Ngon Coffee Company Limited is a wholly owned subsidiary, jointly owned by CCL and Jayanti Pte Limited. This is an instant coffee manufacturing unit. Sales = Rs. 297 cr (263.53 cr.) and PAT = Rs. 55.55 cr (45.16 cr.). Investment is Rs. 38 cr.
Grandsaugreen SA is a wholly owned subsidiary of Jayanti Pte Limited and step down subsidiary of the Company incorporated in Switzerland. This is an agglomeration and packing unit. Sales = Rs. 77.07 cr (22.82 cr.) and PAT = Rs. 0.63 cr (-5.72 cr.).
Jayanti Pte Limited is a wholly owned subsidiary of the Company incorporated in Singapore for the purpose of promoting instant coffee projects in various countries. This is only an investment Company, hence no operational performance is reported. Investment is Rs. 111.25 cr.
The Board has decided to wind up M/s. Jayanti Pte Ltd by transferring the shares held by it in M/s.Grandsaugreen SA and M/s. Ngon Coffee Company Limited, to the parent Company, there by making both the Companies directly owned by CCL as 100% Subsidiaries.
Continental Coffee Private Limited is a wholly owned subsidiary of the Company, which has been established with an objective of promoting instant coffee brands of the Company in the domestic market. Sales = Rs. 23.67 cr (2.77 cr.) and PAT = Rs. -5.87 cr (-3.71 cr.). Investment is Rs. 7 cr.
Your company has spent the following amounts towards capex during this financial year: Duggirala plant for Civil works and line balancing of plant & machinery 23 crores.** **At SEZ in Kuvakolli, Chittoor District for establishment of a new freeze dried coffee plant 198 crores.
Your Company has already established its longstanding presence in the international markets in two forms of instant coffee â Spray Dried and Freeze Dried and keeps upgrading the same with latest technology available globally to get better yield. Now, it is focusing to make a mark in the Indian domestic market which is very encouraging.
The enhanced production capacity of the plant at Duggirala, enabled the Company to cater to the increased demand for instant coffee in international markets.
Your Company through its subsidiary, Continental Coffee Private Limited is keen to grab a pie of domestic market. Domestic business turnover was around ` 46 crores which included retail as well as institutional sales. A team of professionals has been put to create a distribution network which will be supplemented with demand creating activities as well. More focus is on product development with an aim to increase coffee consumption among the consumers.
Continental Xtra and Continental Speciale, instant coffee brands of the Company are being seeded in select markets of South India. The freeze dried coffee, Continental Premium is being targeted to institutional segment and retail through e-commerce.
The presence in Vietnam helps the Company to cater to the coffee needs of ASEAN countries and also this is in close proximity to many South-East Asian nations, Japan, Korea, China etc. Most of these countries have granted Vietnam a most favoured nation status with reduced or NIL duty structures in addition to having savings on logistics.
The soluble coffee consumption in India is expected to witness a growth of more than 15% year on year and Your Company has made a successful entry in the retail market with its brands.
Can you please taste those and post us a review.Thank you.
Considering that those are 10 rupees sachets,there will be lot of âFirst time tryersâ, so good taste and aroma would be a big plus in increasing the domestic revenue
CCL Products Q1FY19 Concall Trascript was a very good read. Management has talked very candidly about the business model of the company. It provides a lot of information and knowledge about the coffee industry, company and the management. Following are the key points.
Margins were higher this quarter due to some particular high margin orders that were executed in this quarter.
Margins for the full year will be similar to those as last year.
We have changed the strategy for domestic market in terms of revising the margin structure. We have increased the price of the product and the additional margins are being used to fund brand building activities.
Target this year is to increase the domestic sales from 46 cr last year to Rs. 100 cr this year, off this 75 cr is targeted from own branded business. In Q1 we did Rs. 17 cr sales in India out of which Rs. 13 cr was in B2C segment. In own branded business everything earned will be used for advertising for next 3-4 years, we do not expect it to contribute to bottom line.
Our current focus is only in AP and Telangana. We will be expanding to Karnataka and Tamil Nadu as well during this year. One fact is about 75% to 80% of the coffee sale in India is taking place in these four states. So our target also is to focus on these four states first and in other regions we will make our products present but our focus is not really to do a lot of promotions and activities in other areas right now.
