Plan to go through over the weekend and post highlights
Plan to go through over the weekend and post highlights
Had a brief look at numbers. Two concerns which were raised earlier on receivables and inventory:
Will go through in detail on weekends.
Tata Global Beverages is also increasing its focus on domestic coffee market with brands like Tata Grand. So, continental from CCL is not alone and compettion is going to intensify + TGB has far better distribution network. For example Reliance Outlet in Gurugram is selling Tata Grand but not continental.
Ccl product q1-2018 result out. Result looks bad,
Did anyone attend the AGM? notes will be handy here
Disc : invested and cringing
Notes from CCL AGM meeting:
Gst impact to ccl:
Management said that Gst is god sent opportunity to ccl. Due to gst they can sell their product from Kashmir to kanniyakumari same price. Hustle free.
As per current ccl operation they are seeing any impact. Currently 95% revenue coming from exports only 50cr is from domestic side. So impact is very minimal and that also can pass on to customer. Green coffee is taxed at 0% vs 2% pre-gst and final coffee is taxed at 28%. So no major impact seen
On domestic side:
Ccl attempted to launch domestic brand in 1997 and they failed miserably that time. So this time management is so cautious going step by step cautiously and professionally. Last financial year they did 50cr and this financial year they formed new subsidiary and appointed new professional director . so they will concentrate on brand building for here on.and management confidence on achieving 150-200cr revenue out of domestic market in next 5 years
On 5rs sauchet:
Management aware of the demand of this small sauchet packet,which mostly consumed in rural side. But management said they don’t want to do currently. They want first professional taste our premium product and that will help the brand building
Current ccl has capacity of 30000mt (25000 in india and 5000 in Vietnam)
Already the work for 5000mt capacity addition in chitoor plant going on, which is going to complete by July next year
And they are planning to up capacity in Vietnam from 5000 to 20000 tn in 5 years time
Overall ccl planning to reach 50000mt capacity in next 5 years (industry leader nestle has 100000t capacity).
Most of capex will be through internal accruals and no dilution expected. Management never went to public after they raised IPO money last 1995
Management so focus on generating return on share holder money. So they decline to give right/bonus anything
Currently swiss plant in loss. But management said due to swiss plant only they are able to sell this much capacity otherwise it is not possible to sell because European Union people said give some business then we take your product. So management said it is not bad strategy either. Swiss plant is debt free and not much running cost. So whatever loss they are seeing is depreciation loss. They appointed new local person and going forward we see the loss will reduce and we may see good number from that unit too
On US business:
Us is largest instant coffee consumer, and US alone consume 75000 ton instant coffee per year. And currently ccl selling through partner , and currently they are selling 2000 ton over there. And company taking steps to capture the market
It is hand written notes, please bear with me about spelling or grammar mistake
Volume guidance increased… Looks promising…
Disclosure : invested
But PAT growth will be 10-15%. The stock looks optically expensive but most of the good companies currently are very expensive.I am waiting for some 230-240 levels to come to buy a big chunk and will start accumulating closer to 250 levels.
Fundamentally, what are the growth triggers for this stock ? I mean, why you believe one should hold this stock. From what I have observed coffee businesses (both TATA and CCL) have over promised and underdelivered.
There are below tailwinds
CCL concall highlights . These are my notes, so there may be some errors while taking down notes
CCL Products - Q1 FY18
5,000 tonne additional capacity for freeze dried coming on- line in FY19 (Q2 FY19). Focusing on increasing volumes (20% growth from the earlier 10% vol growth guidance earlier), however bottom line growth guidance would be 10-15%
Domestic business grew by 100% YoY
Appointed Praveen Jaipuriar - Head of Continental Coffee, prior to this earlier was Dabur - linkedin Profile
Already sold out 80-85% of the capacity , already starting booking for FY19. Given this looking to book volumes for FY18 and are focusing on customers who will ramp up going forward, initially need to sell wide ranging products, some of them are lower margin. For new customers need to be very competitive on prices. These are largely spray dried products. Going forward will introduce freeze dried.
Margin guidance given considering the spend on spends on branded domestic business and expanding customer base where margins will be slightly lower to start with
Willing to work at even 0% margins in order to acquire customers
Current utilizations almost at peak.
Usually Q1 and Q2 are slightly lean, Q3 and Q4 are big quarters. But this year Q2 already we are filling a lot of orders
Barring the new/incremental business the margins will be as they were earlier. Focus is to hit the volume targets for FY19 given the expanded capacity. Thus
Vietnam capacity utilization - 62% utilization. Co did 62% utilization last year as well, however one of the big customers was moved to India plant in Q1. Inspite of that Utilization in vietnam was 62% which means that they have added a lot of clients. Once the Vietnam customer goes back to Vietnam it will further increase the utilization. Vietnam profitability this quarter was lower because of addition of new clients
Expect branded sales (Institution + Branded Business ) - to be 85-100 Crores. Currently around pure branded sales around 12 Crores; expect to be ~ 35 Crores in FY18.
