Dodla Dairy Ltd Management Discussions

Annexure - VIII

Competitive Dynamics of the Indian Dairy Sector

The Indian dairy industry is one of the largest and most diverse sectors globally, with a significant impact on the countrys economy and the livelihood of millions of farmers. Analyzing this industry through the lens of Michael Porters Five Forces Framework provides insights into its competitive dynamics and strategic challenges. The five forces include the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and industry rivalry.

Threat of New Entrants

Barriers to Entry: Moderate to High

Capital Requirements: Establishing dairy farms, processing units, and distribution networks requires substantial investment.

Regulatory Hurdles:

Compliance with food safety standards, quality regulations, and obtaining necessary certifications can be complex.

Brand Loyalty: Established players like Amul, Mother Dairy, and Nestl? have strong brand recognition and customer loyalty, making it challenging for new entrants to gain market share.

Economies of Scale: Larger players benefit from economies of scale in procurement, processing, and distribution, making it hard for smaller new entrants to compete on cost.

Threat of Substitutes

Substitute Products: Moderate

Alternative Products: Substitutes include plant-based milk (soy, almond, oat milk), which is gaining popularity, especially among health-conscious and lactose-intolerant consumers.

Price Sensitivity: Traditional dairy products are generally more affordable than plant-based alternatives, which limits the threat to some extent.

Consumer Preferences: In India, dairy products have deep cultural and culinary significance, reducing the overall impact of substitutes.

Bargaining Power of Buyers Buyer Power: Moderate to High

Consumer Base: The Indian market is highly price-sensitive, with a large portion of the population being price-conscious buyers.

Retail Chains and Cooperatives: Large retail chains and cooperative societies can exert significant pressure on prices and quality standards.

Product Differentiation: Differentiation through value-added products (Paneer, Cheese, Lassi, Yogurt, Flavored milk) and organic or A2 milk can reduce buyer power by catering to niche segments willing to pay a premium.

Bargaining Power of Suppliers Supplier Power: Low to Moderate

Fragmented Supply Base: The majority of dairy farmers in India are smallholders with limited bargaining power individually.

Cooperative Model:

Cooperatives and private dairies aggregate supply, giving farmers more leverage and ensuring better prices and support.

Input Costs: Fluctuations in feed, fodder, and veterinary care costs can impact the cost structure but typically do not significantly empower individual suppliers.

Industry Rivalry

Competitive Rivalry: High

Number of Competitors: The industry is highly fragmented with numerous local and regional players alongside national giants.

Product Differentiation: Intense competition exists in various product segments, with companies constantly innovating to offer differentiated products.

Market Growth: While the dairy market in India is growing, competition for market share remains fierce due to the presence of established brands and new entrants.

Price Wars: Frequent price competition can erode margins, especially in commoditized products like milk and basic dairy items.

Milk Production in India

Total Milk Production:

India produced an impressive 230.58 million tonnes of milk during the fiscal year 2022-23, securing its position as the leading milk producer globally. According to the Food and Agriculture Organization (FAO), India ranks first in the world in terms of total milk production.

Growth Rate:

Milk production in India has increased in 2022-23 significantly by 3.83% compared to the previous year, 2021-22. This growth highlights the effectiveness of ongoing initiatives and improvements in the dairy sector.

Animal Yield:

The average milk yield for exotic and crossbred cattle is 8.55 Litres per day per animal, while for indigenous and non-descript cattle, it is 3.44 Liters per day per animal.

Milk Production by Animal Type:

Exotic and crossbred cattle production increased by 3.75% in 2022-23. Production for indigenous and non-descript cattle increased by 2.63% in the same period. Buffaloes also saw an increase in production by 3.69%. Indigenous buffaloes contribute 31.94% to the total milk production; crossbred cattle contribute 29.81%, Indigenous cattle 10.73%, non-descript cattle 9.51%, non-descript buffaloes 12.87%, goats 3.30%, and exotic cows 1.86%.

