CCL Products

Stock Opportunities Not-so-Hidden Gems
1

Hi Friends,

I was looking at the results of this co recently and found them very interesting.

The key positive is - the co is into instant coffee and claims to be one of the biggest company in the world. The co has plants in India, Swizerland & Vietnam.

The Market Cap is about 400 Cr and it seems the co would end this year with 800 Cr turnover and 50 Cr NP.

The co has been doing a lot of private label manufacturing and also claims to be having a sort of its own brand in some countries. So if we can research more on this co and understand if the recent growth in margins are sustainable, then it could be a very interesting idea.

Here are links to few articles I found online:

http://www.ndtv.com/video/player/news/domestic-market-to-improve-next-year-ccl-products/259770

http://www.business-standard.com/article/companies/ccl-products-to-focus-on-domestic-market-brand-building-113020700762_1.html

http://www.thehindubusinessline.com/industry-and-economy/agri-biz/article2825901.ece

http://www.nirmalbang.com/Upload/CCL%20Products%20-%20Stock%20Idea.pdf

Negative: The coffee prices had been rising over last few years and hence the growth seems higher. Offlate, prices have started correcting.

Views Invited

Regards,

Ayush

Disc: Started with a token position to study the stock

12 Likes
2

You could search for a reliance money report on CCL (it might be a 2-3 years old). The report has is quite detailed and speaks about the entry barriers that this company enjoys.

Supratik

3

I too read the nirmal bang report and found it interesting.

Some risks include:

1). price of coffee going down sharply

2). Currency risks – they had a gain of 2 cr for q3 fy 13

3). Power situation in Andhra Pradesh – there was margin pressure due to power costs going up in q3 fy 13.

Valuations are not too demanding and that prices in some of the risks.

4

Regarding the Link of interview given by Ayush: - one thing that I liked in the interview given by the management is that they speak straight on the company aspects, how have they performed, future plans, sales and profit growth, competition rather than deviating around on the industry trends, coffee prices, stock moments etc etc.,

**I read a transcript of some expert on CCL products I have tried to summarize it. **

**Summary **

The company is in the business of importing coffee beans, processing it and exporting it (soluble coffee). Almost 90 percent of the company’s turnover comes from export. It exports to very big names, which basically sell CCL coffee under their own brand name internationally. The International Coffee Organisation has a positive outlook on the coffee sector. This augurs well for the company.

**Focus on the Domestic Market: - **So far the company had been focusing on the export market. However, now the company is planning to get serious about the domestic market. It has recently joined hands with a number of retailers to sell its coffee under the retailers’ brand. So the retailers would be buying coffee from CCL Products and selling it under their own brand. So, domestic operations of the company are in for a substantial jump in the coming years.

**Plants: - **CCL has currently got three plants. One is at Guntur District in Andhra Pradesh which is said to be a world-class plant. The second plant is at Switzerland, which caters to the requirements of its European clients. The third plant, which has been set up at a cost of about Rs 125 crore just got operational a few months back and that has come up at Vietnam, which would be catering to the Japanese market and the Far East markets.

**Financials: - **The performance of CCL Products India, for the past two years the company has been growing at a steady pace. However, this year if we see the first nine months’ financial results, they are extremely amazing. Turnover went up by 32 percent in the first nine months from Rs 360 crore to about Rs 475 crore or so and profit went up by 67 percent from about Rs 22 crore to about Rs 37 crore or so. But if we see the Q3 results – because the Vietnam plant commenced operation in that quarter – there is a 52 percent jump in turnover, from Rs 130 crore to about Rs 200 crore and the profit went up by 75 percent from about Rs 8.75 crore to about Rs 16 crore or so.

Now that the Vietnam plant has stabilized and commenced operations, the performance of CCL Products India can improve in the current quarter as well as in the coming year, because in the coming year we will see the full impact of the Vietnam plant.

This year already the company has achieved an EPS of Rs 27 or so in the first nine months, and the EPS can go up to at least about Rs 38-40 in the current year. Also, next year since we will have the full impact of this Vietnam plant, its EPS could shoot up to at least about Rs 46-48. So, the stock is very undervalued at this level of about Rs 295.

In the recent midcap carnage, this stock came down from Rs 371 to about Rs 295 levels or so. At this level of Rs 298-300, the stock is quoting at hardly about 7 times the FY14 earnings. I think there is a clear case for 50 percent upside in CCL Products India over the next 18 months or so.

2 Likes
5

Hitesh sir,

the management interview link given by Ayush sir answers your first two queries regarding coffee prices and currency risks…

coffee prices are supposed to stabilize between $1800-$1900 per tonne and the management states they no longer take a call on coffee prices. They do back to back (didnt get the meaning of this) as they have got some big clientele…

PS: - No holding till now…

6

Does the back to back mean that they import coffee at a certain rates and add a margin for value addition or processing that they do and then export it again. Does this mean that they would make a fixed margin per tonnage or would be able to maintain that margin even if the coffe prices go up or down? If this is the case this could be a really interesting story because then this could differentiate itself from a commodity company to a processing company and with branding it may command better multiples going forward. We need to understand the pricing mechanism here.

