CCL Products

Stock Opportunities Not-so-Hidden Gems
374

CCL came out with quarterly results today:

Below is the concall summary: (please cross-check with original transcript once it is out)

  • Revenue growth guidance consistent around 15-20%

  • Vietnam volume similar to last year (except a dispatch of a pending order) - lower off-take

  • Domestic market volume was flat due to effect of severe summer

  • Dividend payout reason: Amount for capex provisioned, remaining amount got as dividend (~58 cr); Vietnam entity now debt-free

  • Rise in depreciation due to operational SEZ started in April this year; Same with deferred tax increase

  • Volume contribution from Europe ~1/3

  • Coffee price decline impact on freeze dried coffee: Realizations has come down vs. what it was 2 years back; This will be new normal for now

  • Freeze dried plant to run full capacity in 1-2 years (can contribute 270-300 cr at full capacity)

  • Domestic business: ~15 cr.; It was lean quarter vs. 8-9 cr. QoQ (continental);

  • FSME law in-force, not being effectively enforced; Some uptick in US now visible (there is 20-25% growth in US, current volumes ~2,500 tonnes)

  • Packaging capacity can come on-line by this FY and commercial production could start in Q1 next FY

  • Volume loss due to loss of customer last quarter: might again start buying few quality of products; Added few other customers on premium side which will help to meet revenue guidance

  • Debt repayment over next 4 years; OPM broadly in-line with Q1 2019

  • Price premium of freeze dried ~20%

  • Capacity utilization (across all plants) ~90% (except SEZ which will be 50%)

  • Depreciation and finance cost run-rate to remain same for this year

  • Freeze dried till date from new plant ~300-400 tonnes production

  • Branded India business: additional 15 cr spend projected; Next year might break-even

  • Profit growth guidance ~10-15%

15 Likes
375

Q1 FY20 Concall notes.
In addition to @vivek_mashrani’s notes.

  • Commenced SEZ unit i April. Will achieve 2500 tn in FY20 from SEZ. Did around 400 tn this qtr.

  • 15-20% volume and EBITDA growth in FY20.

  • Margins in Vietnam were lower this year due to 150 tn order (Rs. 8-9 cr.) which will be dispatched in Q2 and also Q1FY19 we did one product with extra ordinary margins. We will do this product with higher margins in Q2 FY20.

  • Vietnam entity is debt free so we will keep sending money in Indian entity through dividends.

  • Summer was very severe in domestic market so we did not see any increase but no decline either.

  • Domestic sale of own Continental coffee was Rs. 15 cr. Q1 is slightly lean qtr in domestic market. Projected around 110 cr.

  • Europe has exempted duty on Coffee from Brazil: This will come into effect from FY20 onwards. Lot of issues in it. Lot of people doubtful regarding implementation of it. Coffee from India and Vietnam has duty of 3.1% so we are making a presentation to our govt and Vietnam govt to reduce the duty.

  • Little less than 1/3rd revenue comes from Europe.

  • Our sales to US around 3000 tn ( Off this 2500 tn consumed in US and rest send outside).

  • Total loan at Rs. 355 cr.

  • Depreciation is higher due to commercialisation of SEZ unit. It will remain at these levels going forward.

  • Tax was higher due to deferred tax on SEZ Unit. This is not actual cash outflow just notional entry.

  • Dividend payout around 25% coming year. In two instalments on half yearly basis.

  • Sufficient coffee in the market. Not expecting any significant increase in coffee prices.

  • 1-1.5$ price of freeze dried higher than spray dried. 20% in terms of variation.

  • We lost one customer in Q4FY19. He was buying 3-4 qualities from us. He started his own manufacturing. Now he has come back to us for 2 qualities which are premium. Good news for us.

  • Capacity utilisation will be around 90% overall. In SEZ it will be around 50% in FY20.

  • Rs. 350 cr CWIP transferred to Gross Block in Q1FY20. Rest will be transferred in Q2FY20.

  • Standalone margins were better due to SEZ unit operational as it is Freeze Dried.

  • Rs. 300 cr sales expected from SEZ when fully operational in 1-2 years.

Regards
Harshit Goel

14 Likes
376

Thank you both @vivek_mashrani and @harshitgoel for the instant update.

377

Hi, I am a newbie to the investing. I have a question on Q1FY20 Results, In the release, the standalone net profit is 82 Cr, but the consolidated net profit reported is 36 Cr. Why is there a difference between those two. Wont the consolidated profit higher than standalone in this case?

378

Hi @phanni333,

Welcome to the VP community!

