What is the impact on CCL due to recent surge in coco prices?
High raw material price would increase working capital needs, hence increased debt and negative impact on p&l due to interest.
I think this is a short term pain and may last until mid FY25.
Fitch ratings revised outlook to negative, this report has more details
3 Likes
CCL-ProductsâCompany-Updateâ17-Apr-2024.pdf (nirmalbang.com)
âRobusta coffee prices continue to make new highs on a daily basis.
Duration of future orders could be lower, say 3-6 months, thereby indicating lesser visibility than in the past.
While we remain positive, relatively lower demand visibility
and working capital debt overhang might offer a better entry point to
investors in the near termâ - Nirmalbangâs view
4 Likes
hi folks!
I analyzed this business today by scrolling through the valuepikr threads only. I think thats a better option than reading through all concalls.
I know about the moats and cost-plus model of the business BUT
I have a quite neutral view of the business.
Cons:
-
Mediocre earnings growth
10 year Profit growth : 15% while
10 year stock returns : 25%
hence speculative returns : 10%2. Branded Coffee Business is just 7.5% of their total revenue
They commenced their branded coffee business around FY15 and they did around a revenue of 40 cr in the next year itself. Today their revenue from branded business stands around 200 crores which is around 7.5% of their total revenue.
I think it is very insignificant right now and I guess this part of the business had been the thesis for most of the investor community.
We have to see how it grows up. In my view, it might stay <10% of the total revenue in next 4-5 years. will be happy to be wrong here.
*Pros, not so pros: *
3. Its a slow, boring and compounding business. Honestly, a very good business to own for long term which gives you 15% compounded annual return with minimal downside because I believe the valuation multiples are hovering around their averages.
Also there is an optionality of branded business doing well and valuation re-rating because of that but that might come over 7,8 or 9 years in my view. A lot of patience is required for that.
Conclusion:
One can think of this as a defense stock.
Disc : I am not invested in CCL Products
7 Likes
3 Likes
Q1 FY25, Concall notes - Excuse for any mistakes:
- Revenue growth is around 18% yoy
- Volume growth is 15 - 16%, Maintain the volume growth guidance of 10 - 20% for the whole year.
- EBITDA growth is also around 23% yoy, EBITDA growth is driven by high value contracts being executed vs base. This is temporary and but will look to improve margin profile may be after a 1.5 or 2 year period.
- PBT growth is around 25.5%.
- PAT growth is around 18%
- Domestic market gross turn over is 90.5 crore (11.6% of total revenue), 65 crores out of that is branded sales.
- Branded business is growing at 45 - 50%, also expanding distribution and all channels. With volume growth of 30%+.
- Branded business is currently focussed only in south India, having good traction in 5 lakh + population towns. Expanded to Metros with 1000 - 1200 outlets.
- Overall India business targeting at 400 crore and branded business targeting at 300 Cr by End of Year.
- Looking to get 7 - 8% EBITDA margin for the branded business this year. This has broken even last year itself.
- Gross debt is at 1885 Cr: 1200 Cr is working capital and 675 Cr is term loan. Expect it to go to 2200 Cr assuming current price with volume growth.
- Cost of funds will be at 8.25% from July for 1200 Cr working capital
- Rough revenue breakdown:
- 40% from Asian markets
- 20 - 25% from East Europe market
- 15% from Western Europe and UK
- 10 - 15% from US and balance from South America, Africa, Australia and New Zealand.
- No inventory build up yet seen on client side, coffee prices are at pretty high levels.
- Need to watch out the next coffee crop yields in Vietnam and India, which we will get to know by November / December.
- Long term contracts are not yet revived at elevated price, there is wait and watch to see things settling down.
- Capacity Utilization:
- India: Capacity excluding food and beverages is running close to 100%, but F&B should be just 5 - 10%.
- Vietnam: First line is running at full capacity and second one at around 50% capacity
- Margin drivers: Value added products - Small packs and speciality coffee. Sweetest - speciality coffee in small pack
- Small packs - contributing close to 20% of total units, from single digit 4 / 5 years ago.
- UK business: Percol business is being ramped up, looking to get the listings back, it is seen as environmental friendly brand.
- Coffee Prices:
- Brazil coffee prices are much lower and producers there are having some advantage, both in price and logistics
- Inventory days have gone up to 180 days from 120 days earlier, because we are buying from Brazil market and it takes longer to get the shipment, which is helping in margin but having impact on finance cost.
5 Likes
One more thing to add is that CCL has started a few cafes as a Proof-of-Concept (POC) which is a pure play D2C business.
The way management approached this was quite prudent. They started off with few Continental trucks and then to a few outlets in colleges and metro stations and now to a full fledged cafe. The journey taken to prove the concept is probably ready while creating brand visibility. Hopefully this is not a start to an end but a step towards a new beginning. Market may see this as a good opportunity only if the return ratios align well. If the POC gets validated in a year or so this could well be a significant step towards a new line of business. Starbucks is talking about opening 600 new stores by 2028. Starbucks is still in the red after opening 421 stores with a turnover of 1218 crores.
CCL is an prudent management but a scale up with already high debt on books would be a significant challenge but management has got the timing right for the D2C foray.
5 Likes
When asked, the founder(s) of Third Wave coffee chain, as to why they start their branch almost next to, or in the vicinity of StarBucks which is intuitively opposite in logic, they said : due to SB being present, the coffee drinking crowd is already drawn to the location, the captive audience is homed in - all we have to do is capture their final steps, and induce them to our outlet - by being unique in our way.
Remains to be seen how CCL go about building their branded cafe shops. It is not easy - CCD has shown how treacherous rapid expansion is.
4 Likes
stores of their own is too much of a jump and not an easy diversification to manage, best to be very very cautious, esp when macros are against them (high coffee prices) and they have high debt to service, which means they are ill placed to fund burn