dodla dairy ltd share price Management discussions


MANAGEMENT DISCUSSIONS AND ANALYSIS REPORT

Indian Dairy Industry:

The Indian dairy sector has witnessed a significant transformation, positioning itself as a crucial secondary source of income for millions of rural families. Moreover, it has emerged as a primary driver of employment and income generation, with a particular focus on empowering women and supporting marginal farmers. Notably, the per capita availability of milk in India has surged to an impressive level of 444 grams per day during the year 2021-22, surpassing the global average of approximately 320 grams per day in 2021. This growth signifies the sectors remarkable progress and its vital contribution to meeting the nutritional needs of the population while fostering economic development.

Milk Production:

India remains the worlds largest milk producer, with the Government implementing various measures to enhance livestock productivity. These initiatives have led to a significant increase in milk production. In the years 2020-21 and 2021-22, milk production reached 209.96 million tonnes and 221.06 million tonnes, respectively, representing an annual growth rate of 5.29%. As of 2021-22, the per capita milk availability stands at approximately 444 grams per day. The table below illustrates the milk production and corresponding annual growth rates (%) from 2011-12 to 2021-22.

Key Developments in FY23: In FY23, there have been key developments in the dairy industry. Milk production is estimated to have experienced a modest growth of just 1% during the fiscal year ending in March 2023. This growth rate falls well below the average annual rate of 5.6% witnessed over the past decade. Farmers are facing a challenging situation due to two factors. Firstly, their cows are affected by a deadly disease called lumpy skin disease, posing a threat to livestock health and productivity. Secondly, there has been a reduction in market-ready cattle stock as a consequence of the COVID-19 pandemic, which slowed down the breeding process.

The dairy industry has faced additional pressure due to a substantial increase of 39% in dairy product exports in 2022.

This surge in exports, combined with reduced milk supplies, has led to a decrease in inventories of butter and skimmed milk powder (SMP). Simultaneously, the rising incomes of consumers have resulted in an increased demand for protein-rich dairy products. These products play a vital role in meeting the calcium, vitamin, and protein requirements of a large vegetarian population.

Industry officials anticipate a 7% growth in demand for dairy products this year. However, the prices of milk have already risen by more than 15% to T56 rupees per litre over the past year. This price surge, the sharpest in a decade, poses a challenge for the Union Government in achieving the desired retail inflation rate as targeted by the Reserve Bank of India (RBI).

Milk and Value Added Products

The Indian dairy market has witnessed remarkable growth, with a total size of approximately Rs. 13.17 lakh crore in 2021. Over the past 15 years, the dairy market has experienced a consistent annual growth rate of about 15%. According to the 2021 report by International Market Analysis and Consulting Services Private Ltd. (IMARC), it is projected that the market will reach a staggering size of around Rs. 30.84 lakh crore by 2027.

The liquid milk market plays a significant role, representing nearly half of the total dairy market in the country. In the last three years alone, the organised sectors share of the liquid milk market has surged from 32% to 41%. It is anticipated that the share of the organised sector will further increase, reaching 54% by 2026. This shift reflects the growing preference for organised dairy products among consumers.

The future prospects for the dairy industry are highly promising. The market for liquid milk is projected to grow by approximately 16% over the next 5-6 years. Additionally, niche products such as cheese, flavored milk, lassi, buttermilk, whey, and organic milk are expected to experience a robust growth rate of over 20% per annum. Traditional dairy products like paneer, ghee, ice-cream, khoa, curd, etc., are also estimated to grow between 11% to 20% annually.

In terms of volume, household consumption of milk and milk products currently stands at 16.1 crore tonnes. However, this figure is predicted to surge to 26.7 crore tonnes by 2030, indicating a significant increase in demand and consumption.

These growth projections highlight the immense potential of the Indian dairy sector, signifying its vital role in the economy and its ability to meet the evolving needs and preferences of consumers.

Indian Private Sector Dairy

Since the initiation of industrial licensing reforms in 1991, private sector companies have experienced impressive growth in expanding their processing capacities for milk and milk derivatives. They have made substantial investments in the dairy sector, surpassing the combined capacity of both dairy cooperatives and government dairies over the past two decades. Some of these private players have now exceeded the size of certain cooperative dairies and exhibit significant potential for further growth. The growth of the private sector creates market opportunities for a large number of farmers. Currently, there are a total of 1944 private dairies (milk processing units) with a capacity of 901.6 LLPD, as indicated by FSSAI licenses until May 2019.

SWOT Analysis of India Dairy Sector

Strengths:

Growing domestic demand: India has a large population with a significant appetite for dairy products, resulting in a strong domestic market and demand for milk and milk-based products.

