Dodla Dairy rating – buy: Sri Krishna deal to be positive in medium term

28 Mar , 2022 By : monika singh

We believe acquisition of Sri Krishna Milks to be value accretive in medium term as (i) Sri Krishna operates in key region of Dodla i.e. South India and has same products for which Dodla has strong understanding i.e. milk and curd, (ii) While Sri Krishna was loss making, it has gross margin of ~22% over FY18-21 which indicates strong consumer acceptance of the brand and (iii) post acquisition Dodla will be able to consolidate its position in North Karnataka, South Maharashtra and Goa.

However, we believe the acquisition will be earnings decretive in FY23 and also likely in FY24 as the interest income on acquisition value of Rs 500 mn will be likely higher than profits generated by Sri Krishna. We remain structurally positive on Dodla due to its competitive advantages and strong growth opportunity in South India, with a DCF-based TP of Rs 615 (19.4x FY24E EPS).

Acquisition of Sri Krishna Milks: Dodla has acquired Sri Krishna Milks for a cash consideration of Rs 500 mn on a slump sale basis. Sri Krishna Milks has one milk processing unit at Kirwatti with capacity of 0.15mlpd and has also created investments in milk procurements.

Maintain BUY: We model Dodla to report revenue and PAT CAGR of 13.7% and 14.3% respectively, over FY21-24E and RoE to be upwards of 16% in FY24E. Dodla enjoys competitive advantages and strong growth opportunity in South India. We maintain Buy with a DCF-based TP of Rs 615 (implied P/E 19.4x FY24e EPS). Key risks: Delay in distribution and procurement growth, and failure of some of new products.