Conference call and other key highlights
~ High inventory levels at Indian plant: Inventories increased sharply during 4QFY17 from Rs950mn in 4QFY16 to Rs1,372mn in 4QFY17. One of the major reasons for this was a temporary ban imposed by the Indian government on coffee beans imported from Vietnam. As a result, more than 100 containers from Vietnam were stuck in transit. In order to avoid delays in executing orders, the company purchased inventories from India and executed them from the Indian plant.
~ Retail operations: Till 3QFY17, the company’s focus on retail operations was in the Southern region. However, during 4QFY17, the company introduced its continental coffee in North India, mainly in Punjab, New Delhi, and Allahabad. Sales from private labels and branded business were ~Rs500mn during FY17. Management believes sales from branded business can grow 100% from Rs250mn to Rs500mn, while private label business can grow at a rate of 20%. The company hired a consultant during FY17, who is guiding the company to set up its retail operations. Retail operations will be managed by CCL’s wholly-owned subsidiary Continental Coffee Ltd. It will have a separate CEO, distribution team and marketing team. During 4QFY17, marketing expense for this operation was at Rs45mn. Branding expense of Rs300mn is expected to be incurred during the next three years.
~ New capacity addition: CCL’s Chittoor plant is expected to get operational by early FY19. It is a 5,000tn freeze dried plant that comes under SEZ and is expected to serve the export markets. Expected cost for this plant is at $50mn. Apart from this, CCL is expected to complete setting up of an agglomeration unit in Vietnam in the coming two months. This unit will allow CCL to get value addition of 3,000tn using its existing capacity.
~ Domestic Tariff Unit (DTA): CCL’s plant is currently a 100%Export Oriented Unit (EOU). With an EOU, if the company has to sell anything in the domestic market, it is mandatory to sell at least 50% in export markets. In order to avoid this legal complication, CCL has decided to set up a DTA unit. This will give the company the desired flexibility if it intends to sell more or introduce new products in the domestic market. DTA unit will do the packaging, while manufacturing will take place at its plant in Duggirala.
~ US market: US market is one of the biggest instant coffee markets, with annual consumption at 80,000tn. This market is mainly dominated by Brazilian and Mexican coffee manufacturers. The US is imposing 10% border tax on coffee imported from Mexico. Management wants to analyse the situation before it enters the market in a big way.
~ Export incentive: Export incentive of Rs86mn was received during 4QFY17.
Source: nirmal bang institutional equity