Animal Type	Milk Production
Indigenous Buffaloes	31.94%
Crossbred Cattles	29.81%
Indigenous Cattles	10.73%
Non-descript Catte	9.51%
Non-Descript Buffaloes	12.87%
Goats	3.30%
Exotic Cows	1.86

Top Milk Producing States:

Uttar Pradesh leads with 15.72% of the total milk production, followed by Rajasthan with 14.44%, Madhya Pradesh with 8.73%, Gujarat with 7.49%, and Andhra Pradesh with 6.70%. Collectively, these states contribute 53.08% of the total milk production in the country.

State	Milk Production
Uttar Pradesh	15.72%
Rajasthan	14.44%
Madhya Pradesh	8.73%
Gujarat	7.49%
Andhra Pradesh	6.70%

Trends and Growth Patterns:

Milk production has consistently increased over the years. From 222.07 million tonnes in 2021-22, production rose to 230.58 million tonnes in 2022-23. The positive annual growth rate is a testament to the effective governmental initiatives and sector development strategies in place. States such as Karnataka, West Bengal, Uttar Pradesh, Tripura, Madhya Pradesh, Chhattisgarh, Jharkhand, and Maharashtra have exhibited growth rates surpassing the national average of 3.83% in 2022-23.

Impact on Dairy Processing:

The steady increase in milk production in India significantly benefits the dairy processing industry. With a higher volume of raw milk available, dairy processors can scale up their operations, ensuring a steady supply of milk for conversion into various value-added dairy products such as Ghee, butter, curd, sweet, flavoured milk and milk powder. This growth not only meets the rising domestic demand but also enhances Indias potential in the global dairy market. Moreover, the consistent supply and improved quality of milk enable innovation and diversification in dairy products, catering to diverse consumer preferences and expanding market reach.

Union Budget 2024

In the 2024 budget, Honble Finance Minister outlined extensive plans to bolster Indias dairy sector, recognizing the nations status as the worlds leading milk producer.

The budget addressed challenges such as low milch-animal productivity by building on the success of existing initiatives like the Rashtriya Gokul Mission, the National Livestock Mission, and Infrastructure Development Funds for dairy processing and animal husbandry.

Key measures include a continuation of the Animal Husbandry Infrastructure Development Fund (AHIDF) under the Infrastructure Development Fund (IDF), with an allocation of _29,610.25 crore for the next three years until 2025–26. This scheme aims to incentivize investments in various aspects of the dairy industry.

Additionally, the government has committed to a 3% interest subvention for eight years to support dairy cooperatives in their modernization efforts. Significant investments are planned to expand dairy processing infrastructure, with an estimated _11,500 crore to be invested over the next 2–3 years.

Review of Operations

Analysis of the companys Milk Procurement Locations:

Dodla Dairy, procures milk from several states, including Tamil Nadu, Telangana, Andhra Pradesh, Karnataka, and Maharashtra. Analysing milk production in these states based on the MoFAHD provides insights into the companys backward linkage and value chain.

Tamil Nadu: In 2022-23, Tamil Nadu produced 10.32 million tonnes of milk, up from 7.56 million tonnes in 2016-17. This steady increase indicates a strong supply base for Dodla Dairy. The states consistent growth in milk production ensures a reliable and substantial quantity of raw milk, crucial for Dodla Dairys processing operations. The availability of quality milk supports the company in maintaining high standards for its dairy products.

Telangana: Telanganas milk production reached 5.85 million tonnes in 2022-23, showing a progressive rise from 4.68 million tonnes in 2016-17. This growth enhances Dodla Dairys procurement capabilities in the region. The increasing production allows Dodla Dairy to secure more milk, improving supply chain efficiency and reducing dependency on distant suppliers.