Diverse product portfolio: The Indian dairy sector offers a wide range of products, including milk, ghee, butter, cheese, yogurt, ice cream, panner, flavored milk, lassi, buttermilk, whey, Sweets and more, catering to various consumer preferences and needs.

Ample availability of raw materials: India has a large number of dairy animals, including cows and buffaloes, providing a steady supply of milk as raw material for the dairy industry.

Vast rural network: The presence of a vast network of rural areas allows for easy procurement of milk directly from farmers, facilitating the involvement of small-scale and marginal farmers in the dairy sector.

Technological advancements: The adoption of modern technologies and practices in dairy farming, milk processing, and product development has improved productivity and quality in the sector.

Weaknesses:

Inefficient supply chain: The Indian dairy sector faces challenges in terms of infrastructure, logistics, and storage facilities, leading to wastage and quality deterioration of milk and dairy products.

Lack of cold chain infrastructure:

The absence of a robust cold chain infrastructure affects the storage and transportation of perishable dairy products, limiting their shelf life and market reach.

Quality control issues: Maintaining consistent quality standards across the dairy sector remains a challenge, particularly in the case of unorganised or small-scale milk producers.

Limited processing and value addition: Despite the abundance of milk production, there is a need for increased investment in processing facilities and value-added products to enhance profitability and market competitiveness.

Fragmented industry structure: The Indian dairy sector is characterised by a large number of small-scale and unorganised players, leading to fragmentation and inefficiencies in the industry.

Opportunities:

Rising per capita income: As disposable income increases, consumers are likely to seek higher- quality dairy products, presenting opportunities for premium and value-added offerings.

Growing health consciousness:

There is an increasing trend towards healthier food choices, creating a demand for organic, low-fat, and functional dairy products that cater to health-conscious consumers.

Export potential: India has the potential to become a significant player in the global dairy market, leveraging its large-scale production, competitive pricing, and expanding product portfolio.

Government support: The government has implemented various schemes and policies to support dairy farmers, promote investment in the sector, and enhance infrastructure, creating favourable conditions for growth.

Technological advancements: Continued innovation and adoption of advanced technologies in dairy farming, milk processing, and distribution can enhance productivity, reduce costs, and improve product quality.

Threats:

Price volatility of inputs: Fluctuations in the prices of animal feed, fodder, and other inputs can impact the profitability of dairy farming and processing.

Competition from imported products: The Indian dairy sector faces competition from imported dairy products, which may pose a challenge in terms of pricing, quality, and market share.

Adverse weather conditions: Natural disasters, droughts, and other weather-Related events can affect milk production and availability of feed, impacting the overall performance of the sector.

Changing consumer preferences: Evolving consumer preferences and dietary habits may shift towards alternative sources of protein, posing a threat to the traditional dairy industry.

Regulatory challenges: Compliance with stringent food safety and quality regulations, as well as evolving labeling and packaging requirements, can present challenges for small- scale and unorganized players in the sector.

Animal health issues: Animal health issues pose risks to the dairy sector. Outbreaks of diseases like foot-and- mouth disease, mastitis, and other livestock ailments can reduce milk production, increase treatment costs, and compromise animal well-being.

Review of Operations

Milk Procurement:

Total Chilling Centers / RMRD: The number of chilling centres has gradually increased over the years. Starting from 85 in FY19, it reached 86 in FY20, 94 in FY21, 110 in FY22 and 118 in FY23. This is an outcome of Dodla Dairys efforts to expand its procurement infrastructure and reach more areas for milk collection.

Total Procurement Transport Vehicles: The number of procurement transport vehicles has increased over the years, based on the need for improved logistics and transportation capabilities. Starting from 725 in FY19, it decreased to 695 in FY20 but then increased to 740 in FY21. There was a significant jump to 844 in FY22 and a slight decline to 825 in FY23. Overall the increase of transport vehicles is in line with Dodla Dairys efforts to enhance its fleet capacity to meet the growing milk procurement demands.

Milk Procurement - DDL (Litres Per Day): The quantity of milk procurement by Dodla Dairy has shown consistent growth over the years. Starting from 7,39,284 liters per day in FY19, it further more increased to 9,20,881 in FY20, it slightly increased to 9,51,791 in FY21. There was a significant jump to 10,97,732 in FY22 and a further increase to 11,99,068 in FY23. This indicates the companys ability to attract more farmers and increase milk production despite ongoing challenges Related to animal health and climate issues.

Number of Dodla Milk Collection Centers: increased from 5,581 in FY19 to 6,285 in FY20, further grew to 6,771 in FY21, and reached a peak at 7,837 in FY22. However, there was a slight decline to 7,602 in FY23. This is due to various factors including rationalisation considering various market and operational aspects.