Expect private label growth in domestic market ~ 5%
Investment will be ~ 30 Crores in the first 3 years (on a CY basis, starting 2017)
Did sales of Andhra ~ 1.1 Crores in Branded segment in Q1 post some promotions
Margin increase on the customers added this year will be visible
There is excess capacity in the market - 50-60% .
In such a scenario CCL is unique because of
Long lasting relationships
Economies of scale
To grow volumes by 10-20% we need to add just 5-6 customers. These are volume customers, they don’t go to small guys. Need to have at-least 15-20,000 tonnes in capacity
US Market - no clarity at this moment. Lot of lobbying - not hopeful of seeing something changing in the near future. 2 issues - a)FSMA- economic adulteration banned then Brazil and Mexico will be impacted b) Border Tax if implemented then Mexico will be impacted, others will gain.
There is shortage in freeze dried capacity globally, that also contributes to the better margin.
The new Freeze dried plant shall contribute ~ 300 Crores at full capacity. Plan to achieve 50% utilization in the first year. Should be able to reach 85% util in 3 years
DOmestic B2C market would be ~ 10,000 tonnes, if one includes the B2B segment then total market size would be ~ 14-15,000 tonnes
The way you have observed both co’s over promising and under delivering please go through all annual reports of CCL Products since inception and make a note of what they have promised and what they have delivered
The companys fortunes seem to have changed post 2011. A look at coffee prices post 2011 shows quite a sharp increase in coffee bean prices.
Would a sharp decrease in coffee prices not impact the operating margins of this company negatively?
Also, how superior is this the processing business to Tata Coffee which is a fully integrated company? Tata coffee is making inroads with its brand in the domestic market too. It has already entered the US market with its Eight o clock brand and yet there is a big valuation gap between the two. Lately , Tata Coffee has been showing superior margins as compared to CCL. Whats the reason for that?
I think the reason why CCL has higher multiple as compared to tata coffee is because it has more than 4x capacity. Also tata coffee is into pepper, tea and backward integrated intro plantations which exposes them to risks like volatility in prices and productivity due to monsoon. Its branded play in US is not doing well while the benefits of the ones in the domestic market are being reaped by Tata Global beverages since they have the marketing rights. Tata coffee has announced 5000 mt of freeze dried capacity in Vietnam along with a host of other players who are setting up manufacturing units due to incentives given by the government. Should it not impact the realizations going forward? CCL claims to have 10% share in the global exports in a market which has oversupply and a large number of competitors. Does this mean the the global instant coffee market is just 9000-10000 cr? Has anyone been able to verify this information? Who are the other large players in the market globally?
Also in q1 18, the company said that the margins increased due to increase in raw material prices. Now when the company has a back to back contract why would the gross margins be impacted by price of green coffee beans?
The company claims that it is the largest private label player globally. Any idea what is the share of private labels for CCL currently? It is quite miniscule in the domestic market (approx 25 cr).
I still cant understand the issue with the Swiss plant. How does it help the company to cater to the customers in Europe? Why cant the company cater the customers from here? What about the other coffee processors who cater to the European market? Tata coffee does not have a plant in Europe.
I would really like to understand the competitive dynamics better. Despite what the management says about relationships and number of blends, I would assume that processing is a commoditized sector even when it comes to edibles (eg. high competition in shrimp processing). What is it that really makes this company stand out?
I suggest you read last 2 year annual reports and concall transcripts. You will get detailed answers of your questions. Also, business models of tata coffee and CCL are different and hence different multiples.
Tata Coffee bought Asian Coffee from Rajendra Challa, erstwhile promoter. Even after starting from scratch again in 1995 they have built CCL Products which sells 2.5x more than Tata Coffee in the global markets even when Tata had acquired Asian Coffee and had a head start.
The incentives end in 2020. A plant takes 2-3 years to be complete. Even in the latest communication from Tata Coffee management they are still contemplating the proposal at a committee level. The work on construction hasn’t started. When their plant starts the tax holiday will be over and they will have reduced tax rates like other players. This speaks a lot about how prepared the management is when they take so long to take advantage of an incentive
Read about the coffee crisis in Vietnam in 2013 when in a single year 50% of the firms exporting coffee had to close their business because of oversupply. I think CCL knows what it is doing because they know that its an oversupplied market
They have mentioned of a 5% market share excluding Nestle. You can rework your calculations
There is one company in Vietnam which is 20% of the market. It is the Intimex Group. There are companies in Brazil & Columbia but they are not a direct competition because they supply Arabica and CCL is mostly into Robusta. Infact Vietnam & Indonesia are the major markets for Robusta beans so those are the only two markets which should concern
The margins have gone down because the company has started to get contracts from new clients which has reduced the blended margins. Also first two quarters are lean period hence to maintain volumes they have to sell at lower prices.
I think you should go through the concalls for your answer on this
Start reading more about the global coffee market. You will get your answers
The above article talks about increasing coffee consumption in China. I guess similar trends are also visible in India. With the two countries accounting for the majority of global population and the demographic shift due to the majority of millenial population present it will prove to be an interesting mega trend in the coming years