Andhra Pradesh: In 2022-23, Andhra Pradesh produced 15.45 million tonnes of milk, up from 12.18 million tonnes in 2016-17. This substantial increase underscores the states importance in Dodla Dairys supply chain. With Andhra Pradesh being one of the top milk-producing states, Dodla Dairy benefits from a large volume of milk, facilitating economies of scale and consistent product availability.

Karnataka: Karnatakas milk production reached 12.83 million tonnes in 2022-23, a significant rise from 6.56 million tonnes in 2016-17. This rapid growth supports Dodla Dairys procurement strategy, providing ample supply for processing needs. The increased production in Karnataka enhances the companys ability to meet market demand and maintain a stable supply chain.

Maharashtra: Maharashtra produced 15.04 million tonnes of milk in 2022-23, up from 10.40 million tonnes in 2016-17. This growth solidifies Maharashtra as a key supplier for Dodla Dairy. The states rising production levels ensure a consistent and substantial supply of raw milk, essential for the companys processing and product diversification efforts.

Milk Procurement in FY24 By Dodla

Dodla Dairys milk procurement from FY 20 to FY 24 showcases a dynamic and robust growth trajectory, reflecting the companys resilience and strategic capabilities in navigating market challenges and leveraging expansion opportunities. Over this five-year period, Dodla Dairys milk procurement began at 11,28,042 litres in FY 20. This figure serves as a baseline before any significant disruptions impact the dairy sector. In FY 21, there was a noticeable decline in procurement to 10,26,160 litres due to the adverse effects of the COVID-19 pandemic. This period was challenging for many dairy companies, including Dodla Dairy, due to disrupted supply chains, reduced demand in certain sectors, and logistical constraints.

Despite these challenges, Dodla Dairy demonstrated a strong recovery starting in FY 22, with procurement volumes increasing to 11,73,468 litres. This 14.3% rebound from the previous years dip highlights the companys effective adaptation to post-pandemic conditions and its efforts to stabilize and restore its supply chain operations. The upward trend continued into FY 23, with procurement volumes rising to 12,85,016 litres, representing a 9.5% increase. This steady growth reflects ongoing improvements in procurement strategies and possibly an increase in market demand. The most significant growth occurred in FY 24, where procurement volumes surged to 15,72,106 litres, marking a substantial 22.4% increase from FY 23. This impressive growth indicates that Dodla Dairy not only recovered from previous challenges but also significantly expanded its procurement network and capabilities. Factors contributing to this surge could include enhanced procurement mechanisms, strategic expansion into new markets, improved relationships with dairy farmers, and increased production capacities.

Milk Procurement Logistics

Total Milk Chilling Units / RMRD:

The number of Milk Chilling Units/ RMRD has gradually increased over the years. From 86 in FY20, it reached 150 in FY24. This growth reflects Dodla Dairys efforts to expand its procurement infrastructure and reach more areas for milk collection.

Total Procurement Transport Vehicles:

The total procurement of transport vehicles stands at 951 For FY24

Milk Collection Centres:

The number of Dodla Milk Collection Centers has shown a significant upward trend over the years. In FY20, the number increased to 6,285 from 5,581 in FY19. This growth continued in FY21, reaching 6,771, and peaked at 7,837 in FY22. However, there was a slight decline to 7,602 in FY23 due to various factors, including rationalisation based on market and operational considerations.

For FY24, the number of Dodla Milk Collection Centers is 7,879, reflecting ongoing efforts to optimize and expand the milk collection network.

Milk & Value Added Products

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

Liquid Milk Category (5 Variants):

Dodla offers fresh milk in various quantities catering to different customer needs.

Value Added Products

Butter:

Dodla produces high-quality butter, a versatile dairy product used as a spread and for cooking purposes. Ghee: Ghee, a clarified butter essential in Indian cuisine, is a key product in Dodlas lineup.

Paneer:

Dodla offers paneer, or Indian cottage cheese, which is a popular ingredient in numerous Indian dishes.

