. Still, the company saw a good response to its IPO which was oversubscribed by more than 45 times. The qualified institutional buyers (QIB) portion was oversubscribed by 85 times, while the non-institutional investors' portion was oversubscribed by 73 times and the retail portion by 11.3 times.

Dodla Dairy had a decent debut on the stock exchanges, with the shares listing at a premium of 23 per cent over its issue price opening at Rs 528. Post listing, the stock quickly ran up to Rs 650 within a couple of weeks, which was more than 50 per cent above its issue price of Rs 428, as the company's valuation appeared to be a little cheaper than its peers Hatsun Agro and Parag Milk Foods.

Business performance
Recently, the company has reported its quarterly results for the June quarter, with a 12.5 per cent y-o-y growth in revenues at Rs 512 crore. However, as compared to the previous quarter, revenues were down by 3.5 per cent. The net profit for the June quarter was up by 12 per cent and stood at Rs 36 crore and increased by 276 per cent as compared to the previous quarter, which had higher tax outgo.

The company raised Rs 50 crore through the fresh issue from its IPO, which will be used to repay outstanding debt and fund incremental capital expenditure. On August 11, 2021, the company paid out Rs 55 crore to settle out its outstanding debt and currently, it is debt-free on its books.

What to do now?
Although the company has a strong balance sheet, it has lower margins as compared to its peers. The company generates a majority of its revenues by selling milk, which has low margins as compared to other value-added products. However, a high volume from its milk business helps the company to generate high return on capital employed (ROCE). Also, the milk has a low shelf life, which helps the company quickly convert its sales into cash and thereby, lowering the working-capital cycle, which stands at 7.6 days.

The company has been increasing its topline at a rate of 10.1 per cent annually for the last five years, which is in line with the industry growth. The company will be able to grow its business only if it expands its operations to other geographical regions. However, the company's stock trades at a low valuation as compared to its peers at a P/E of just over 26 times.

Disclaimer: This analysis is not meant to serve as a recommendation. Do your own research before investing in the company. If you are interested in our stock recommendations, please visit www.valueresearchstocks.com