CCL PRODUCTS INDIA LTD: THE PERFECT CUP OF COFFEE !!

Scrip Code: 519600 / CCL 

CMP:  Rs. 183.70; Market Cap: Rs. 2,443.72 Cr; 52 Week High/Low: Rs. 222.50 / Rs. 60.75

Total Shares: 13,30,27,920 shares; Promoters : 5,92,49,243 shares – 44.54 %; Total Public holding : 7,37,78,677 shares – 55.46 %; Book Value: Rs. 26.65; Face Value: Rs. 2.00; EPS: Rs. 5.61; Dividend: 60.00 % ; P/E: 32.85 times; Ind. P/E: 30.84; EV/EBITDA: 10.63.

Total Debt:  Rs. 240.39 Cr; Enterprise Value: Rs. 2,650.20 Cr.

CCL PRODUCTS INDIA LIMITED: CCL Products India Ltd was incorporated on December 1961 and is based in Hyderabad, India. The company was earlier known as Sahayak Finance & Investment Corporation Limited and changed its name to Continental Coffee Limited in the year 1993 reflecting the change of its business from hire purchase financing to coffee related business. The company is predominantly engaged in exporting and manufacturing of Soluble Coffee known as Instant Coffee. The company came out with an IPO of about 27,00,000 lakh shares of Rs. 10 each at a premium of Rs. 10 per share in August, 1995. The company had split the face value of its share from Rs. 10 to Rs. 2 in 3 July 2013 and on same date it also declared bonus in ratio of 1:1. The company, CCL Products (India) Limited, together with its subsidiaries, manufactures and sells coffee products in India. Its coffee products include pure soluble coffee products comprising spray dried coffee powder and granules, freeze dried coffee, and freeze concentrate liquid coffee; decaffeinated coffee; flavoured coffees in vanilla, cinnamon, caramel, chocolate, and hazelnut flavours; certified coffees; and chicory-coffee mix. The company provides its products in various packs, such as jars, cans, sachets-pouches, bag-in boxes, drums, and bulk boxes under the brand name of Continental Spéciale, Continental Premium, and Continental Supreme. CCL Products (India) limited also exports its products to approximately 80 countries worldwide. Company also has its own manufacturing process units for Green beans storage, cleaning and grading, roasting and grinding unit, Extraction/Clarification unit, Aroma recovery and Evaporation unit, Spray drying, Agglomeration, Freeze-drying unit, Freeze Concentrated Liquid Coffee manufacturing unit, and Packaging unit. CCL Products also has an Export Oriented Unit, with the ability to import green coffee into India from any part of the world, and export the same to any part of the world, free of all duties. CCL Products exports to over 80 countries. CCL Products' state-of-the-art Coffee Manufacturing Plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India. The company is also certified with ISO 9001:2008, HACCP and BRC Quality Management System (QMS), and has achieved “Trading House” status. CCL Products is also certified approved to produce Organic Coffee, Rain Forest Alliance Coffee and Fair Trade Coffee, in any combination, by the relevant organizations. The company’s Coffee Manufacturing Plant also holds Kosher and HALAL Certification. CCL Products India Ltd can be locally compared with Tata Global Beverages, Bombay Burmah Trading Co, Mcleod Russel (India) Ltd, Jay Shree Tea & Industries Ltd, Nestle India, Assam Company India Ltd, Goodricke Group Ltd, Warren Tea Ltd, B&A Ltd, Upper Ganges Sugar & Industries Ltd, Tata Coffee Ltd, Hindustan Unilever Ltd and Globally with Unilever PLC of UK, Suntory Beverages & Foods Limited of Japan, BrasilAgro of Brazil, B& G Foods Inc of USA, Premium brands holding corporation of Canada, Ten Peaks Coffee Com of USA, Farmer Bros. Co. of USA, Keurig Green Mountain Inc of USA, Growers Direct Coffee Company Inc of USA,   Power Root Berhad of Malaysia, Unicafe Inc of Japan, Coffee Holding Co. Inc of USA. Key Coffee Inc of Japan.