Curd:

Dodlas curd, or yogurt, is a creamy, fermented dairy product enjoyed in various culinary applications. Flavored Milk: Dodla produces sterilized flavored milk in a variety of flavors such as chocolate, strawberry, pista, and badam. This product is especially popular among children.

Doodh Peda:

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

Ice Cream:

Dodla produces a wide array of ice cream flavours and formats, providing a delightful customer experience Buttermilk/Sweet Lassi: Dodla offers refreshing buttermilk, made from fermented milk, and sweet lassi, a sweetened yogurt-based drink, both of which are popular traditional beverages.

Distribution Centers

Dodla Dairy operates an extensive distribution network to ensure the efficient delivery of its products. This network includes over 44 sales offices and more than 2,650+ agents, facilitating widespread market reach. Additionally, the company collaborates with over 1,900+ distributors specialising in milk and milk products, ensuring that Dodlas offerings are readily available to consumers. Dodla employs 604 DRPs (Dodla Redistribution Points) and has established a presence in 67 modern trade outlets to further enhance its distribution capabilities. This robust distribution framework underscores Dodla Dairys commitment to maintaining a seamless supply chain and meeting the growing demand for its diverse range of dairy products.

Processing Plants

The total milk processing capacity across all 14 plants in India is 20,13,510 litres per day (LPD). This distribution network enables Dodla Dairy to efficiently process and distribute milk products, catering to a diverse consumer base across multiple states.

Andhra Pradesh (AP):

Nellore: 2,22,300 LPD

Penumur: 1,00,000 LPD

Palamaner: 3,80,000 LPD

Sattenapalle: 46,700 LPD

Badvel: 50,000 LPD

Kurnool: 70,000 LPD

Rajamundry: 1,43,600 LPD

Karnataka (KA):

Tumkur: 30,000 LPD

Indragi: 2,00,000 LPD

Kirwatti: 2,00,000 LPD

Tamil Nadu (TN):

Dharmapuri: 1,01,000 LPD

Vedasundur: 50,000 LPD

Batlagunda: 95,000 LPD

Telangana (TS):

Hyderabad: 3,24,910 LPD

Geographic Expansion:

Kenya Plant: Dodla Dairy commenced commercial production at its new dairy plant in Kenya, with a capacity of 1,00,000 liters per day. This new facility is expected to contribute significantly to the companys Africa segment revenues in the coming years.

Orgafeed Expansion:

The capacity of Orgafeed, Dodla Dairys cattle feed business, was increased fivefold to 480 metric tonnes per day (MTPD) during FY24. This expansion strengthens ties with dairy farmers, leading to higher productivity and profitability.

Review of Financial Performance

Revenue

Dodla Dairy experienced a significant revenue increase, from Rs.28,120 million in FY23 to Rs.31,255 million in FY24, representing a year-on-year (YoY) growth of 11.1%. This growth was driven by the managements continuous effort towards higher procurement, expanded distribution, and a focused strategy on Value-Added Products (VAP).

Cost of Goods Sold

The cost of goods sold also increased, from Rs.21,409 million in FY23 to Rs.22,821 million in FY24, indicating a YoY growth of 6.6%. The increase can be attributed to higher volume sales, increased raw material costs and elevated production expenses.

Gross Profit

The increase in revenues and cost of goods sold, Dodla Dairy achieved a gross profit of Rs.8,433 million in FY24, compared to Rs.6,711 million in FY23, representing a YoY growth of 25.7%. This significant increase reflects the companys ability to manage costs effectively and improve profitability.

Gross Profit Margin

The gross profit margin improved from 23.9% in FY23 to 27.0% in FY24, representing an improvement of 312 basis points (bps). This improvement is due to better cost management and operational efficiencies.

Expenses

Employee expenses increased by 14.2% from Rs.1,191 million in FY23 to Rs.1,360 million in FY24, while other expenses increased by 16.0% from Rs.3,607 million to Rs.4,184 million over the same period. The rise in expenses reflects higher operational costs and investments in branding, Inventory and in expanding the companys capabilities.