Total Farmers:

The total number of farmers associated with Dodla Dairy has shown a mixed trend. The average milk procurement per farmer increased to 10 litre in FY23 from 3 litre in FY19. It started at 2,33,036 in FY19, decreased to 1,83,926 in FY20 mainly due to covid challenges, and further decreased to 1,09,670 in FY21 and to 1,21,214 in FY22. The numbers marginally decrease to 1,15,971 in FY23. These minor fluctuations in farmer numbers have no significant impact on the operations and are influenced by external factors such as market conditions and farmer preferences.

Milk & Value Added Products

Dodla offers a diverse product profile in both the liquid milk and by-product categories. Here is an analysis of Dodlas product offerings:

Liquid Milk Category (5 variants):

Fresh Milk: Dodla offers fresh milk, which is likely to be available in different quantities such as 500ml, 1 liter, etc.

Butter:

Dodla produces butter, which is a dairy product made from milk or cream. It is commonly used as a spread or for cooking purposes.

Ghee:

Ghee is a clarified butter commonly used in Indian cuisine. Dodla offers ghee as part of its product lineup.

Paneer:

Paneer, also known as Indian cottage cheese, is a popular dairy product used in various Indian dishes. Dodla produces paneer for its customers.

Curd:

Curd, also known as yogurt, is a fermented dairy product with a creamy texture. Dodla offers curd as part of its product category.

Flavoured Milk:

Dodla produces sterilized flavored milk, which likely includes different flavors such as chocolate, strawberry, pista, badam etc. Flavored milk is a popular beverage among consumers, especially children.

Doodh Peda:

Doodh peda is a traditional Indian sweet made with condensed milk and flavored with cardamom. Dodla offers this sweet as part of the product range.

Ice Cream:

Dodla produces ice cream, which is a frozen dessert available in various flavors and formats.

Skimmed Milk Powder:

Skimmed milk powder is produced by removing the cream from milk and drying the remaining milk solids. Dodla offers skimmed milk powder as a product option.

Buttermilk/Sweet Lassi:

Buttermilk is a refreshing drink made from fermented milk, and sweet lassi is a sweetened yogurt-based drink. Dodla offers these beverages as part of its product category.

Product Performance Highlights:

• Revenue from value-added products (VAP) and fat & fat- based products was at Rs.7,408 Mn of the overall dairy revenue during FY23 i.e a year on year increase of 26.8%.

• 10.7 LLPD is the average milk sales during FY23 as compared to 9.3 LLPD in FY22 i.e an year on year increase of 14.5%.

• 323.8 MTPD is the Curd sales during FY23 as compared to 269.8 MTPD in FY22 i.e an year on year increase of 20.0%.

Sales & Distribution Channels:

DRPs (Distributor Retailers Partners):

The number of DRPs has shown a consistent increase over the years, starting from 192 in FY18 and reaching 580 in FY23. The company has been successful in expanding its network of distributor retailer partners in its markets.

Agents:

The number of agents initially increased from 3,658 in FY18 to 4,226 in FY20 but experienced a decline in subsequent years, reaching 2,627 in FY23. This suggests some fluctuations in the agent network, potentially indicating changes in the distribution strategy or market conditions.

Milk & Product Distributors:

The number of Distributors having an increase trend from 1,009 in FY18 to 1,769 in FY23. This indicates the presence of expanding of distributors specializing in milk and dairy products within Dodlas distribution network.

Total:

The total number of sales and distribution partners (including DRPs, agents, and milk & product distributors) increased from 4,859 in FY18 to a peak of 7,365 in FY20. However, in the subsequent years, the total number decreased, reaching 4,976 in FY23. This potentially indicating changes in the distribution strategy or market conditions.

Review of Financial Performance:

Against a challenging industry scenario in FY23 mostly Related to milk product Related challenges across India, Dodla Dairy witnessed growth in revenues and gross profit, but experienced a decline in profitability indicators mainly due to Multiple sectoral headwinds like lumpy skin disease and rise in milk prices.

Revenue:

Dodla Dairy experienced a significant increase in revenues, from INR 22,434 million in FY22 to INR 28,120 million in FY23, representing a year-on-year (YoY) growth of 25.3%.

Cost of Goods Sold:

The cost of goods sold also increased, from INR 16,262 million in FY22 to INR 21,409 million in FY23, indicating a YoY growth of 31.7%.

Gross Profit:

Despite the increase in revenues and cost of goods sold, Dodla Dairy managed to achieve a gross profit of INR 6,711 million in FY23, compared to INR 6,172 million in FY22, reflecting a YoY growth of 8.7%.