7

The Economic Times of 13th July, 2012 has a mention of this company. I have reproduced the para as below:

“The Guntur-based company is one of the leading coffee exporters from India. It is an export-oriented firm with the ability to import green coffee into India and export the same - free of all duties. It is a leading private label manufacturer of soluble coffee in the world.”

What back to back may mean is as mentioned above. Surely, some value addition is done and re-exported.

8

S P Tulsian on CCL Products:

Not much in terms of new information. In fact misses a few key aspects:

  1. New plant in Vietnam and possible growth from this facility

  2. Any upside from Domestic business

9

A brief study on business of CCL Products Ltd. Views invited.

CCL Products Ltd. Is engaged in processing of coffee, it procures green coffee and turns it into instant coffee. Around 95% of finished product is sold as white label to global coffee brands and retailers for their private labels. The co. also ventured into selling its own brand of coffee, âContinentalâ, in India.

The co. produces 3 varieties of coffee using different processes, i.e.,

1). Spray Dried Coffee: Itâs the most common and cost-effective variety of coffee produced. Itâs also the most common variety of coffee consumed. Itâs also used in chocolates and ice-creams and various other products to give flavour of coffee.It sells for around USD 5/kg.

2). Freeze Dried Coffee: Itâs a premium product and retains the flavour and aroma of coffee to a great extent, much more compared to spray dried variety . The procedure to manufacture the same entails high capital expenditure and thus this variety sells for around USD 8/kg. This variety of coffee is quite popular in European countries.

3). Liquid Coffee: Itâs again a premium product and retains most of the falvour and aroma. This variety of coffee is consumed only in Japan and Korea. The co. is not selling any of liquid coffee now but has capacity for the same and has done extensive sampling with customers in Japan and Korea both.

The co. has two plants, at Guntur in AP, India with a capacity of 25K MT and recently commissioned (Fy14), high-tech one in Vietnam with a capacity of 10K MT with basic infrastructure ready to take up to 20K MT, only investment required in future would be for machinery.

Processing Business:

CCL Products is a pure processor and doesnât own any coffee plantations. The co. procures green coffee from Chikamagalur in Karnataka, india as well as imports premium variety like Robusta and Arabica from Vietnam and Ethiopia respectively. The green coffee/raw material constitutes approx. 80% of total cost and the co. works at cost-plus model. The mark-up is 20%. The co. does not stock raw-material and places the order for the same as and when the customer places an order for coffee, effectively insulating itself from any raw-material cost fluctuations. This also reduces working capital requirement as suppliers are paid later however no advance is received from the customers too. Coffee trades in USD worldwide and the since the co. exports more than 90% of the produce in instant coffee form, there exists a natural hedge to a great extent.

The co. has more than 100 customers spread out across 70 countries. The co. faces competition from processors in Brazil but CCL Products has strong relationship with its customers lasting for 15-20 years built on successful completion of orders, reliability on quality and trust resulting in vey high customer stickiness. The relationship is also strong because customers who market the instant coffee their brand demand consistence in quality.

The co. recently added capacity by adding a 10K MT capacity plant in Vietnam. The plant is state of the art with high degree of automation. The plant is located in highest green coffee producing state in Vietnam and thus helps in easy availability of raw-material. The co. also saves approx. USD 60/MT on transportation viz-a-viz India. The biggest advantage from Vietnam is exemption of income-tax for first 5 year of operations. Plus, Vietnam enjoys MFN status with most countries and thus its advantageous to customers due to low duty structures.

Branded Business:

The co. ventured into selling its own brand of coffee, âContinentalâ, in Fy14. The co. enjoys double margins on EBIDTA basis in branded business viz-a-viz its processing business. The product was launched only in AP and clocked Rs 40 cr worth of sales in first year itself. Management indicates strong recall of the brand and plans to launch âContinentalâ all over India in a staggered manner. It has already launched the product outside AP, in packets where coffee consumption is high. The instant coffee market in India is dominated by Nescafe which does sales of Rs. 1400 cr. and Bru which does sales of Rs. 1200 cr. The instant coffee market is growing at 12-13% in India due to increased exposure to coffee among Indians due to the budding caf© culture, especially youngsters. Southern India accounts for approx. 80% of instant coffee consumption in India and AP constitutes approx. 20% of entire India according to some news articles. The co. considers Nescafe as its main competition as Bru has a different variant with Chicory added to the coffee. The co. also sells a product with Chicory mix. The co. is not doing any promotions except in-store promotions and relying on word-of-mouth. The co. also plans to provide coffee to organized retailers in India to sell under their private labels and has already tied up with reliance Retail.

