CCL Products

Stock Opportunities Not-so-Hidden Gems
42

Please look at the consolidated PE and not at the standalone one. Consolidated pe is around 27. It is neither cheap nor exorbitantly expensive for the current market.

Disclosure - It is not a recommendation to buy the stock and put here only for discussion purposes. I am invested in the counter and opinion is most likely biased.

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43

Manoj,

In CCL products, the bet is on higher sales coming from its Vietnam plant. Now this Vietnam plant has some advantages which should improve margins. First is it has some tax benefits. Secondly Vietnam is a big producer of raw coffee and hence company saves a lot on logistics costs.

Another joker in the pack could be the fate of their retail venture. Although full blown effects may be some quarters away, markets are always excited with something with a label of retail in it.

Basically its a story of higher sales along with improving margins which seems to be playing out quite well.

If as the management says they will do bottomline of 125-130 crores this year, then fy 16 eps could be close to 10 per share. And as we have seen in most fast growers in our markets, wherever there is possibility of predictabe fast growth, markets tend to pay up.

disc: happily invested. :blush:

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44

Note From Q1FY16 Con Call

  • Conservative guidance of 1000 cr. Revenue. for FY16. May cross 1100 cr., almost sure to outperform 1k cr.
  • Hope to hold the EBITDA margins of first quarter for the full year. Tax rate would be lesser & lesser as Vietnam capacity usage increases, 25% would be a fair assumption.
  • Volume Sales - Last year 20,000 MTPA, this year 25,000 MTPA. So volume growth of 25% but revenue guidance of 13% (Because of lower coffee prices?)
  • India Branded Coffee Business - FY15 - 50 cr. revenue, this year may cross 60-65 cr. Not interested to spend massive on branding, will plough back the earnings into brand building over next 4-5 years. It’s go slow-steady approach and focus is to build distribution. Max sales is from TN. Targeting Army & other defence sales.
  • They don’t want to give Qtrly. volume nos.
  • Developed a very high end product for a client for Europe. Effects will kick in Q3-Q4 of this year.
  • Consistent dividend payout policy , might increase over next few years.
  • Further Expansion – infrastructure is already built, negotiation has started with machine manufacturers (Takes a year to build those machines). So this expansion will come in FY17-18.
  • Liquid coffee – samples before Dec-31st , for Japanese market(?) many trials done, if that clicks then it could be big, not considered in the 1000 cr. Guidance.
  • Vietnam – 20 mn (currency ?) loan outstanding. India – no long term debt. For the Vietnam operation out of 20 mn loan, 10 mn is used for working capital.
  • Wouldn’t name the clients, but name the country and the top sellers are CCL clients. Clients in turn blend some coffee and sell them. They themselves might also produce. There is enough demand in the market. Company has advantage due to consistency in delivery, client relation and of course lowest cost producers. 20 years of experience.
  • Jonathan foyer was pleased with US product launch. US will be focus for few years going forward.
  • Industry Insight’s
  • Instant coffee is already an over supplied market and that’s not a recent phenomenon. Every plant in the world is run at utilization level of less than 50%. Brazil produces more than 100,000 tons (was it metric tons ?)
  • Companies USP is the blends. They do over 200 different blends. Those are not so easy to copy. Anyone can setup an instant coffee factory. Not a big deal.

If they are able to maintain the current quarter margins market may be getting optimistic about 30%+ PAT growth year. Mgmt. conservative guidance is for a 20-25% PAT growth.

This business is almost like a Mayur (good but laborious), but probably B category ? I think 20-25 should be a stable PE range, or probably little lower. So as per me valuations are little ahead of fundamentals. BUT if they spring any surprise like Hitesh mentioned above then valuations may get justified with performance.

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45

Thanks a lot @hitesh2710. Read more about the Vietnam plant, and I can see how it is different from others.

46

The other important thing to note would be improvement in profitability metrics. RoE has improved from 16% in FY12 to 24% in FY15. RoCE has improved from 10% in FY12 to 16% in FY15. According to brokerage estimates, roe/roce are further expected to improve to 30%/26%. With the kind of growth visibility and improvement in valuation metrics, the stock can command much higher PE ratio compared to its historical PE band.

47

Promoters interview on MoneyControl.

Important to note:
We are always very conservative. We are confident to do Rs 1,100 crore, but always better to say something less and perform better. That is the philosophy of the company.

1100 Crore is roughly a 25% growth on FY 15 sales numbers. With better margins, profit growth should be even higher. Story is playing out as expected.