At the beginning of every financial year we do our estimate for that particular year based on the repeat orders that we have. It is the quarterly execution is something that we do not focus on at all, which is also one of the reasons why you will see that there has been a lot of quarterly fluctuations in the company but yearly targets we are still meeting. Last conference call also there were lot of surprise questions saying that we did not expect Quarter 4 to turn out to be the way it did. But that is something that we had projected from day one.
There will be a significant decrease in raw material prices from next quarter onwards. Because of the falling green coffee prices when you buy the coffee, by the time it gets delivered it takes maybe even 2 to 3 months. So you would not see the impact immediately in the numbers. Last yearâs higher numbers are still getting reflected in this quarter as well.
As far as the global demand and supply is concerned the demand is growing at the same rate of 2.5% to 3% globally. As far as the supply is concerned, to be frank there is more than 50% excess production capacity that is available in the world. You have numerous manufacturers with spray as well as now freeze-dried capabilities, so there is no shortage of potential supply. The reason that we have been able to grow in a systematic and consistent manner is because one we have the right marketing collaborators in different geographies, two we have a wider range of product mix that no one else in the world can offer, three we are keeping our R&D to ourselves. So whatever is the Research and Development that we are doing we are keeping this as part of our in-house technology and we have now created more than 1,000 blends in our portfolio.
We are expecting that over the next 4 to 5 years there is going to be a decline in our B2B business which is also one of the reasons why we are focusing on the branded business more aggressively starting with domestic market.
We will complete Rs. 300 capex this year. Rs. 250 cr already spent, Rs. 50 cr will be spent this year. No further Capex apart from this.
Installation work of the new Freeze dried unit will be completed by September. Trial production will be started in Q3FY19 and after that we will apply for approvals from clients. Itâs a green field project so it may take some time for the production to stabilise. So commercial production will start this year or next remains to be seen.
Around 50% capacity we can reach in EBITDA breakeven with our plant and we are expecting to reach that in the first year itself.
Due decrease in green coffee prices by 15-20% realisations will decrease but margins will improve. So we are seeing 10% kind of growth in turnover for the whole year.
Volume increased during the quarter by around 30%.
For the next three, four years between 10% to 20% is the volume growth that we can sustain, but after that it is likely to slowly start coming down because if you are already at say 45,000 tons or 50,000 tons production capacity, every year growing by 5,000 tons to 6,000 tons is going to be a very big challenge.
In the US one of the largest conglomerated and packing units in the US is shutting down this year. So there is a transition that people are looking at, looking at alternative suppliers. Most of that business was earlier being done by Brazil. The same company they have approached us, they wanted to have a tie up with us as well so from Vietnam we are going to be supplying to them. Quantum of supply will be around 400-500 tonne.
We have more than double the capacity capability of what they (2 market leaders in India) have, which will enable us to be more economically efficient on a per kg basis, so that is our biggest advantage. So our sustainability will be much longer than them even if there is a price war.
Vietnam has capacity of 10000 tonne of Spray Dried line capacity, off this 4000 tonne is convertible into agglomerated capacity. if we supply agglomerated products to the customers, we are likely to get little higher margins.
Capacity utilisation in Vietnam this year will be 80-85%. Next year we will increase capacity by 4000 tons.
40 crores is the amount that we have allocated for this year in building the brand including team cost, offers and everything else.
Our strategy for the last 20-odd years has been to constantly keep the margins as it is. We do not renegotiate margins with our customers. We give that kind of transparency to our customers when it comes to pricing and that also enables us to be very competitive in the market. The drawback of this model is that the only way that you can grow is through volume growth that is why we have always focused on volume growth in the company.
Seems like there may be some stress on global coffee supply due to Kerala floods. Indiaâs production is at a 21 year low (70% of this produce is exported).
What I donât understand is why the price of coffee has come down, along with reduction in supplyâŚ
There is global glut in coffee. There is strong expectation of bumper coffee crop in Brazil, Indonesia and Vietnam. Hence the coffee prices are multi year low.
@siyaram7 Even yesterday i bought continental xtra for first time and it taste really good. I used to have nascafee and bru before but now I will go with continental as itâs cheap compared to other with same quality
Could you please source the snippet? I am aware that the next coffee crop in India might not be good due to the recent floods in Karnataka and Kerala. However, my understanding of CCLâs coffee bean procurement is not in line with the snippet. CCL procures from many different countries other than India.
You are right the management has said many times the price of coffee doesnât really affect itâs margin as they procure coffee after they have the orders and itâs priced accordingly. I donât know from where the twitter handle of @bear_bull_cycle got it from.
