Dodla Dairy rating – Buy: Competitive advantages to push growth

Milk procurement in South India is growing at ~10% per annum. Dodla has expanded its market share from 0.6% in FY08 to ~1% in FY21.

Dodla Dairy has created multiple competitive advantages in the fast growing dairy industry. Apart from cluster approach in South India, it has developed (i) strong brands; (ii) 100% direct milk procurement network; and (iii) direct distribution model. The company also focusses on products that generate RoCE in excess of cost of capital such as milk and curd, and has negligible/nil presence in cash burning products like ghee, cheese and whey. Milk procurement in South India is growing at ~10% per annum. Dodla has expanded its market share from 0.6% in FY08 to ~1% in FY21.

Considering market growth and market share expansion potential, we model Dodla to report mid-teens revenue growth in medium term. We forecast 14.2% and 17.6% CAGR in revenue and PAT, respectively over FY21-23e. We initiate coverage with Buy and DCF-based TP of Rs 700 (24x FY23e). We forecast RoE to be upwards of 17% in FY23e. Key risks: Potentially higher competitive intensity in South India and delay in distribution expansion.

Cluster approach: Dodla focusses largely on South India. It also created strong brands via brand building spends in regional languages. The company is steadily penetrating smaller towns and semi-urban markets. Considering steady growth potential in South India, we believe cluster approach will continue to be a key competitive advantage for the company.

Creation of competitive advantages: Dodla’s competitive advantages include: (i) Strong brands like Dodla Dairy, Dodla+ and KC+. It has steadily increased ad-spend to sales to strengthen its brand equity; (ii) it procures ~100% milk directly from farmers; (iii) it has also created strong distribution network for selling milk and curd to consumer households.