Shares of Dodla Dairy Ltd. gained after ICICI Securities initiated coverage on the stock with a ‘buy’, citing the company’s competitive advantages in milk procurement, distribution and branding.
The brokerage, according to its research report released on Sept. 27, has set a target price of Rs 700 apiece on the maker of everything from ghee and ice-creams to flavored milk and milk-based sweets. That implies a potential upside of 16.6% from the current market price.
Shares of Dodla Dairy gained as much as 6.6% to Rs 632.8 apiece in early trade on Tuesday. The stock has rallied 45.7% since its Rs 520-crore IPO in June.
ICICI Securities, the first brokerage to rate the Hyderabad-based dairy company’s stock, said its cluster approach will continue to be a key competitive advantage, considering its steady growth potential in south India. “Its milk procurement, including its plants as well as the distribution network, is established in south India, and it has a small business in Africa.
The company’s strong brands such as Dodla Dairy, Dodla + and KC +, according to the brokerage, also work in its favor. It has steadily increased ad spend-to-sales to strengthen brand equity. Besides, Dodla procures almost 100% of milk from farmers. That, the report said, helps to reduce procurement price as most middlemen are eliminated, as well as results in negative working capital. The company’s wide distribution network of more than 1,510 milk and milk product distributors and 455 Dodla milk parlors are other advantages.
According to ICICI Securities, the company’s plan to focus on key products such as packaged milk and curd that generate healthy return ratios works out well. “These products require negligible investments in working capital and also limited capex. Hence, they continue to generate return ratios in excess of the cost of capital. It also plans to steadily expand its ice-cream portfolio but does not plan to expend aggressively in low return on capital employed products like ghee, whey and cheese. ”
ICICI Securities also listed a few key risks to its upside projections:
- A steep rise in competitive pressures and material increase in production capacities by peers in a short time frame can hurt Dodla’s earnings. Higher cost of production may also impact earnings.
- Any delay in launch of new products and / or failure of new products may impact Dodla’s financials.
- If there is prolonged weakness in India’s economy, it will impact the company’s growth prospects.
- The company’s inability to compete with dairy cooperatives may adversely affect the results of operations and financial conditions.