Verdict: Not as tasty as it may appear
Rs. 520 cr IPO: 10% fresh issue to repay Rs. 32 cr debt and 90% OFS, to facilitate part-PE exit, like most IPOs these days. TPG is looking to reduce 26% holding to 10% and accounts for 76% of IPO size.
Fresh issue looks quite unnecessary, as company is cash surplus by ~Rs. 200 cr after raising Rs. 100 cr via equity from IFC in Feb 2021.
Date: Wed 16th Jun to Fri 18th Jun 2021
Price band: Rs. 421-428 per share
M Cap: Rs. 2,546 cr, implying ~20% dilution
Listing: 28th June 2021
South Indian Dairy Company
5 Southern Indian states account for 93% of FY20’s Rs. 2,139 cr revenue, with balance from Uganda and Kenya, where margins are 3x than in India. Share of African business rose from 3% of FY18 revenue to 7% in FY20, but company guides to cap it at 10%. Product-wise, milk accounts for 3/4th revenue with balance from curd, paneer, ghee, ice cream etc.
Profitability Extremely Price Sensitive
Between FY18-20, company’s revenue increased at 16% CAGR from Rs. 1,590 cr to Rs. 2,139 cr, but EBITDA margin contracted from 7.5% to 6.9% and PAT margin from 3.6% to 2.3%, with FY20 PAT at Rs. 50 cr, as against Rs. 57 cr in FY18, highlighting price sensitively and slim margins in the business. Larger peer Hatsun with Rs. 5,000 cr topline clocks about Rs. 100 cr PAT, after paying annual interest of Rs. 100 cr, leading to 2-3% net margin. For Dodla, even after lower interest component of Rs. 10-15 cr annually, net margins have been in the 2-3% range, over the long term.
9MFY21 Super Profits Temporary
Company’s sales are more B2C in nature, unlike peers Heritage and Parag, which helped it post stellar earnings for 9MFY21. 9MFY21 revenue stood at Rs. 1,414 cr, despite 20% decline in volumes, as prices strengthened on two counts (i) milk realisation improved 8.5% from Rs. 45 per litre in FY20 to Rs. 48.8 per ltr in 9MFY21 (ii) cost of procuring milk declined 5% from Rs. 33 per ltr to Rs. 31.2, due to supply glut on covid-induced lockdown. Due to twin benefit of higher realization and lower cost, EBITDA margins jumped from 6.9% in FY20 to a super-normal 14.8% in 9MFY21 while PAT rose from Rs. 63 cr in FY20 to Rs. 116 cr and net margin sky rocketed to a never-seen-before level of 8.2% (2.3% in FY20), with EPS at Rs. 21. This has been an industry wide phenomena for B2C players.
Since such sharp price movement is temporary, 9MFY21 margin is not sustainable and cannot be extrapolated, while long term net margins will converge to historic average of 2-5%. Infact, taking cues from March quarter results of Hatsun and Britannia, milk procurement prices have already inched up sequentially in Q4Y21.
As 9MFY21 earnings can not be benchmarked for valuation, based on FY20 EPS of Rs.9, PE multiple works out to 48x. Assuming normal growth on long term average margin, forward PE multiple is 40x, which is quite steep for a small cap stock with Rs. 2,500 cr m cap, regional presence and slim margins.
While company may be better off than some of its peers, due to debt-free status and surplus cash of nearly Rs.200 cr, promoter facing criminal proceedings under minimum wages act (matter currently pending) and IPO price at 14% premium to last fund raise in Feb 2021 at Rs. 377 per share is not too comforting.
Besides, dairy industry is highly commoditized wherein producers do not enjoy much pricing power. This is why dairy, despite being a repeat food purchase, does not command valuation of FMCG sector. Moreover, barring a couple of exceptions, dairy sector has not rewarded shareholders, with Parag Food still ruling below IPO price and Kwality going into liquidation.
9MFY21 margin is an aberration and cannot used as a benchmark. Commoditized and crowded industry structure with poor sector track record make this IPO an ‘avoid’.
Grey Market Premium (GMP) of Dodla Dairy: Grey Market Premium of Dodla Dairy is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.