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49

Vietnam has devalued the dong for the third time this year. This will make life difficult for coffee exporters like CCL

Quoting the Hindu - “CCL Products, which exports to about 56 countries, has so far shipped about 24,741 tonnes of instant coffees in the current calendar year. Tata Coffee has exported about 10,207 tonnes, while Nestle with 8895 tonnes were the other large instant coffee exporters.”

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50

Devaluation will make life difficult for exporters, how exactly?

51

Firstly, SUPER CONGRATS for forum members for rightly recognising this company in its diaper stage. I’m a late entrant but still the company is sucking its thumb. Barring surprises, I would like to exit when it reaches adolescent stage or middle age.

Salient points from my notes on CCL Products:

  1. Improving RoE/RoCE until FY18 where we have certain visibility.
  2. Reduction of debt and probably settle around 0.1 D/E or Zero debt by FY18.
  3. Super visibility of free cash flows
  4. Increasing dividend as a %ge of net profit with increasing cashflows
  5. Vietnam plant at 75% utilisation by FY 17 and then increase the Vietnam capacity to 20000 MT by capex of about 20 million USD funded entirely by internal accruals. No tax on Vietnam revenues for next 3 years and later 50% tax - effective tax rate is going to be low for foreseeable future.
  6. Immediate revenue visibility of 25% for FY 16 and 30+ EPS growth. (mostly built into current price, still scope of surprise exists)
  7. No recent history of equity dilution, ethical management, promoter holding increased from 3-4 years back and stabilised around 44%.
  8. Upside due to new big European client and probable entry into Japanese markets (very sticky market where long term revenue visibility would be high and management sounded positive on this new business).
  9. This is NOT a commodity business and also NOT a real estate intensive (no plantations). I really liked that they do the RAW MATERIAL purchase as per JIT (Just In Time) policy so they are completely insulated from coffee prices though realisations could vary by 7-8% in case of fluctuations as per management.
  10. Own brand retail foray: Very difficult preposition. Nescafe and Bru has SUPER mindshare of customers and breaking this could be difficult. However, the coffee is priced less than 50% the price of Nescafe for same quality - now beat this. Management only has to make people realise this. Difficult though.
  11. I’m from Hyderabad and CONTINENTAL COFFEE has a shelf space beside Nescafe and Bru in Vijetha Super market. I took both the bottles and compared the price, packaging, bought home both of them and tasted. ( I will put my observations in a day or 2 in this thread).
  12. Better late than never even though the valuations are a bit high and IF all the above story plays out well, there WILL be a PE re-rating as we cannot have a company growing at 25% plus, with near zero debt levels, with RoE and RoCE levels above 30, increasing dividend, free cash flows at 24 PE. Retail foray success (IF) will provide even further PE expansion. This may require a long term core portfolio allocation and not just short term.
  13. Coffee Day IPO will bring certain interest among coffee stocks and if Coffee day, Tata Coffee, CCL Products are evaluated based on current and next 2-3 years financial metrics/ratios then am sure CCL Products will come out on top whether it’s RoE/RoCE, profitability etc. I agree all the three cannot be compared as the businesses and business models are different (retail chain, plantations heavy, coffee processor respectively), but there are no similar listed businesses on exchanges.
  14. Opportunity Size? Just do not ask me, it’s COFFEE, the second MOST traded commodity after OIL and people have been consuming COFFEE since eternity and simply NOT possible to change people tastes on Coffee and preference. If world growth and particularly the ASEAN countries GDP were to increase going forward, coffee consumption will look up.
  15. In a way, isn’t Coffee like an addiction? So demand will be there.
  16. Unexplored market opportunity in USA which is the biggest market for coffee.
  17. The plant in Switzerland seems to be a very strategic decision to serve EU clients and the company gets to trade its coffee as “MADE IN SWITZERLAND” coffee. I liked it. But demand in EU may not leap but just snail about.
  18. CCL Products IMPORTS green coffee beans (Arabica, Robusta) and processes and then exports. Isn’t it a natural hedge with a ‘time lag’ against currency fluctuations though very steep fluctuations could impact. But the revenue seems to be in diversified currencies (not sure here). EU CCYs, USD, ASIAN CCYs?

Most of the above points are discussed in this forum and else where and the above points are the ones which helped build my conviction along with management interviews done in various media channels.

I have updated my portfolio thread with my entry into CCL Products and here is the link to it:

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52

So, here you go with my little observation to understand CCL Products’ Continental Coffee.