This is from Prof. Bakshiâs session on the topic : Fragility & Optionality in Business Models (August 2018)
PRICING POWER is a shock absorber as it will make you less fragile- turning a commodity into a brand- like buying sugar and turning into candy. The second level of pricing power is pass through costs model - so the profit margin on per unit remains the same
CCL is doing both :
Pricing power for the Continental Business : Buy-Commodity-Sell-Brand
2nd Level Pricing power for the Converter Business : Complete price pass through. They buy coffee beans only with confirmed orders in hand.
I have been tracking CCL for a fairly long time now. And as everyone else, I am mighty impressed by the way the company has grown. The management has demonstrated growth mind-set as they are now placing the next foundation for growth for the company in the coming years through their foray in the domestic market with a large focus on the branded business.
However they are up against two behemoths in this category. Nestle and HUL. They are definitely not going to make it easy for CCL to get market share. I am not taking anything away from CCL and I have a lot of respect for what CCL has achieved in the last decade or so, but this fight with the global biggies will certainly not be easy.
As an investor, how should one look at the situation? The base rate for CCL to win in this market given what we know today is less than 50%? Not many have been able to succeed against Nestle, HUL, P&Gs of the world. Sure the times are changing, but CCL is an underdog in this fight.
Having said that, it has a strong base of cash flows which as an investor one can value. Itâs B2B IC manufacturing business. Last year it generated a PAT of INR 148 Crores. This includes an ad spend of INR 20 crores towards the B2C business, if you add that back (adjusting for taxes) the PAT comes to around 160 Crores. If we assume a growth of 15% on top of this this translates to around INR 180 Crores of PAT for FY19. What multiple will you give to the B2B IC business? The history has been terrific both in terms of growth and return on capital employed.
However the future is not as rosy as the past. As growth will stagnate in the next 4-5 years. This is what the management believes, so I as a minority shareholder, do not have any reason to believe otherwise at this stage. Iâll take this at face value.
Considering this, what multiple would one want to give? This is a subjective question and I donât think there is any correct answer. 15x looks to be a conservative multiple. More than 20x a bit too stretched given growth is going to be tepid after the next 3-5 years.
In that context how much of value of the B2C venture is currently embedded in the market cap of the company? The lower the better as I think the risk-reward will then be skewed in favour of me.
I have different views on this. I will comment more on the growth perspectives and leave out any comments on the valuation front at this time.
On the B2B IC side, there would be gradual market shift towards more private label, as the product quality improves. If we consider mature Coffee markets, like Germany for example, the variety and quality of private labels is commendable. So while overall growth might look saturating, the market shift might provide strong opportunities for CCL both in India and especially abroad.
Another related trend in large markets is the rise of RTD coffee and inhibition towards soft drinks. Coca-Colaâs recent acquisitions are a proof towards this. This would also have large implications towards growth in the long term as health consciousness picks up in India too.
On the B2C Side, while CCL is an underdog definitely, but the fight is not about a zero sum game at present. There are two levers of a) organic growth with consumption of coffee growing 15-20% per annum and b) shift from tea drinkers. So in effect CCL can continue to grow and establish the brand in immediate future rather than worrying too much about market share battles. In mature markets, there after often 5-6 strong brands, so given the current competitive intensity, I do not see immediate challenges.
"Coffee cannot compete with tea in several regions of the country as it is not as affordable,ââ he said. The move is aimed at capturing the market in North India, where tea is the main beverage. Almost 80% of the coffee consumption in the country is concentrated in the four states of Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. Link
and also agree with @Prdnt_investor that this is not a zero sum game anymore.
On the B2C side, CCL has planned not only in Instant coffee segment, but also wants to compete in flavoured coffee, RTD coffee, Ground coffee and also coffee dispenser at corporate offices. Except for instant coffee, the rest of the markets are largely unorganised and there is enough scope to build a brand.
Among the instant coffee players, there is a good chance of being at least a decent no.3 player, if it is able to displace TataGrand and imported brands which sell at a much higher price.
The majority of the current sales are coming from the southern coffee drinking states, with Andhra & Telegana contributing the most.
The market size of all the segment put together is at least around 5000 crores with instant coffee alone at 1500-1800crs. I think the branding can be regarded as a failure if the B2C + domestic biz does not cross 200crores revenue in next couple of years.
On the valuation side, I believe the premium to given multiple owes to the steady OPM of 20% for past 5 years, Revenue growth of 10-12% in past 5 years, vision to create a brand and premium for mgmt quality.