Investment Rationale:

CCL Products (India) is among the world’s leading and India’s largest processor and exporter of instant coffee. It exports to more than 67 countries. It has 10 % market share globally in instant coffee exports. Its top big customers include Israel’s Strauss Coffee B.V. and Germany’s Deutsche Extrakt Kaffee. CCL is one of the very few companies globally that have successfully scaled up this business and increased its capacity near about 10 times since inception in 1995, and that too without equity dilution. CCL Products (India) Ltd.’s capacity expansion in Vietnam has brought CCL’s name to the world’s second-biggest grower of the beans list. Any good forecasts for record coffee crops in Vietnam and India will guarantee CCL Products raw materials and bolster efforts to win more buyers for instant coffee supplies which are currently dominated by Nestle SA and Kraft Foods Group Inc. CCL was the largest importer of coffee from Vietnam for 15 years and so Vietnam government offered concessions for setting up plant there. The Vietnam plant offers four benefits: Logistical advantage; better raw material availability; favourable duty structure and no income-tax for first four years and tax exemption of 50 % for next five years. Vietnamese operations are expected to account for almost 50 % of the profit by 2016-17. CCL added one large client in 3QFY15 in Europe for freeze dried coffee. The product enjoys super premium in nature as the company is using 100 % Indian coffee. As per the management, the client will provide additional business in other countries as well. It will take one year for the client to stop purchases from its existing supplier and ramp up volume from CCL. For CCL, 3Q and 4Q are better quarters than 1Q and 2Q on account of seasonality. The company has registered a volume of 15,000 ton from Indian operations which is 100 % capacity utilisation and 4,600 ton from Vietnam plant which is 46 % capacity utilisation in FY15. As per the management, total volume is expected at 25,000 ton in FY16. Vietnam plant’s volume is expected to increase 63 % from 4,600 ton in FY15 to 7,500 ton which will be 75 % capacity utilisation and Indian operations’ volume is likely to increase 16 % from 15,000 ton to 17,500 ton. CCL is expanding its Indian operations from 15,000 ton to 20,000 ton at a cost of Rs. 20 Cr through brownfield expansion and is expected to complete it by December 2015. CCL’s Swiss plant operates at sub-optimal utilisation level because of non-competitive pricing of supplies from Switzerland to the European Union. Import duty levied by the EU on Swiss coffee is 9.0 % whereas only 3.3 % is levied on coffee supplied from India. CCL is negotiating with Swiss government on the terms of duty payment, wherein CCL will import bulk coffee from its Indian plant by paying 3.3 % duty, do value addition in Switzerland and thereby get entitled to pay the balance 6 % duty on value addition, rather than on basic coffee. The company has sorted out the tax problem pertaining to Switzerland plant. As of now, CCL is paying tax on value-added products. Utilisation of the Switzerland plant is expected to improve and it incurred Rs. 3 Cr loss in FY15 will turn to positive by FY16. CCL gave marketing rights to a local Swiss authority for products from Switzerland plant. CCL expects capacity utilisation level at its Switzerland plant to improve to 75 % with single-shift capacity of 1,000tn in the next one year. Because of higher costs, liquid coffee is consumed only by the Japanese population. Currently, Japan consumes 10,000-20,000 ton of liquid coffee and out of this 50 % is produced locally while the rest is sourced from Brazil. The shifting of liquid coffee operations from Switzerland to India is complete and trial production started in 1QFY15. CCL expects some revenue from liquid coffee from December 2015 onwards and capacity utilisation to increase to 50 % in the next two years. To double the capacity at Vietnam plant from 10,000 ton to 20,000 ton, CCL has to incur incremental capex of US$10mn-US$12mn as against original capex of US$32mn. Once finalised, it will take one year to double the capacity. CCL is expected to finalise doubling of the capacity at its Vietnam plant once its existing operations achieve 75 % to 80 % capacity utilisation, tentatively by FY17. As per the management, US imports 80,000 ton to 100,000 ton of instant coffee, while CCL sells only 2,000 ton. The imports are mostly from Brazil, Mexico and Ecuador. CCL’s associates in the US have more than 30 years and have gained substantial experience. CCL will be conducting market research in the US over the next six months to set up a packaging facility where its coffee will be shipped from Vietnam. Capex required for the same is the range of US$8mn- US$10mn. The location will be finalised in the next six months. 

