Dodla Dairy IPO: Should you subscribe to the issue?

The Rs 520 crore initial public offer (IPO) by Dodla Dairy will open for subscription on Wednesday. The public issue by the South India-based integrated dairy company is priced in the range of Rs 421-428 per share and comprises a fresh issue worth Rs 50 crore and an offer for sale of Rs 470 crore.

The IPO, analysts said, is valued at 16.5 times FY21 earnings and looks reasonable compared with peers, although some concerns on the earnings growth front linger. Most analysts have a 'subscribe' rating on the issue as they expect a rerating of valuations given Dodla Dairy's market leadership, high return ratios, thrust on expanding footprint and improved efficiencies.

The company during 9MFY21 has witnessed a robust rebound in financial performance, led by healthy improvement in EBITDA margin. The PAT stood at Rs 1.16 billion in 9MFY21 as against an average annual profit of Rs 0.6 billion over the last three years. Further, operating cash flow (OCF) generation continues to remain steady with a cumulative OCF of Rs 5.8 billion during FY18-9MFY21. However, during FY18-20, the performance has not been as impressive, mainly due to volatile operating margin and higher depreciation.

While revenue and EBITDA recorded 16 per cent and 12 per cent CAGR, respectively, net profit recorded a negative CAGR of 6 per cent during FY18-20. 

Heightened margins, according to analysts at Ventura Securities, are unlikely to sustain and management has also guided towards normalisation going ahead. "As a result, we expect overall revenues, EBITDA, PAT to grow at a CAGR of 9 per cent, -4.9 per cent and -4.4 per cent by FY24. EBITDA and net margins are expected to degrow by 480 bps and 259 bps to 9.5 per cent and 5.4 per cent, respectively over the same period," the brokerage said.

Going forward, sustainability of recent improvement in operating performance will be the key for Dodla Dairy’s valuation rerating in the medium-term, said Vikas Jain, senior research analyst at Reliance Securities.

"Considering strong OCF yield and consumer-centric business, which usually commands higher multiple, we recommend 'Subscribe' to the IPO from the long-term perspective," Jain added.

Ventura Securities, too, has assigned a 'Subscribe' rating to the IPO and expects the scrip to touch Rs 580 in two years' time. "We value the stock at Rs 580, 25 times FY24 earnings, representing a potential upside of 35.4 per cent from the IPO higher band price of Rs 428 over the next 24 months," it said.

Despite the lack of earnings growth, given the high base effect of net earnings for FY21, we expect a re-rating of the valuations given strong sectoral growth trends, improved efficiencies, thrust on expanding retail footprint, debt-free status, completion of capex cycle and high return ratios, the brokerage added.

Amarjeet S Maurya, AVP-Midcap at Angel Broking said  Dodla Dairy has shown improvement in the operating margin with an efficient working capital cycle.

"In terms of valuations, the post-issue 9MFY21 annualised PE works out to 16.4 times at the upper end of the issue price band, which is low compared to Parag Milk Foods which is trading at 32.7 times. Further, Going forward, we believe that Dodla Dairy would perform better on the back of an increase in value-added product mix.  Thus, we recommend a subscribe rating on the issue," Maurya said in an IPO note.

The company plans to use the proceeds from the IPO to prepay borrowings, meet capex requirement and fund expenditures towards general corporate purposes.