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I have entered into CCL Products this week. I’m done with my portfolio adjustments by introducing new companies for that ALPHA. There will NOT be any new entrants into my portfolio. Only re-alignments of the weights going forward.

Weightage: The stocks which are introduced for that ALPHA will be capped at 20-25% of the total portfolio.

PORTFOLIO


Stocks introduced for ALPHA: MPS, CUPID, CCL Products. (cap at 25%).
Core stocks: Repco, Gruh, PI Industries, Page industries. (cap at 75%).


Rationale for CCL Products (I have already explained the rationale for MPS, Cupid:

  1. Improving RoE/RoCE until FY18 where we have certain visibility.
  2. Reduction of debt and probably settle around 0.1 D/E or Zero debt by FY18.
  3. Super visibility of free cash flows
  4. Increasing dividend as a %ge of net profit with increasing cashflows
  5. Vietnam plant at 75% utilisation by FY 17 and then increase the Vietnam capacity to 20000 MT by capex of about 20 million USD funded entirely by internal accruals. No tax on Vietnam revenues for next 3 years and later 50% tax - effective tax rate is going to be low for foreseeable future.
  6. Immediate revenue visibility of 25% for FY 16 and 30+ EPS growth. (mostly built into current price, still scope of surprise exists)
  7. No recent history of equity dilution, ethical management, promoter holding increased from 3-4 years back and stabilised around 44%.
  8. Upside due to new big European client and probable entry into Japanese markets (very sticky market where long term revenue visibility would be high and management sounded positive on this new business).
  9. This is NOT a commodity business and also NOT a real estate intensive (no plantations). I really liked that they do the RAW MATERIAL purchase as per JIT (Just In Time) policy so they are completely insulated from coffee prices though realisations could vary by 7-8% in case of fluctuations as per management.
  10. Own brand retail foray: Very difficult preposition. Nescafe and Bru has SUPER mindshare of customers and breaking this could be difficult. However, the coffee is priced less than 50% the price of Nescafe for same quality - now beat this. Management only has to make people realise this. Difficult though.
  11. I’m from Hyderabad and CONTINENTAL COFFEE has a shelf space beside Nescafe and Bru in Vijetha Super market. I took both the bottles and compared the price, packaging, bought home both of them and tasted. ( I will put my observations in CCL thread).
  12. Better late than never even though the valuations are a bit high and IF all the above story plays out well, there WILL be a PE re-rating as we cannot have a company growing at 25% plus, with near zero debt levels, with RoE and RoCE levels above 30, increasing dividend, free cash flows at 24 PE. Retail foray success (IF) will provide even further PE expansion.
  13. Coffee Day IPO will bring certain interest among coffee stocks and if Coffee day, Tata Coffee, CCL Products are evaluated based on current and next 2-3 years financial metrics/ratios then am sure CCL Products will come out on top whether it’s RoE/RoCE, profitability etc. I agree all the three cannot be compared as the businesses and business models are different (retail chain, plantations heavy, coffee processor respectively), but there are no similar listed businesses on exchanges.
  14. Opportunity Size? Just do not ask me, it’s COFFEE, the second MOST traded commodity after OIL and people have been consuming COFFEE since eternity and simply NOT possible to change people tastes on Coffee and preference. If world growth and particularly the ASEAN countries GDP were to increase going forward, coffee consumption will look up.
  15. In a way, isn’t Coffee like an addiction? So demand will be there.
  16. Unexplored market opportunity in USA which is the biggest market for coffee.
  17. The plant in Switzerland seems to be a very strategic decision to serve EU clients and the company gets to trade its coffee as “MADE IN SWITZERLAND” coffee. I liked it. But demand in EU may not leap but just snail about.

Request forum members to provide feedback on my portfolio. Criticism of stock selection is welcome. Many thanks!!

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