Recommendation From Sector Plantation - Tea & Coffee

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

CCL Products (India) Ltd

CONCOCT A BREW OF REFRESHING RETURNS WITH CCL

BSE Code: 519600
CMP: Rs. 299.45
FV: Rs. 2
BSE Volume: 5,453 

HERE IS WHY
Steady and resilient margins
Robust business model
Sustainable growth prospects

CCL Products (India) Ltd is one of the largest instant coffee manufacturers in the world. Over the years, CCL has effectively developed more than 1,000 blends of coffee and is capable of preparing blends specific to customer requirements. The company imports 85 per cent of its raw materials for its India operations and exports 90 per cent of finished products. As a result, fluctuations in exchange rate do not have a material impact on its financials.

On the consolidated financial front, total income from operations stood at Rs.234.08 crore in Q3FY19 as against Rs.273.99 crore in Q3FY18, thereby falling 14.57 per cent. EBITDA plummeted to Rs.54.31 crore in Q3FY19 from Rs.64.47 crore in Q3FY18, posting a drop of 15.76 per cent. Net profit spiralled down to Rs.32.61 crore in Q3FY19 from Rs.40.42 crore in Q3FY18, thereby sinking 19.32 per cent. EPS dropped to Rs.2.45 in Q3FY19 from Rs.3.04 in Q3FY18, posting a fall of 19.41 per cent.

Its ROE surged from 10 per cent in FY09 to an average of 22 per cent during  FY14-18. Over the last 10 years, CCL’s sales, EBITDA and net profit grew at a CAGR of 10 per cent, 18 per cent and 26 per cent, respectively, due to improving capacity utilization.

The company boasts a pass-through mechanism which safeguards it against the volatility in the prices of raw coffee, thereby ensuring margin protection. It operates a business model which is difficult for its competitors to replicate.

It recently set up a 5,000 MT freeze dried unit in Andhra Pradesh. This is likely to propel sales growth. The new plant, which is likely to commence operations in Q1FY20, will have tax benefits for five years. It is at a proximity of 160 km from the Chennai port, ensuring low logistical costs. he strong order backlog is expected to ensure nearly 50 per cent capacity utilisation going forward. An upcoming capacity of 3,500 MT in Vietnam is expected to lead to volume growth in FY21.

Over the last 15 years, the company has scaled up its coffee processing capacity by approximately seven times. Its EBITDA margins are resilient and stable because it procures raw materials only upon receiving orders. Despite green coffee prices being at historical lows, CCL’s margins are unlikely to take a hit in the event of a recovery in green coffee prices. Furthermore, over the last 10 years, the company has relied modestly on leverage to achieve growth, has refrained from diluting equity and has maintained healthy return ratios.

The company has spent an additional Rs.700 million towards infrastructure development for future expansions. At its Indian operations, the company aspires to increase its products in favour of small packets vis-à-vis bulk. As such, it is setting up a packaging capacity of 3K-5K tonnes. The realisations awarded by small packets are 5-10 per cent higher as compared to bulk. It is also setting up 5,000 tonnes of agglomeration capacity to improve the quality of coffee; thereby fetching realisations which would be higher by 5-10 per cent. Thus, we recommend our reader-investors to BUY this stock.