Tested products were Continental Speciale vs. Nescafe Classic.

  1. Both are instant coffees
  2. CCL one is Granules type (more premium than powder as it retains aroma better?) while Nescafe was powder.
  3. Cost-wise, 50 gms Continental Coffee costed me 75 INR while 25 gms Nescafe costed me 65 INR (could not find 50 gms bottle, not sure if cost would be considerably less). Continental is being offered with 10 INR discount, so looks like product is not moving? Not sure. But then the company has just started it retail entry, so let’s give them a bit leeway.
  4. Quantity to be used: Nescafe being powder, had to be used a bit more (2.5 spoons Nescafe vs. 2 spoons Continental)

To my surprise, I found Continental to be more Coffee like (strong, rich, aroma - may be granules variety playing part here) while Nescafe is enhanced with something else to make it sweeter. Another way to phrase the sentence, the taste is not so much different at least that Nescafe powder should cost around twice (or 80%) more than the Continental granules.
Disclaimer: Taste is a SUBJECTIVE matter and what I felt might be different from what others feel.

Bias

In order to eliminate stock holding bias, I involved my mother in this little experiment without telling her the intention. All that I told was, we will buy which ever tastes better. She too independently told that Continental is better. I did not say my observation to her first and asked her as in that case psychologically she would be inclined to agree with me not to sound different than from my opinion. So, here we have 2 new customers for Continental from today! Bye-Bye Nescafe.

Packaging

  1. Nescafe packaging is more premium. The look and feel of the bottle, the top cap color (brown) and feel of the bottle while holding it are premium actually.
  2. Continental cap has ridges to open the cap easily while the Nescafe is plain, so rotation is a bit difficult in comparison while your hands are wet. I know, I’m being finicky, but let me put my observations anyway.

Calories

Total calories of Continental calories are lesser than Nescafe while protein content in Nescafe is more.

Conclusion

I feel if people were to try once both of them, majority would vote for Continental and pricing being half is the real kicker! I asked my wife if she would buy after telling the price and my taste observation, she said yes.

With current 1000 MTs of selling coffee in India, does not the domestic market itself has HUGE potential if market were to realize Continental’s preposition or rather company focuses in building the brand in a cost effective manner (like Page?)

I know this would be too much of positive bias, confirmation bias, holding bias from my side. So, I request other forum member to do this little 140 INR experiment and tell the observations.

Coffee.JPG1224×1632 629 KB

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53

Q2 numbers came out before bell. http://www.moneycontrol.com/livefeed_pdf/Oct2015/FDD8556C_3F3C_42DF_801C_3E122362B12C_144810.pdf
Stock took a solid beating, on the face of an average result. Based on Prasad’s lofty projections, there was heightened sense of expectation but the numbers were far from the 1000 cr/150-160 cr tops/bottoms kind. At this run rate of Q2, much of heavy lifting has to happen in Q3/4, if the above has to happen.
PS - invested and gritting the teeth

54

Hi Hitesh,
Results look little disappointing
Operating profit is almost flat
no revenue growth
Short term borrowings went up sharply
(while trade payables and other current liabilities have come down)
Can you give your opinion on the results


Thanks

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Results on first look seem lacklustre. Will need to go thru the concall details whenever they are available to find out what caused this kind of flattish numbers.

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Hi @hitesh2710,

I attended the conf call of CCL . The management maintained the volume guidance for FY16. They highlighed couple of reasons for lower sales and profits.

  1. 5 cr of sales is pushed to next quarter as they did not receive bill of lading in time before the close of qtr.
  2. the ‘other operating income’ has also dropped to 2.4 cr in Q2 compared to around 8 cr last qtr and Q2 14. the mgmt said it is related to some duty writeback and technical in nature and they expect it to normal levels from next qtr onwards. CFO was not there on call today. so he was not able to provide more details into these nos.
    the CEO was also not able to provide answers to increase in short term borrowings
    But the mgmt looked fairly confident of achieving 130 cr pat in fy16.
57

Thanks Hitesh & Vaibhav


It looks like most of increase in short term borrowing might be due to increase in packing credit
not sure whether it is indication of strong sales in future(but inventory is not gone up much.(or is there a possibility of repo inventory.)as this qtr coffee prices were low compared to last qtr
(are they increasing inventory to benefit from lower prices)

58

Few More points from concall,Please add if i missed any

Other Expenses went up due to two reasons primarily
a)More small packs (more production for the retail customer),so additional cost in packing etc.
b)shift to CIF contract for some clients.