India’s coffee market is estimated at Rs. 3,000 Cr with Nestle India and Hindustan Unilever Ltd dominating with a combined branded market share of more than 65 %. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. Consumption in India is seen expanding to 2.5 million bags of 60 kilograms each by 2020 from 1.92 million bags in 2013. The world coffee market is set for the largest shortage in nine years as drought cuts the crop in Brazil. Demand will exceed production by 8.8 million bags in the 12 months starting October. Domestic consumption has increased, and this gives CCL the advantage of entering the Indian market as a brand and expects to garner revenue of Rs. 300 Cr in five years. CCL currently sells 1,000 ton of coffee in domestic market including super markets and does institutional sales as well as branded product sales. CCL did a soft launch of a product in Andhra Pradesh and the product was widely accepted. The next target which CCL is eyeing to sell its brands is North India, which is the leading instant coffee market after South India. To increase visibility, CCL has also started selling coffee under the Continental brand to institutions like hotels, airlines etc. Even the chefs of hotels are recommending the Continental brand. The company is also in the process of setting up a marketing team in the next six months so as to push the sale of products aggressively. As the brand is making reasonable profit now, the management is planning to increase advertisement spending. CCL is yet to hire senior people for its marketing team. It has hired market research and other consultants. CCL is planning to develop two separate brands and also two separate teams for marketing - one for chicory and one for coffee. As per the management, once the branding exercise is complete, senior members in the marketing team will be hired and also new states will be targeted. The company is now targeting northern cities like Punjab, Uttar Pradesh, Lucknow, Delhi, Allahabad etc. As per the management, in the next six months, Continental brand will be made available in Delhi market. As per management, the product is widely accepted in AP, Allahabad, some other parts of North India and also South India.

Outlook and Valuation: 

