*As the author of this blog I disclose that I do hold C.C.L. Products India Ltd in my portfolio.
Scrip Code: 519600 / CCL
CMP: Rs. 123.45; Buy at
current levels and Accumulate at every Dips; Short term Target: Rs. 150; Medium to Long term Target: Rs. 200; STOP LOSS – Rs. 113.55 (for short term players only); Market Cap: Rs. 1,552.03 Cr; 52 Week
High/Low: Rs. 124.90 / Rs. 24.95. 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. 5.54; Dividend: 50.00 % ; P/E: 22.28 times; Ind. P/E: 21.43;
EV/EBITDA: 12.12.
Total Debt: Rs. 240.39 Cr; Enterprise Value: Rs. 1,848.57 Cr.
CCL PRODUCTS INDIA LIMITED: CCL Products India Limited was
incorporated 0n 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, 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 67 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' 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 with 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. Plans to produce 5,000 tons of coffee this year at its Vietnamese plant
which has an annual capacity of 10,000 tons, and company plans to raise this
capacity further in the next three years. This capacity expansion in Vietnam will
make CCL the world’s second-biggest grower of the beans. Forecasts for good
record 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 govt. offered
concessions for setting up plant there. The Vietnam plant offers four
benefits: 1) Logistical advantage of US$150 per tn because of proximity to
coffee-growing zone, 2) Better raw material availability, with lead time lower
by one-and-a half months as Vietnam is the second-largest green coffee grower,
3) Favourable duty structure and close proximity to coffee-consuming ASEAN
nations like Japan, Korea, China, etc, and 4) 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. 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. 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 - 5 % of global coffee export. The
Govt. of India however, proposes to provide support for the certification of
organic coffee under the scheme ‘Integrated Coffee Development Project’ for XII
Plan. There has been a gradual increase in the production of coffee in the
country. The production of coffee in the country increased from 3,02,000 MT in
2010-11 to 3,18,200 MT in 2012-13. The domestic coffee consumption which was at
1,02,000 MT in 2009-10 has risen to 1,15,000 MT in 2011-12 and growing at the
rate of 5-6 % per annum and is estimated at be at 1,20,000 MT during 2012-13.
The exports of coffee have achieved an all-time high of 3.33 Lakh MT during
2011-12. 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 in Andhra Pradesh. The company is also supplying to private label
manufacturers such as retail supermarkets.
Outlook and Valuation:
CCL
Products India ltd is India’s largest private label in instant coffee, supplying
to premium brands in over 67 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. Recently, Government of India approved Rs. 950 Cr project for development of the Coffee sector in 12th Five year Plan, with an aim to increase production and Exports of Coffee. The Integrated Coffee Development Project (ICDP) will be funded for reasearch & development and for export promotion and for transfer of technology. 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. As stated above, coffee business is very tough to
scale up, and the profitability, return ratios and cash flow of CCL remained
subdued until FY11, adversely impacting its valuation. Therefore, its
historical valuation is not the right benchmark. CCL has increased its capacity
since inception in 1995 from 3,500tn and more than three times in the past six
years at 33,000tn currently. The expansion was funded mainly through internal
accruals, and without recourse to significant debt. CCL has not raised any
fresh equity since its listing in 1995. In addition to this, CCL’s debt profile
is conservative with a peak Debt to Equity ratio of 1.6 x to its current Debt
to Equity ratio of 0.8 x. With Vietnam operations, it is expected that CCL can
generate a healthy free cash flow of Rs. 340.5 Cr over FY14-FY17E, which is
likely to be utilised to repay the entire debt of Rs. 292.1 Cr and can also
improve dividend payout. CCL has now diversified operations in three countries
- India, Switzerland and Vietnam - and plans to set up a plant in Africa. This
diversified presence will help CCL to gain access to new markets and also
exploit arbitrage opportunities between different manufacturing plants to its
advantage which would also improve valuation due to lower volatility in earning
profile. To cite an example, CCL will leverage the lower duty structure
available for its Vietnam plant in several Asian markets and also leverage
extended tax benefit. CCL operates on fixed margins without carrying the risk
of coffee price volatility. CCL plans to launch its own products on Pan India
basis under the brand name Continental (Spéciale, Premium and Supreme) and has
already made a soft launch in AP. 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. It will take two more years for CCL to roll out its own brand
nationally. Nestle India and HUL dominate the branded coffee market in India
with a combined organised market share of more than 65 %. Unlike Nestle, which
sells only spray dried coffee, CCL has a wider portfolio comprising premium
freeze dried coffee, pure vanilla coffee products, etc. In addition,
competitors (Nestle and HUL) do not have manufacturing capacities (for freeze
dried instant coffee) and CCL has been manufacturing value-added coffee like
single filter, double filter, freeze dried, etc at a much lower cost. Hence,
CCL is able to offer better products at prices lower than its competitors. CCL’s
management aims to achieve in the next three to five years market share of 20 %. 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. At the current market price of Rs.
123.45,
the stock P/E ratio is at 13.27 x FY15E and 10.92 x FY16E respectively. Company
can post Earning per share (EPS) of Rs. 9.30 for FY15E and Rs. 11.30. One can
buy this stock with a target price of Rs. 200.00
for
Medium to Long term investment.
| KEY FINANCIALS | FY14 | FY15E | FY16E | FY17E |
|---|---|---|---|---|
| SALES (₹ Crs) | 716.80 | 949.60 | 1,068.20 | 1,143.20 |
| NET PROFIT (₹ Cr) | 64.40 | 92.00 | 123.70 | 149.80 |
| EPS (₹) | 4.80 | 6.90 | 9.30 | 11.30 |
| PE (x) | 18.60 | 13.00 | 9.70 | 8.00 |
| P/BV (x) | 3.40 | 2.80 | 2.30 | 1.80 |
| EV/EBITDA (x) | 10.20 | 7.80 | 6.30 | 5.20 |
| ROE (%) | 20.40 | 23.60 | 25.80 | 25.10 |
| ROCE (%) | 12.30 | 16.40 | 20.20 | 23.30 |
*As the author of this blog I disclose that I do hold CCL INDIA LTD in my portfolio.
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