JUBILANT FOODWORKS LTD : IT's PIZZA TIME !!!

Scrip Code: 534804 / JUBLFOOD

CMP:  Rs. 1031.10; Market Cap: Rs. 6,800.00 Cr; 52 Week High/Low: Rs. 1348.75 / Rs. 760.50

Total Shares: 6,59,49,070 shares; Promoters : 2,96,52,784 shares – 44.96 %; Total Public holding : 3,62,96,286 shares – 55.04 %; Book Value: Rs. 116.49; Face Value: Rs. 10.00; EPS: Rs. 13.40; Dividend: 25.00 %; P/E: 76.94 times; Ind P/E: 50.12; EV/EBITDA: 24.95.

Total Debt: ZERO; Enterprise Value: Rs. 6,768.62 Cr.

JUBILANT FOODWORKS LTD: The Company was founded on 16th March, 1995 and is based in Noida, India. The company was formerly known as Dominos’s Pizza India Limited and changed its name to Jubilant FoodWorks Limited in 2009. Jubilant FoodWorks Limited operates as a food services company. The company holds the rights to develop and operate Domino's pizza brand in India, Sri Lanka, Bangladesh, and Nepal and Dunkin’ Donuts brands & restaurants in India. Its Dunkin’ Donuts restaurants offer donuts, drip coffee, cappuccino and latte, milkshakes, smoothies, and iced teas, as well as a range of burgers, wraps, sandwiches, and side-bites. In addition, the company sells its products online. The company came with an IPO of 2,26,70,447 equity shares of Rs. 10 each at Rs. 145.00 per share to the general public in January, 2010. The purpose of the issue was to achieve the benefits of listing on the exchanges and for the pre-payment of loans & other general corporate purposes. It got listed at Rs. 160.00 per share making a high of Rs. 240.90 on listing day. Domino's Pizza India has grown into a countrywide network of stores, with a team of over 6,000 people. Jubilant FoodWorks has the sole master franchisee for Domino’s Pizza & Dunkin Donuts in India. It also has, the product profile which are complementary to Domino’s and are run separately from Domino’s outlets. Dunkin’ Donuts is owned globally by Dunkin’ brands, which also owns Baskin Robbins worldwide. Dunkin’ Donuts has over 11,000 outlets worldwide in over 30 countries. As of February 6, 2017, Jubilant FoodWorks Ltd operated 1,111 Domino’s Pizza restaurants in across 260 cities; and 68 Dunkin’ Donuts restaurants in 19 cities in India. Jubilant Foodworks Ltd is locally compared with Westlife Development Ltd (who runs McDonalds in India), Speciality Restaurants (which runs Mainland China & Ohh Calcutta in India), Tata Global Beverages (which runs StarBucks in India) and Globally with Sato Restaurant Systems Co., Ltd of Japan, Hiday Hidaka Corp of Japan, Faurwood Holdings Ltd of Hong Kong, Ajisen (China) Holdings Ltd of Hong Kong, Cafe` de Coral Holdings Ltd of Hong Kong, Jollibee Foods Corporation of Philippiness, Matsuya Foods Co., ltd of Japan, MOS Food Services Inc of Japan, BJ’s Restaurants Inc of California, Bob Evans Farms Inc of Ohio, Carnival Corporation Ltd of Florida, Dunkin’ Brands Group Inc of Massachusetts, The Wendy’s Company of Ohio, Domino’s Pizza Group of UK, McDonald’s Corporation of Illinios, Compass Group PLC of UK, Lowe’s Companies Inc of North Carolina, Starbucks Corporation of Washington, YUM! Brands Inc of Kentucky, Zoe’s Kitchen Inc of Texas. 