Answer lies in item #4 in Notes of the financial statement:

image
image1683×502 225 KB

1 Like
379

CCL is classic case of putting fight against already established brand. In my opinion its not easy to displace brands with long track record and fine recalling power. There are many small regional player coming in instant coffee area. SLN group launched Levista in southern part of India where I believe CCL is also trying to penetrate market. If we look at habit of most of the people, they simply dont switch food and other consumption related brand just because there is a new kid in town. Ask our neighbors when was the last time they changed the brand of tea powder, salt, toothpaste , bath soap etc. Brand switching is very rare scenario. In most of the time in shops people ask “give me BRU” not “give me instant coffee”. When there isnt any issue with existing brand why would someone switch to something else ?
Next comes huge distribution. In almost all kirana shops including small tea vendor kind of shops we can see BRU coffee sachet. Small sachet is where margin is. Imagine how much time and investment required to build brand and distribution at huge scale. Few months back I have seen many small shops selling CCL brand coffee. But now they simply vanished from store. I checked with many shops , response is not that great.
So CCL to became a major consumer story, there is very long road which may or may not be possible to travel.

7 Likes
380

Even ITC is jumping into coffee retailing business… https://brandequity.economictimes.indiatimes.com/news/business-of-brands/itc-s-sunbean-beaten-cafee-to-take-on-hul-s-bru-and-nestle-s-nescafe/69883455

381

Totally agree with your point of view, if someone needs to understand how difficult it is for new brand just track ITC FMCG story of last 10 years.

1 Like
382

Absolutely, its a tough business particularly when stickiness associated with taste.

They are trying to create niche with their differentiated brands and blends, have heard both sides of feedback and many are even switching.

I would see this business as broadly capital protection bet due to stickiness, blend capabilities, diversified client base, recession proof nature of business model + Optionality offered from B2C side.

Though whether it will sustain 20x fwd PE multiple with 10-15% profit growth is what needs to be seen in near term. Long term if B2C clicks, its worth increasing allocation in my view.

7 Likes
383

In my opinion, there are two aspects for the CCL story. One is looking CCL as ancillary Coffee Bean manufacturer which is what their bread and butter business is. Second seeing potential for CCL’s consumer coffee business. This is at the very beginning stage. My whole point is not to value CCL based on consumer business rather value it on its core business.

2 Likes
384

True…and rightly so, its getting multiple in the middle of commodity businesses (5x-15x) and FMCG (30x-50x) businesses.

3 Likes
385

Nirmal Bang Notes on CCL products (Not rated)

CCL Products Ltd is one of the leading private label manufacturers of coffee
globally. The company has 35,000 MT capacity across three manufacturing
facilities and a newly commissioned SEZ plant in India with 5,000 MT capacity. It
exports its products to 82 countries and has an addressable market size of 250-
300k MT. CCL sells its own branded product in the domestic market through a
wholly owned subsidiary and the company is investing in promotion and brand
building activities to generate visibility for the brand. The company aims to scale
up the domestic business with the goal of reaching Rs2bn in the next five years.

Conference-call takeaways and other key highlights
 Revenue in 1QFY20 stood at Rs2731.74mn as against Rs2944.46mn in the same
period last year, whereas net earnings stood at Rs346.7mn in 1QFY20 against
Rs394.6mn in 1QFY19.

 The management maintained its volume growth guidance of 15-20% for FY20 and
also maintained EBITDA growth guidance in the range of 15-20%.

 CCL’s Chennai plant, which is a 100% premium freeze-dried coffee plant with a
capacity of 5,000 MT, commenced commercial operations in 1QFY19. The
management indicated that the Chennai plant is expected to run at 65% capacity
initially because of lengthy and frequent service of the plant in its maiden year of
operation.

 Sales volume for Vietnam was marginally lower than last year if we take into
account an order of 150 tonne which got deferred and will be realised in the next
quarter. The newly commissioned SEZ unit is working at 50% capacity utilisation
and is well on its way to reach the annual target as guided by management earlier.
There was no growth in volume from the domestic business due to a severe and
prolonged summer.

 Commenting on the EBITDA performance, management stated that EBITDA from
Vietnam subsidiary was lower compared to last year as a particular product had
given substantial additional profitability. That business is likely to recur in 2QFY20
and profitability in the next quarter is expected to be better. The EBITDA from Indian
business has improved because of the contribution of premium freeze dried coffee
from the newly commenced SEZ plant.

 The capacity utilisation across various manufacturing units is 90% except for the
SEZ in Chennai which is running at 50%. The company will be going in for capacity
expansion of 3000 MT in Vietnam and has already set aside the funds from internal
accruals.

 The domestic retail business achieved revenue of Rs150mn this quarter which is up
from Rs90mn in the same period last year. Management stated that 1Q is a lean
quarter (coffee business is seasonal) and revenue is expected to be better going
ahead.

 Management is not expecting any significant change in the coffee prices this year as
there is sufficient supply in the market.

We remain positive about the company considering its expansion plans, superior R&D,
product development capabilities and long term client relationship. We believe that
CCLP’s growth momentum remains intact in the medium term and remain positive on its
future outlook.