CCL Products India ltd is India’s largest private label in instant coffee, supplying to premium brands in over 80 countries. CCL Products also have one of the world’s largest single-location plants and is considered amongst the top three private label manufactures in global instant coffee. Coffee processing is a niche and highly profitable industry, and has high entry barriers. Coffee processing is not an easy business, as it is very important to get the right blend. Further, the taste & preference varies region-wise and culture-wise. Experience and relationships is Key to success, and the model is not easily replicable. It takes three to five years to win over a client and establish one’s credentials. CCL Products is one of the very few companies globally that have successfully scaled up this business. CCL’s USP is its technology, which it acquired from Brazil, allowing it to use low grade of green (or raw) coffee beans to produce very high quality instant coffee. CCL is building a market for coffee in Africa and at present, it sells 1,200 ton there. The company plans to set up 3,000 ton plant at a cost of Rs. 50 Cr, once the sales top 2,000 ton to 2,500ton. CCL officials are keen to invest in Africa as it has two advantages: Raw material there is available in plenty and no duty is levied in African countries and secondly, coffee can be exported to this country without any duty. Exports to South Africa attracts 35 % import duty currently. As a result, a significant part of coffee exports from India and other countries to West Africa is taking place illegally currently. In order to avoid this risk, CCL sells coffee to Indian exporters-trading houses-branded players who are selling coffee in Africa. Once the duty structure in the African region is streamlined, CCL will set up a plant there. CCL currently sells 1,000 ton of coffee in the domestic market including super markets, to Hindustan Unilever, and also via branded sales. CCL did a soft launch of a product in Andhra Pradesh and the product was widely accepted. The next target which CCL is eyeing to sell its brands is North India, which is the leading instant coffee market after South India. The company is targeting northern cities like Punjab, Uttar Pradesh, Lucknow, Delhi, Allahabad etc. As per the management, in the next six months, Continental brand will be made available in the Delhi market. To increase visibility, CCL has also started selling coffee under Continental brand to institutions like hotels, airlines etc. The company is also in the process of setting-up a marketing team in the six months so as to push the products aggressively. Indian coffee is the most extraordinary of beverages, offering intriguing subtlety and stimulating intensity. India is the only country that grows all of its coffee under its shade. India’s coffee growing regions have diverse climatic conditions, which are very well suited for cultivation of different varieties of coffee such as Arabicas and Robustas. India is one of the major coffee producing countries and ranks seventh in the world. With only about 2 % share in the global coffee area, India contributes about 4 % towards the world production and it contributes between 4.5 % to 5 % of global coffee export. CCL Products is no longer content with selling to institutional buyers outside India. The company wants a slice of the domestic branded instant coffee market and has started retailing under the Continental brand across the country. The company is also supplying to private label manufacturers such as retail supermarkets. Till last year the biggest goal of the company was to be to generate profits in excess of a Rs. 100 Cr every year. Well that being achieved, the management con-call clarifies, what the company wishes to do with all the additional money it generated. Even with the Swiss plant which is losing about Rs. 3 Cr a year the partly operational Vietnam plant has contributed over 25 % of the EPS in the current year itself. Of the 5000 MT capacity only about 75 % was effectively used this year. Next year onwards the company should be able to utilize full capacity turning out an EBITA of more than 25 % due to its excellent product mix as well as its tax holiday it enjoys from Vietnam. Thus for every Re. 1 of Vietnamese earning, Indian operation will have to earn Rs. 1.42 just to set off the tax advantage. No wonder then, the Vietnamese plant will be expanded to 10,000 MT as soon as steady orders are established. While the numbers have shown excellent growth, the quality of the numbers too has shown fantastic improvement. The company is future proofing itself by slowly moving away from the spray dried coffee into instant and into liquid coffee. With current capacity of 20,000 MT which will be upgraded to 25,000 MT by the end of the year and additional 5,000 MT in the anvil in Vietnam, CCL’s order book is going to be fully packed. CCL will repay its debt of upto Rs. 138 Cr which was due to Vietnam plant and CCL will pay off Rs. 45 Cr this year and the remaining Rs. 93 Cr in the next two years. Also, Coffee Day Enterprises Ltd, the firm behind Cafe Coffee Day, India's biggest home grown coffee chain, is all set for a market debut that could value it at almost $1 billion. Cafe Coffee Day, a cafe pioneer in India, aims to list a 20 %, raising roughly Rs. 1,150 Cr through IPO. CCD has more than 1,650 stores and 600 kiosks across India as well as 30,000 vending machines in 11,000 corporate offices. Cafes have become a hangout for India’s young and restless generation and have now became a meeting hub for entrepreneurs, corporate workers. It is said that Rs. 750 Cr will be used to repay CDEL debts and Rs. 290 Cr will be used for capex. CDEL owns Amalgamated Beans Coffee Trading CO. ltd- which runs the café chain. CDEL also owns Coffee Dat Hotels & Resorts Pvt Ltd, Global Technology Ventures Ltd and Tanglin Developments. CDEL is valued at Rs. 6200 Cr based on Pre-IPO round of funding concluded in March raising Rs. 100 Cr. Rakesh Jhunjhunwala, Radhakishan Damani & Nandan Nilekani have made pre IPO investment in CDEL at Rs. 289 apiece. CDEL had consolidated Revenue of Rs. 1,088 Cr with a net profit of Rs. 75 Cr as on 31 March 2014. On the other hand CCL will conservatively generate Rs. 115+ Crs PAT in the next year and so this company is available at just Rs. 2,450 Cr today, manageemnt expects company to grow 25 % yoy. CCL plans to launch its own products on Pan India basis under the brand name Continental (Spéciale, Premium and Supreme). CCL started doing private labelling for Reliance, Spencer and other super markets, which helped CCL to get space for the Continental brand in these super markets, thereby increasing its visibility. CCL’s management aims to achieve 20 % market share in the next three to five years. As CCL has completed a major portion of its capex, it is likely to incur only maintenance capex. With strong profitability, lower capex and improving working capital cycle, free cash flow generation is expected to be very healthy and company could be debt free by FY17 which would result in re-rating of the stock. Historically, the stock has traded between 5x and 20x one year forward earnings. However, with the sustainable strong growth in revenues and earnings in the medium term, the stock is expected to command a premium to its historic averages. At current price of Rs. 183.70 the stock is trading at P/E of 18.18x FY16E on EPS of Rs. 10.10 and 13.50x FY17E on the EPS of Rs. 13.60. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	716.80	880.60	944.00	1,157.40
NET PROFIT (₹ Cr)	64.40	94.00	134.30	180.70
EPS (₹)	4.80	7.10	10.10	13.60
PE (x)	38.20	26.20	18.30	13.60
P/BV (x)	7.00	5.80	4.70	3.60
EV/EBITDA (x)	19.00	15.50	11.70	8.90
ROE (%)	20.40	24.30	28.30	30.00
ROCE (%)	12.30	16.00	21.00	25.50

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*As the author of this blog I disclose that I do hold CCL PRODUCTS INDIA LTD in my investment portfolio.

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