Investment Rationale:

Jubilant FoodWorks was incorporated in 1995 but started its operations in 1996. It is the sole master franchisee for both Domino’s Pizza Brand since 1996 as well as Dunkin’ Donuts Brand since 2011 in India. The company is part of the Bhartia group, which owns a 48.9 % stake in Jubilant FoodWorks Ltd. With over 1,100 Domino’s restaurants in India, starting from the first outlet opened in 1996, Jubilant FoodWorks is in charge of the second-largest chain of restaurants for Domino’s worldwide, overtaking UK in the current year but it’s still behind the US which is Domino’s home country, headquartered in Michigan, US. In terms of number of stores as well as sales, Jubilant FoodWorks is the largest player in the Quick Service Restaurants (QSR) market, which is still in nascent stage in India with about 17 % market share whereas there’s more than 60 % market share is of pizza and in excess of 70 % in pizza delivery. QSR’s in India accounts for slightly 2 % of the overall food service market in India and this is expected to grow much faster at 20 % compared to 10 % food service industry’s growth. The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year. In India, the food sector has emerged as a high-growth and high-profit sector due to its immense potential for value addition, particularly within the food processing industry. The food industry, which is currently valued at US$ 39.71 billion, is expected to grow at a Compounded Annual Growth Rate (CAGR) of 11 % to US$ 65.4 billion by 2018. Food and grocery account for around 31 % of India’s consumption basket. Indian food service industry is expected to reach US$ 78 billion by 2018.The Indian gourmet food market is currently valued at US$ 1.3 billion and is growing at a Compound Annual Growth Rate (CAGR) of 20 %. India's organic food market is expected to increase by three times by 2020. The online food ordering business in India is in its nascent stage, but witnessing exponential growth. The organised food business in India is worth US$ 48 billion, of which food delivery is valued at US$ 15 billion. With online food delivery players like FoodPanda, Zomato, TinyOwl and Swiggy building scale through partnerships, the organised food business has a huge potential and a promising future. The online food delivery industry grew at 150 per cent year-on-year with an estimated Gross Merchandise Value (GMV) of US$ 300 million in 2016. Also as a help for QSR industry, there are many business factors such as high turnover, low area occupied; reasonable ticket size matters. In India, the biggest barrier to profitability in the restaurant as well as retail businesses in urban areas, particularly in metros, is high lease rentals. Domino’s predominantly delivery-based model in these cities enables it to circumvent this problem. While the overall proportion of delivery to dine-in is 50:50. Consequently, the store size required is much smaller at around 900-1,500 sq.ft compared to predominantly dine-in restaurants and other QSR (at 2,500-3,000 sq.ft). In addition, the average bill size for pizza outlets like Domino’s is also higher than other QSRs like McDonalds, KFC and coffee shops like Café Coffee Day (CCD), Barista and Costa Coffee. Jubilant FoodWorks has focused on its less competitive intensity delivery start-ups focusing more on profitability and will also focus on Same Stores Sales Growth over store expansion via store opening rationalisation. The demonetization drive was dampening on JFL’s performance in 2HFY17E, but with gradual recovery in consumer confidence, increased promotions, moderation in competition from food aggregators and success of new products could take SSSG to higher levels, going forward. While JFL’s operating cash generation has fallen from 15 % to 10 % of sales in past four years, it still remains strong as the Company generates operating cash in the excess of Rs. 2500 Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL has maintained solid control over its costs. While overall expenditure witnessed 4 % CAGR through FY12-17E, JFL has remarkably been able to maintain