Gross Profit Margin:

However, the gross profit margin declined from 27.5% in FY22 to 23.9% in FY23, a decrease of 364 basis points (bps). This is primarily due to increase in raw material prices during the year.

Expenses:

Employee expenses increased by 16.3% from INR 1,024 million in FY22 to INR 1,191 million in FY23, while other expenses rose by 18.6% from INR 3,040 million to INR 3,607 million during the same period.

EBITDA:

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) decreased by 9.2% from INR 2,107 million in FY22 to INR 1,913 million in FY23.

EBITDA Margin:

The EBITDA margin also decreased from 9.4% in FY22 to 6.8% in FY23, representing a decline of 259 bps. as mentioned above due to increase in raw material prices during the year.

Other Income:

Dodla Dairy experienced a significant increase in other income, from INR 137 million in FY22 to INR 230 million in FY23, indicating a YoY growth of 67.5%.

EBT (Earnings Before Tax):

EBT decreased by 8.3% from INR 1,656 million in FY22 to INR 1,518 million in FY23.

PAT (Profit After Tax):

The companys net profit after tax decreased by 7.9% from INR 1,328 million in FY22 to INR 1,223 million in FY23.

PAT Margin:

The PAT margin declined from 5.9% in FY22 to 4.3% in FY23, reflecting a decrease of 157 bps. as mentioned above due to increase in raw material prices during the year and partially benefiting from lower finance cost and higher other income.

EPS (Earnings Per Share):

The earnings per share dropped by 8.3% from INR 22.24 in FY22 to INR 20.39 in FY23.

Assets:

Non-current Assets: The non-current assets have shown a consistent upward trend over the years, with the companys focus on long-term investments. Starting from INR 5,374 million in FY19, it has increased to INR 5,697 million in FY20 and remained relatively stable at INR 5,703 million in FY21. There was a significant increase to INR 6,869 million in FY22 and further growth to INR 7,775 million in FY23 on account of investing in non-current assets such as property, plant, and equipment to support its operations and future growth.

Current Assets: The current assets have also shown a positive growth trend, indicating effective management of short-term assets. Starting from INR 2,061 million in FY19, current assets increased to INR 2,229 million in FY20 and further grew to INR 4,019 million in FY21. However, there was a slight decline to INR 4,015 million in FY22, followed by another increase to INR 4,738 million in FY23. Dodla Dairy has been able to effectively manage its working capital by optimising cash, inventory, and receivables.

Capex:

We Spent INR 1,298 million during the FY23, mainly towards Automation, Milk Analyzers and Solar system and etc.

Review of Sales

Average milk sales during FY23:

Dodla Dairy witnessed a significant increase in average milk sales during FY23. The average milk sales were reported at 10.7 LLPD compared to 9.3 LLPD in FY22, representing a YoY increase of 14.5%. This growth indicates a positive trend in the companys core product.

Revenue from value-added products (VAP) and fat & fat-based products:

Dodla Dairy experienced a substantial YoY increase in revenue from value-added products and fat & fat-based products. The revenue generated from these segments reached ^7,408 million during FY23, reflecting a growth of 26.0% compared to the previous year.

This indicates successful market penetration and acceptance of their diversified product portfolio.

Curd sales during FY23:

Dodla Dairys curd sales also exhibited a positive growth trajectory during FY23. The company sold 323.8 MTPD of curd, representing a 20.0% increase compared to FY22 when the sales stood at 269.8 MTPD. This growth indicates the effectiveness of Dodla Dairys strategies in capturing market demand for curd.

Performance during recent quarters:

The average milk sales LLPD during the recent quarters provides insights into the companys quarterly performance. The sales figures were as follows:

Q4FY23

10.8 LLPD

Q3FY23

10.5 LLPD

Q2FY23

10.9 LLPD

Q1FY23

10.4 LLPD

Q4FY22

9.7 LLPD

Consistent increase in average milk sales throughout the quarters, with a peak in Q2FY23. This indicates a positive growth trajectory and a well- managed sales strategy.

VAP sales: The revenue generated from value-added products (VAP) in INR million shows the following figures for each quarter:

Rs. million

Q4FY23

1,858

Q3FY23

1,533

Q2FY23

1,727

Q1FY23

2,290

Q4FY22

1,536

VAP sales experienced seasonal fluctuations during the quarter, with a significant increase in Q1FY23. However, overall revenue from VAP showed a positive YoY growth during FY23.

