CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected

India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/17064" target="_blank" data-smartkarma-citation="entities:17064:1">Ccl Products India Ltd (CCLP IN)</a> is the largest exporter of instant coffee from India with a total capacity of 35,000 tonnes per annum (tpa). Near 90% of its revenues are generated from exports to Business to Business clients that are spread across 90 countries. The company has a very long-term relationship with clients due to a range of blends (near 200 proprietary blends) while also providing scale as CCL is among a few players globally that can deliver bulk volumes. The relationship with clients is generally sticky as the end consumers rarely change their preferred blend that is kept secret by CCL. The company is a family run business with the promoter holding 44% stake.Key growth drivers<ul><li>Global instant coffee consumption expected to grow at a CAGR of near 5% till 2025.</li><li>High growth outlook for China’s instant coffee consumption that may grow at near 14% CAGR till FY20 and drive CCL’s manufacturing unit in Vietnam. Vietnam is the largest exporter of instant coffee to China with a market share of near 50%.</li><li>The company’s foray into the domestic market with its “Continental” brand is likely to change its growth and profitability trajectory going forward, given its scale and ability to manage large volume business.</li></ul>ValuationThe company trades at an EV/EBITDA of 16.5x FY18, 14x FY19e and 12x FY20e EBITDA and a PE of 26x FY18, 22x FY19e, and 19x FY20e EBITDA which in our opinion is a fair valuation given a favorable growth prospect, improving profitability profile and good management quality.

Ccl Products India Ltd (CCLP IN) is the largest exporter of instant coffee from India with a total capacity of 35,000 tonnes per annum (tpa). Near 90% of its revenues are generated from exports to Business to Business clients that are spread across 90 countries. The company has a very long-term relationship with clients due to a range of blends (near 200 proprietary blends) while also providing scale as CCL is among a few players globally that can deliver bulk volumes. The relationship with clients is generally sticky as the end consumers rarely change their preferred blend that is kept secret by CCL. The company is a family run business with the promoter holding 44% stake.Key growth driversGlobal instant coffee consumption expected to grow at a CAGR of near 5% till 2025.High growth outlook for China’s instant coffee consumption that may grow at near 14% CAGR till FY20 and drive CCL’s manufacturing unit in Vietnam. Vietnam is the largest exporter of instant coffee to China with a market share of near 50%.The company’s foray into the domestic market with its “Continental” brand is likely to change its growth and profitability trajectory going forward, given its scale and ability to manage large volume business.ValuationThe company trades at an EV/EBITDA of 16.5x FY18, 14x FY19e and 12x FY20e EBITDA and a PE of 26x FY18, 22x FY19e, and 19x FY20e EBITDA which in our opinion is a fair valuation given a favorable growth prospect, improving profitability profile and good management quality. 

CCL Products India

CCL Products- Its Time to Smell the Brew