its total expenditure per store constant in the last four years. Around half of Dominos’ sales are through the delivery platform with the average online ordering as a percentage of delivery sales has been increasing rapidly, which now accounts for 47 % of delivery sales. Most of these customers are using alternative payment options i.e. credit-debit cards, mobile wallets and net banking for paying the bill. JFL has now also offered cashless payment facilities for all home deliveries ordered through the phone. JFL did witnessed fall in revenues in initial days of demonetization, but gradually it improved as new currency started floating in hence marking improvement in sales. Not with standing significant material impact on revenues in last 4 years owing to dismal SSS growth with additional impact of Dunkin Donuts, JFL has impressively contained its costs. While overall expenditure increased at 24 % CAGR through FY12-17E, it has been able to maintain its total expenditure per store constant in the last 4 years. Despite steady rise in overall cost, JFL has been able to maintain average operating cost per store constant at Rs. 2.2 Cr calculated based on average number of stores per year. Company reduced employee strength per store without hampering efficiency and has also rationalized its power supply expenditure by implementing Wipro’s energy management services. Company have increased its share of online ordering and is renegotiating rentals and increasingly entering into rental contracts based on % of revenue rather than flat structure. The company is reducing the capex costs per store and increasing its emphasis on launching new products, JFL has introduced several new products especially in non-pizza segment like Pizza Mania Extreme & Burger Pizza. While through Pizza Mania Extreme, JFL intends to provide value-added offerings at reasonably lower price points vs. regular pizza, it introduced Burger Pizza to cash in the rising opportunity in Burgers segment with an all-day menu option, unlike Pizza which is more of a meal replacement category. With both these products getting encouraging response from the consumers, they would permanently feature on Dominos’ menu, going forward. In the pizza segment, the company has recently launched Quattro Formaggi Burst Pizza and Choco Pizza. JFL’s new state of the art commissary is expected to be commissioned in Noida by March’17, which is expected to not only manufacture the conventional dough, but also other products such as buns, breads and some types of desserts. This is anticipated to accentuate new product development and increase JFL’s ability to introduce new products at a faster rate. However, only very few of them contributed meaningfully to its growth in past few years, which is evident from share of Pizzas to its overall sales remaining more or less stagnant in past four years. Jubilant’s core business comes from Dominos Pizzas, and Pizzas are consumed during lunch and dinner and are not snacks like in the case of other outlets. A combination of delivery-based model and healthy bill size enables high sales per square feet and aids profitability. Jubilants’s Asset-light business model boosts its high-growth story, the business is remarkably asset-light as a result lease rentals are much lower which helps profitability of the store. Net working capital continues to be in excess of negative 25 days and fixed asset turnover continues to be in excess of 3 times. Even in a subdued economic environment of the past two years, there was no worsening of working capital metrics. When the growth trajectory resumes on same-store sales, cash flow improvement will be significant. It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, which expanded from 180 stores in FY08 to around 1,100 stores currently including 68 Dunkin’ Donuts outlets did not have the need to raise fresh equity capital or avail significant amount of debt. This is a testament to strong business model and a kind of proof about the abilities and expertise of management which also shows their understandings about their business in India.  

