Dodla Dairy IPO opens June 16: Grey market premium jumps ahead of public issue; should you subscribe?

Dodla Dairy, an integrated dairy company based in south India, earns its revenue through the sale of milk and dairy-based value added products (VAPs) in the branded consumer market. Image: dodladairy website

Dodla Dairy’s Rs 520-crore IPO will open for subscription on Wednesday, 16 June, in the price band of Rs 421-428 per share. The issue will close on June 18. The issue comprises fresh issue of equity shares worth Rs 50 crore and an offer for sale (OFS) of up to 1.09 crore equity shares of face value Rs 10 each. In the grey market on Tuesday, Dodla Dairy shares were quoting a premium of Rs 130-135 a share over the IPO price. The shares were seen trading at Rs 563, up 31.54 per cent in the primary market. The research teams at Angel Broking and Ventura Securities in their respective notes have recommended “Subscribe” to the offer while those at HDFC Securities and JST Investments haven’t given any rating to the IPO.

Dodla Dairy, an integrated dairy company based in south India, earns its revenue through the sale of milk and dairy-based value added products (VAPs) in the branded consumer market. The company sells fresh milk, ghee, butter, curd, paneer, among other dairy products, which are targeted at consumption at home.

Angel Broking
Rating: Subscribe

The brokerage firm said that in terms of valuations, the post-issue 9MFY21 annualised PE works out to 16.4x (at the upper end of theissue price band), which is low compared to Parag Milk Foods (trading at 32.7x). Further, Dodla Dairy has shown improvement in operating margin with an efficient working capital cycle. Angel Broking believes that Dodla Dairy would perform better on the back of an increase in value-added product mix.

Ventura Securities
Rating: Subscribe

Ventura Securities has valued the stock at Rs 580 (25x FY24E) representing potential upside of 35.4 per cent from the IPO higher band price of Rs 428 over the next 24 months. Despite the lack of earnings growth over the forecast period (given the high base effect of net earnings for FY21), Ventura Securities expects a re-rating of the valuations given the market leadership, strong sectoral growth trends, improved efficiencies (by eliminating market intermediaries), thrust on expanding retail footprint, debt free status, completion of capex cycle and high return ratios.

HDFC Securities
Rating: Not rated

The brokerage firm said that Dodla Dairy’s farmer friendly policies and continuous engagement with them with welfare programs have strengthened its relationships with farmers which in turn have strengthened its raw milk procurement process. It offers a variety of initiatives for the farmers from whom it procures raw milk. The company undertakes research to reduce the breeding cycle of cows and on related activities including semen selection for more productive cows. Investigation into genetic diversity and relationship between HF breed cows and varied India cattle breed to lead to improvement of dairy herd genetics that affect health, longevity and reproductive traits in cattle used for raw milk production. While company’s operations are dependent on the supply of large amounts of raw milk, and inability to procure adequate amounts of raw milk from farmers and third party suppliers, at competitive prices, may have an adverse effect on the business, results of operations and financial condition.

JST Investments
Rating: Not rated

At upper price band of Rs 428, it is priced at 15.4x P/E, 4.33x P/BV, 1.8x P/S (9mFY21 sales) and 1.35x P/S (FY21A Sales). The valuations are good when compared to Heritage who has 13.2x P/E, 0.80x P/S, 3.31x P/BV and Hatsun who has 81.1x P/E, 3.59x P/S, 19.6x P/BV. At the same time management has guided for more Value added products, more OPM and more NPM growth. Thanks to good valuations, the IPO may see good subscriptions and good listing. The company management themselves have said they are a fairly new company. In the long term, we have no view as we would want to monitor this more as FY21 seems to be an aberration with other milk players also clocking in EBITDA growth.

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