Performance during the last five years:

Average Milk Sales (LLPD):

Rs. million

FY23

10.7 LLPD

FY22

9.3 LLPD

FY21

8.5 LLPD

FY20

9.9 LLPD

FY22

8.6 LLPD

Dodla Dairy has shown a mixed sales performance in terms of average milk sales over the past five years. There was a significant increase from FY19 to FY20, followed by a slight decrease in FY21 due to Covid. However, the company experienced consecutive growth in FY22 and FY23, with a notable increase in FY23 compared to the previous years.

Curd Sales (MTPD):

Rs. million

FY23

323.8 MTPD

FY22

269.8 MTPD

FY21

223.8 MTPD

FY20

292.5 MTPD

FY19

244.4 MTPD

Curd sales for Dodla Dairy exhibited fluctuating performance over the past five years. There was an increase from FY19 to FY20, followed by a decline in FY21 due to covid. However, the company experienced growth in FY22 and FY23, with a significant increase in FY23 compared to the previous years.

VAP Sales (INR Million):

Rs. million

FY23

7,408 Mn

FY22

5,878 Mn

FY21

4,865 Mn

FY20

5,794 Mn

FY19

4,579 Mn

During the last 5 years Dodla Dairys revenue from value-added products (VAP) showcased a mixed performance i.e subdued performance in FY21 due to covid lockdowns and subsequent disruptions in retail and Horeca segements. However, the company rebounded with an increase in FY22 and FY23, with a significant rise in FY23 compared to the previous years.

Review of Overseas Operations:

Dodla Dairy in the recent years has expanded its operations in Africa and currently operates in Uganda and Kenya through its subsidiaries

Lakeside Dairy Limited and Dodla Dairy Kenya Limited. In Africa, Dodla Dairy markets its products under the brands "Dairy Top" and "Dodla +. The company offers a diverse product portfolio, including milk, yogurt with different flavors, ghee, paneer, cheese, and UHT milk.

One of the key advantages of Dodla Dairys operations in Africa is the higher margins it enjoys due to limited competition and a constrained supply of processed milk. This favorable market condition allows the company to achieve better profitability compared to other dairy players in the region.

Dodla Dairy also benefits from the abundant grazing lands available in Africa, which facilitates easier dairy farming as a livelihood for many. This advantage helps ensure a consistent supply of milk.

The business model implemented by Dodla in Africa is similar to its integrated model in India. This approach involves engaging in various stages of the dairy value chain, from procuring to processing and distributing dairy products. By controlling different aspects of the value chain, Dodla can maintain quality standards, streamline operations, and ensure efficient supply chain management.

The East African market, including countries like Kenya and Uganda, offers promising prospects for dairy companies like Dodla. With a growing population and increasing demand for dairy products in the region, it presents an attractive market for expansion. Dodla Dairy aims to capitalise on this favorable market environment by leveraging its product portfolio, established brand presence, and efficient business model.

By establishing subsidiaries and marketing its products under recognised brands in Kenya and Uganda, Dodla Dairy has positioned itself to tap into the rising demand for dairy products in Africa. The companys commitment to quality, innovation, and customer satisfaction enables it to compete effectively and capture a significant market share in East Africas dairy industry.

Review of Operations - Feed Business

The feed business of Dodla Dairy, known as Orgafeed, offers a range of agricultural and livestock-Related activities, is procure raw material, manufacture cattle feed and sell the same through their network of milk collection centres of 7,600+ in numbers.

One of the key highlights of Orgafeed is its state-of-the-art manufacturing facilities located in Kadapa, Andhra Pradesh. These modern facilities are equipped to produce high-quality cattle feed to meet the demands of the market effectively.

Another notable aspect of Orgafeeds operations is its direct sales approach, selling feed directly to farmers through its extensive procurement network. This approach ensures a streamlined supply chain and enables the company to maintain a strong relationship with its customers, the farmers. By directly engaging with farmers, Orgafeed can understand their needs better and provide tailored feed solutions to optimise livestock health and productivity.

Furthermore, the partnership with various veterinarians to provide services to farmers for their milch animals demonstrates Dodla Dairys commitment to supporting the wellbeing and health of the livestock.

By collaborating with experts in veterinary care, Orgafeed not only provides high-quality feed but also offers additional value-added services to enhance animal health and productivity.

Overall, based on the provided information, Dodla Dairys feed business, Orgafeed, seems to have a strong manufacturing infrastructure, a direct sales approach, and a focus on customer support through veterinary tie-ups

Review of Financial Performance

Orgafeed has shown a strong growth trajectory in operating revenue, EBITDA figures.

Revenue (In INR Million)

FY23

569

FY22

420

FY21

220

EBITDA (In INR Million)

FY23

53

FY22

51

FY21

38