Higher procurement cost of green coffee caused increase in working capital. They have less than 80 million USD - borrowing out of which 10million is working capital loan, but repaid as term loan only.

Liquid Coffee->Still WIP and may be ready by next year but no revenue guidance for next couple of years(will start adding revenue in 2017-2018 only)

Branded Coffee in India >>Targeting 100 crs in 2 years time.Cautious approach due to earlier failure.They want to make this big.Received a lot of enquiries from top chefs after their sponsorship of a event.Club mahindra/sterling already using continental but they are concerned about distribution/worried about giving credit for growth(NO Credit Policy), otherwise it’s all good.

Institutional sales going good with increase in supply to army canteens/hotels/police canteen etc.30 crs Sales till now, expecting 70-75 crs by this year.

Other income down from 8 crs to 2 crs, this is mainly govt of india incentive but without cash in hand not accounted for in statement
inventory increase is not a concern as they mostly maintain presold inventory(±5%).Max 6 weeks to 8 weeks inventory stock in hand.

India capacity 20000 tons for spray and freeze dried coffee in bulk+retail(5-6%)
target to make retail 10% soon in a year.
vietnam 10000 tons capacity and only spray drying,mostly bulk sales.They plan to utilize capacity by 90% in vietnam by 2017-18 and then double capacity to 20000T.

Coffee price dropped 15-20% still how CCL is growing revenue 15-20% , is it due to volume increase?

CCL sells to different types of clients, different varieties,numerous special products. Selling value added better products giving higher realization and helped in maintaining revenue even in an environment where coffee prices dropped significantly.

last year second quarter was an exceptional quarter,not comparable to other quarters.
Normal trend is Q1 to Q4 increasing revenue in coffee business but for the last 2 yrs 3rd and 4th generally better for CCL(60:40 ratio)

Except in USA no competition from brazil.,brazil produces 35% of coffee but they don’t import so have to sell only own coffee and not growing much.CCL can import duty free from anywhere and create special products(brazil can’t compete).CCL’s market is mainly Europe and the Far East.

Strategy in US - Law may change soon(6 months?) and will put everyone at par.Right now CCL can’t compete with brazil due to currency and adulteration,CCL sells pure coffee.US is biggest market and they may soon start expanding in US.currently into packaging mainly.Talks on with supermarkets but problem is no credit to anybody policy.

Just my thoughts,
They are maintaining growth even when coffee prices have gone down so much, already ~60 cr bottom line in first half, so may be able to reach 120/130 crore easily for the full year. All the reasons for investing still looks well in place and number of triggers possible in future.

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59

Relaince’s own private label Coffee(Reliance Kaffe) sold at Reliance Mart/Fresh outlets is manufactured by CCL.

A 50gms packet of Reliance Kaffe( with 70% coffee & 30% chicory mix) is priced Rs.89 same as of Nescafe Premium (of same blend) but Relinace Kaffe is being sold with “Buy one & get one offer” so effectively it is being sold at half the price of Nescafe Premium with same blend

Generally we use Nescafe Premium in our home. But this time I bought one Reliance Kaffe. My father liked it a lot then Nescafe. He felt it had more of Natural Coffee essence then Nescafe and suggested to bring this brand from next time :smile:

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60

Didn’t like the way Rajendra Prasad answered few questions about company’s performance. Even though there was slight decline in the revenue on YOY basis, Rajendra is not accepting the fact that there was any de-growth.

Nothing wrong with the result but just nervous about management’s denial mode in accepting the facts.

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We should not read too much into the way (behavioural part) he is answering questions. I think what he is trying to say is that CCL enters into yearly contractual arrangements and these shipments need to be delivered in an year. And it might happen that a shipment may not be released on 30th September but got released on 1st October instead and therefore revenue not booked in the previous quarter and will be booked in next quarter. Hence he is trying to emphasis that it is not an actual de-growth and one should look at annual numbers rather than QoQ comparisons (be it previous Qtr. or last years same Qtr.)

That is the way I may read it. Using the word ‘may’ as I am not invested in CCL and therefore might not seriously dig into the reasons behind the numbers. Just offering a view point.

Regards.

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Friends,this might be a bit old news for some but I came across this just now.Is this something we need to be concerned about?
Are there any regulatory issues that might prop up?How does this reflect upon the management and corporate governance?
https://karthiknavayan.wordpress.com/2015/06/01/the-human-rights-forum-hrf-demands-the-ccl-products-india-ltd-be-immediately-closed/

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