Estimate of 17.6% PAT CAGR over FY21-23; initiated with ‘Buy’ and TP of Rs 700
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.