386

IBCI capital notes on CCL Products

CCL Products Q1FY20 revenue was in line with our forecast while EBITDA was 17.8%
above our estimate. The company’s EBITDA grew 9.0% YoY to Rs694 mn due to 377bps
improvement in EBITDA margin to 25.4%. Despite 9.0% YoY growth in EBITDA, net
profit decreased 12.1% YoY to Rs347 mn mainly due to higher tax rate at 36% in Q1FY20
vs. 24% in Q1FY19. Newly set up freeze dried plant sales stood at ~350 kt while Vietnam
sales were lower as some shipments were deferred (150 kt).
We trim our Vietnam sales estimates given weaker than expected sales in Q1FY20.
Also, we raise our depreciation expenses resulting in net profit to be lowered by
5.6%/5.0% for our FY20/21 forecasts. We trim our target price to Rs329 (earlier Rs345),
continuing to value the stock at 20x FY21 EPS.

Key Highlights and Investment Rationale
 Sharp improvement in standalone margins: The Company’s standalone business
EBITDA margin improved 670bps YoY to 25.9% mainly due to improved product mix
(new 5 ktpa freeze dried plant commissioned during the quarter). In Q1FY20, Vietnam
subsidiary, Ngon Coffee Company, has paid dividend of Rs584 mn to its Indian parent
company. Indian branded business sales stood at Rs150 mn vs. Rs90 mn in Q1FY19.

 Company maintains guidance: CCL continues to expect sales and EBITDA to grow by
15-20% YoY in FY20. However, net profit growth is likely to be lower due to higher
interest and depreciation expenses (capitalized new freeze dried plant in Q1FY20). It
targets branded business sales at Rs1,000 mn in FY20 vs. Rs800 mn in FY19 – this will
require cash funding of Rs150 mn from standalone business.

 Outlook and valuation: Although CCL had lost one of its large clients in Q4FY19, it
continues to maintain healthy guidance for FY20. We expect CCL’s net sales and net
profit growth to be driven by the recently commissioned 5 ktpa freeze dried plant in
Chittor. We forecast CCL’s EBITDA/net profit to grow at a CAGR of 18.0%/18.8% over
FY19-21E. We continue to value the stock at a PE multiple of 20x on our FY21E EPS to
derive a target price of Rs329.

387

Disc - I have sold majority of CCL position in last 90 days. I am not SEBI registered analyst & this is not a buy/sell recommendation.

Essentially the hypothesis for CCL was as follows ->

  • Coffee is tough business to do, with relationships established over decades. It is very tough for new entrants to enter the market. Further, CCL management claims that they have expertise in blends etc. which is difficult to replicate.
  • Further, specifically in case of CCL, the investment trigger was 5000T of Freeze dried capacity coming online. The margins in freeze dried business were supposed to be much better than spray dried business.
  • The third was the optionality of consumer business getting scaled up & multiple going from B2B processor business to FMCG business.

The first “chink in the armor” came while listening to Tata Coffee Q4FY19 conference call. The company recently commissioned 5000T of freeze dried plant in the Vietnam.
The company claimed that they have special “Blends Lab” where customers can experiment with blends. The company claimed that they will go to 100% capacity utilization in 2 years & expected revenue is ~400Cr.
So nothing stops an existing player from scaling up the capacity although it might be difficult for new player to come inside. Further, existing player like Tata also has capability to create several blends & they will probably have it easier to get client contracts due to group reputation. Due to this, premium/margins in freeze dried side has come down significantly.

The second “chink in the armor” came when revenue/PAT declined in Q3FY19 & it became clear later that one of the CCL’s customer is getting into its own capacity. Although that customer might struggle to scale up etc. but as investor - it meant slower growth at fairly priced or slightly overpriced multiple.

Unlike many other industries, the industry landscape in coffee does not offer high growth rates for long duration while accommodating several players.

Consumer business is still remains one of the exciting parts of the story but the fight is going to be tough & it is going to take a long time. Although IMO, they seem to be doing a lot of things.

In summary, business growth timelines & my investment expectation timelines started to diverge & hence I sold out.

30 Likes
388
389

Was browsing Grofers app and was happy to find that their coffee private label is manufactured by CCL.

ccl
ccl400×800 51.3 KB

5 Likes
390

Some recent news articles related to B2C launch/marketing and CAPEX/Debt

1 Like
391

Interview of MD srishanth selecting Nitya Menon, a good Telugu actress in south market to market continental coffee…

The Interviewer is asking all the things we know from the quarterly Concall. He was asking about expansion plans, the Domestic sales of CCL as a % of total(which is 7%) and they want to increase to 15% in the next few years.

And he told about roping Nitya menon as Brand ambassador.

disc: Invested.

393

Would appreciate a summary for those who don understand telugu

395
4 Likes