Conclusion:

The co. plans to double sales in approx. 3 yearâs time on back of added capacity and its branded foray, aims to capture approx. 20% market In India. The co. is also aiming at higher profitability levels due to increased benefits from Vietnam and high-margin branded business. The co. sold 16K MT in Fy14 and aims to sell 20K MT in Fy15. A solid reputation among customers and high customer stickiness act as a moat around the business and plus, acceptance and strong recall of its âContinentalâ augur well for the co.

Disclosure: I hold stock inthe co.

10 Likes
10

âContinentalâ,

1). Itâs Itâs Itâs coffee.It

2). Itâs

3). Liquid Coffee: Itâs

Processing Business:

doesnât

Branded Business:

âContinentalâ, âContinentalâ caf© yearâs âContinentalâ inthe co.

11

I want to understand pricing power - that’s the most important in a B2B business.

)- does the company sell through fixed price contracts ? or are the prices spot driven /

)- who are the other competitors ? What are switching costs involved - for say an ice cream manufacturer who needs coffee from CCL - is he buying a mere commodity or something else, say taste, aroma etc. in the latter

Any one with contacts in tata coffee/any one on the procurement side in a FMCG compay, can throw light.

âContinentalâ, in India.

1). Itâs Itâs Itâs coffee.It

2). Itâs

3). Liquid Coffee: Itâs

Processing Business:

doesnât

Branded Business:

âContinentalâ, âContinentalâ caf©

Conclusion:

yearâs âContinentalâ inthe co.

12

I want to understand pricing power - that’s the most important in a B2B business.

)- does the company sell through fixed price contracts ? or are the prices spot driven /

)- who are the other competitors ? What are switching costs involved - for say an ice cream manufacturer who needs coffee from CCL - is he buying a mere commodity or something else, say taste, aroma etc. in the latter

Any one with contacts in tata coffee/any one on the procurement side in a FMCG compay, can throw light.

âContinentalâ, in India.

1). Itâs Itâs Itâs coffee.It

2). Itâs

3). Liquid Coffee: Itâs

Processing Business:

doesnât

Branded Business:

âContinentalâ, âContinentalâ caf©

Conclusion:

yearâs âContinentalâ inthe co.

13

Ragunathan ji,

The co. works on cost-plus model. The day it enters into a contract to sell processed coffee,the same day it orders raw material (green coffee beans). The contract price of course considers prevailing raw-material cost,so no impact on margins.

The co. sells majority of its finished product as white label goods to marketers who sell under their own brand. The marketers want to maintain consistency in quality and taste/aroma so they won’t go changing vendors easily,in my opinion,and hence switching costs. The co. has also created different blends of coffee through trial and error and can tailor-make varieties as demanded by customers.

Trying to get some credible info on competition in processing,will update. Nescafe is one big competitor worldwide as the customers of CCL Products are effectively competing with Nescafe. Also in India,for its branded foray,Nescafe is only equivalent competitor for the variety of coffee CCL Products sells. I would suggest you to go through conference calls on researchbytes.com to get more insights.

14

Nirmal Bang initiates coverage.

http://www.indianotes.com/uploads/article_pdf/2014/NirmalBang_CCL_27August_2014.pdf

Disclosure: Invested. 8% of pf.

15

Nikhil

Thanks much appreciate it - do any of the VP-ers know anyone in nescafe or anywhere else ? Some scuttlebutt could be critical in this - I want to understand if this business like sanjoy bhattacharya describes is a barsaati business - which does well if the going is good or if it wil have good pricing power.

The thing I have learnt is that moat comes from one of the following in an industry like this :

)- control of raw material - say CCL has access to the best coffee source

)- R & D/quality

)- reach and distribution - unlikely since this is a B2B business with limited universe of buyers

I want to be sure it is B - quality of products and that their products are better than everyone else’s in the market.

I am now convinced that they do genuine value addition but what I want to know is what kind of pricing power they enjoy in this industry.

http://www.indianotes.com/uploads/article_pdf/2014/NirmalBang_CCL_27August_2014.pdf Link: http://www.indianotes.com/uploads/article_pdf/2014/NirmalBang_CCL_27August_2014.pdf

16

Today ICICI has recommended this for nano Nivesh. The positives are are as discussed here .

17

Story on track from 2/3 yrs perspective –

18

I read that coffee has been one of the best performing commodities in the past year. Has that played a dominant role in the company’s superlative performance in the recent quarters?

19

Their foray into private labels of supermarkets will certainly not bring in much profit. I have learned that they have launched their Continental Brand in Andhra Pradesh. Can somebody there have a first look how the brand is being advertised & accepted.

20

On my holiday to Gir in Gujrat was surprised to see the sachets of coffee in the Room were from Continental Brand . I frequent across the same in Bangalore too.