EBITDA

EBITDA surged by 51.0% from Rs.1,913 million in FY23 to Rs.2,888 million in FY24. This substantial growth demonstrates the companys improved operational efficiency and profitability for the fiscal year.

EBITDA Margin

The EBITDA margin also increased from 6.8% in FY23 to 9.2% in FY24, representing an improvement of 244 bps. The margin improvement can be attributed to better cost control and higher revenues from value-added products.

Other Income

Dodla Dairy experienced a significant increase in other income, from Rs.230 million in FY23 to Rs.274 million in FY24, indicating a YoY growth of 19.4%. This increase in other income positively contributed to the companys overall financial performance.

EBT (Earnings Before Tax) and PAT (Profit After Tax)

EBT increased by 67.9% from Rs.1,289 million in FY23 to Rs.2,164 million in FY24. The companys net profit after tax also increased by 36.4% from Rs.1,223 million in FY23 to Rs.1,667 million in FY24. These increases indicate improved profitability for Dodla Dairy during the fiscal year.

PAT Margin

The PAT margin increased from 4.3% in FY23 to 5.3% in FY24, reflecting an improvement of 99 bps. The increase can be attributed to higher gross profit margins and efficient cost management.

EPS (Earnings Per Share)

The earnings per share increased by 36.1% from Rs.20.39 in FY23 to Rs.27.75 in FY24. This improvement reflects the companys enhanced profitability and operational efficiency.

Current Assets

The current assets have shown a positive growth trend, reaching Rs.4,739 million in FY23 and Rs.7,084 million in FY24. Effective management of short-term assets indicates the companys ability to optimize cash, inventory, and receivables.

Capex

Dodla Dairy invested Rs.1,065 million during FY24, mainly towards automation, New Milk Chilling

Units, Freezers , and solar systems. In FY25, the company continued its investment in infrastructure improvements, amounting to Rs.1,008 million.

Average Milk Sales

Dodla Dairy witnessed a significant increase in average milk sales, with an average of 10.9 LLPD in FY23 compared to 10.7 LLPD in FY24, representing a YoY growth of 1.6%. 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, reaching Rs.8,618.8 million in FY24, reflecting a growth of 16.3% compared to Rs.7,408 million in FY23. This increase indicates successful market penetration and acceptance of their diversified product portfolio.

Curd Sales

Curd sales exhibited a positive growth trajectory during FY24, with 349.9 MTPD, representing an 8.1% increase compared to 323.8 MTPD in FY23. This growth reflects the effectiveness of Dodla Dairys strategies in capturing market demand for curd.

Internal Control Systems

Key components of our internal control system include:

Risk Assessment: We regularly identify and assess risks across various business processes and implement appropriate mitigation measures. This proactive approach helps in early detection and correction of potential issues. Control Activities: We have established comprehensive policies and procedures that ensure proper authorisation, approval, and reconciliation of transactions. These control activities are embedded in our daily operations to maintain high accountability standards.

Information and Communication: Effective communication channels ensure that relevant information flows across all levels of the organisation. This facilitates timely decision-making and enhances the overall effectiveness of our internal controls.

Monitoring: Internal controls are continuously monitored through regular internal audits and management reviews. Our internal audit team, supported by external auditors, performs independent evaluations to ensure adherence to established controls and recommends improvements where necessary.

Compliance: We are committed to complying with all statutory and regulatory requirements. Our internal control system is regularly reviewed and updated to align with changes in regulations and industry best practices.

Our Board of Directors and

Governance Committees oversee the internal control system, ensuring its adequacy and effectiveness. Through continuous improvements and rigorous control enforcement, we strive to enhance operational efficiency and safeguard stakeholder interests.

Maintaining a robust internal control system, Dodla Dairy ensures sustainable growth, reliable financial reporting, and high transparency and accountability in our business operations by maintaining a robust internal control system.