Outlook and Valuation:

Jubilant FoodWorks Limited is India’s largest food service company. JFL operates Domino’s Pizza & Dunkin Donuts brand with the exclusive rights for India, Sri Lanka, Bangladesh and Nepal. The company have recently launched Pizza Mania Extreme & Burger Pizza and launched Quattro Formaggi Burst Pizza and Choco Pizza, Navratra Pizza and these products are receiving positive response from its customers. It has launched its Online Mobile ordering site in July, 2013 and it is seen as important platform to reach a wider audience base. Till present there are over 62 lakh downloads of the Domino’s Pizza mobile ordering app across various smart phones & the Average Online ordering contributes to 49 % of delivery sales in Q3 FY17 and Mobile Ordering sales contributes to 56 % during the quarter. There are total 68 Dunkin’ Donuts Restaurants as on February 06, 2017 in 19 Cities and offers a wide variety of western menu including donuts, coffee, burgers, sandwiches, snacks, and more. It has introduced Big Joy Paneer Delight, Munchkins, Donut Cakes which is 100 % eggless, DunkyDoos, Big Joy Burger which are gaining popularity amongst kids and youngsters. Within the pizza market, Domino’s has a share of more than 60 %. Domino’s has consistently gained its market share from its pizza peers as well as other QSRs in the past few years. The average bill size of Domino’s Pizza is healthy across stores which range from Rs. 350 to Rs. 450 per head. And most of the stores also have delivery facility except stores that are located next to food courts situated at higher levels in malls and the ones that are newly set up. Delivery proportion in other stores is 20 %, which is healthy and adds another avenue of growth. Delivery portion has minimum bill size of Rs. 150 and has on an average 7 bikes to facilitate that delivery. Looking at these factors it can be easily believed that the break-even of its store could be achieved in two-three years. Company will focus more on Same Store Sales Growth rather than focusing on opening on new stores and expected that SSS growth could be around 8-9 %. Growth in SSS will depend on a mix of company-related and macro factors, like Increase traction in new products, faster growth in value-added offerings, Revival in consumer confidence, especially post demonetization, Level of discounting and promotions, Uptick in job creation, and Extent of price hikes which JFL could pass on to the consumers. The growth in SSS is likely to recover in FY18E on the back of positive improvement in afore-mentioned areas and it could be around 8 %. JFL plans to open over 100 stores annually in next few years. While the number of Dominos outlets stood at 1,100 at Feb 17 end, Dominos International has projected the potential store count for Dominos in India at 1,800. However, with the decline in percentage of new stores opened vis-à-vis extant stores, JFL’s margins would improve at a faster pace as higher number of stores would have attained breakeven. Based on current SSS growth trends, calculation suggests a new Dominos store would typically achieve cash breakeven in 4 years. On financial side Jubilant Foodworks Q3FY17 performance was good, it reported Revenues of Rs. 660 Cr, up 3.9 % YOY; SSG was at -3.3 %, EBITDA at Rs. 64 Cr, down 12 % YOY, gross margin declined 2 % YOY to 74.9 %, impacted by promotional activity and change in mix; EBITDA margin declined 1.80 % YOY to 9.7 %, impacted by higher rent cost, however lower employee cost and controlled other expenditure curtailed decline in EBITDA margins. Home delivery sales through phone has also been impacted due to cash crunch and has been not compensated by online sale, company is working on getting card machines for home delivery. New product launches like Pizza Mania extremes and Burger Pizza are seeing healthy traction and aiding growth. Delivery sales continue to grow faster than dine-in sales as company is aggressive on driving sales through OLO (online ordering) and in long term it expects to be 70 % to 80 % which is the average seen in developed markets. SSSG uptick, GST and break-even in Dunkin are levers to margin expansion. JFL’s operating cash generation has fallen from 15 % to 10% of sales in past four years, yet it still remains strong as the company generates operating cash in the excess of Rs. 250Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL’s gross block increased by >2.5x to Rs. 900 Cr in the last 4 years, while the resultant higher depreciation impacted its earnings as well. This is evident from JFL’s cash profit of Rs. 220 Cr was almost double than the reported net profit Rs. 110 Cr in FY16. The growth shown by Jubilant FoodWorks Ltd is consistently based on the robust operational foundation on which it stands. In the current economic environment, demonetization and slowdown in consumer spending, especially in discretionary expenditure, the company continues to pursue excellence in key areas such as cost management, restaurant selection processes, and continual re-investment in strengthening the supply chain, connecting deeply with consumers, and investing in innovations. This approach is complemented by a robust training apparatus and high operational efficiency standards that allow growing the business in line with the potential. Domino’s Pizza mobile ordering (Online Ordering (OLO)) remains an important platform to reach a wider audience base serving around 63 lakh pizzas every month with its new ad campaign on Order 1 pizza online and get 1 pizza free. This enables to drive higher levels of optimization and supply chain systems into the hinterland, to serve tier 2 and 3 cities. At the current market price of Rs. 1031.10, the stock is trading at a PE of 80.55 x FY17E and 44.83 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 12.80 in FY17E and Rs. 23.00 in FY18E. 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	FY16	FY17E	FY18E	FY19E
SALES (₹ Crs)	2,410.20	2,608.00	3,116.00	3,788.50
NET PROFIT (₹ Cr)	106.60	84.40	151.20	229.70
EPS (₹)	16.20	12.80	23.00	34.90
PE (x)	62.20	78.60	43.90	28.90
P/BV (x)	8.70	7.90	7.00	5.90
EV/EBITDA (x)	24.30	25.90	17.90	12.90
ROE (%)	14.90	10.60	16.90	22.00
ROCE (%)	20.40	14.30	23.10	30.40

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold  JUBILANT FOODWORKS LTD in my any of the portfolios.

**Dear Reader Friends, if you enjoyed this article then please do share it with your friends & colleagues through Facebook and Twitter, also do drop in your valubale thoughts in comment box...
So, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !! 

-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article. 

---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

VIEW THE POWER POINT PRESENTATION ON

RETURN ON CAPITAL

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

 As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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

-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

VIEW THE POWER POINT PRESENTATION ON

RETURN ON CAPITAL