CD Equisearch Pvt Ltd Nov 4, 2015 Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance CCL Products (India) Ltd No. of shares (crore) 13.3 Mkt cap (Rs crs) 2805 Current price (04/11/2015) 211 Price target (Rs) 258 52 week H/L (Rs.) 254/130 Book Value (Rs.) (fv:5) 36.2 P/BV (16e/17e) 5.3/4.2 P/E (16e/17e) 21.9/17.2 EPS growth (FY15/16e/17e) 45.8/36.0/27.8 ROE (FY15/16e/17e) 24.3/26.8/27.1 Beta 0.8 Daily volume (avg. monthly) 291403 BSE Code 519600 NSE Code CCL Bloomberg CCLP IN Reuters CCLP.BO Shareholding pattern % Promoters 44.7 MFs / Banks / FIs 5.9 Foreign 23.2 Non-Promoter Corp. 3.1 Public & others 23.1 Total 100.0 As on Sep 30, 2015 Recommendation BUY Analyst KISHAN GUPTA, CFA, FRM Phone: + 91 (33) 4488 0043 E- mail: [email protected](Figires in Rs crs) FY13 FY14 FY15 FY16e FY17e Income from operations 650.74 716.83 880.57 1053.44 1265.13 Other Income 1.88 2.62 3.02 3.13 3.28 EBITDA (other income included) 123.16 145.72 174.25 218.04 265.80 Net Profit after EO item 47.44 64.43 93.96 127.83 163.35 EPS (Rs) 3.57 4.84 7.06 9.61 12.28 EPS growth (%) 31.0 35.8 45.8 36.0 27.8 Company Brief CCL Products produces several varieties and blends of coffee including spray dried coffee powder, spray dried agglomerated / granulated coffee, freeze dried coffee and freeze concentrated liquid coffee. It is also certified to supply organic coffee, rainforest alliance coffee, UTZ certified coffee and fair trade coffee, in any combination. In India it has a capacity of more than 20000 mt pa. Highlights CCL is banking on growing demand of instant coffee in emerging markets of Asia, Africa and Middle East to propel dispatches. According to market research firm Euromonitor, global sale of instant coffee would touch $35bn by 2018 from $31bn in 2013. CCL’s presence in Vietnam helps it to cater to growing coffee consuming nations of South East Asia, Japan, Korea and China. Apart from significant cost savings on logistics, most of these countries have granted Vietnam most favored nation status with reduced or zero duty structures. With this opportunity in sight, CCL is doubling capacity of its plant to 20000 tonnes by 2017. No less important is the liquid coffee capacity of 5000mt at Vietnam which recently completed trial production. Higher throughput in Vietnam unit would push margins higher not least due to product superiority and better availability of raw materials in Vietnam. Indian market is also not left untouched. Huge potential in the soluble coffee segment in the country (expected to grow annually by nearly 4% over the next five years) goaded CCL to take a plunge with both private labels and own brands. It has launched its Continental brand of coffee in supermarkets in Andhra Pradesh, Telengana and Tamil Nadu, while the retail private label market is being promoted across most Indian states in Reliance Retail, Big Bazaar etc. CCL has failed to lose its zeal of launching value added products. After launching few such products in Vietnam last year, it now plans to increase share of small pack business (read: convert bulk business to retail packs). The stock currently trades at 21.9x FY16e EPS of Rs 9.61 and 17.2x FY17e EPS of Rs 12.28. CCL’s relentless business growth over the last few years has caught investors unawares. Yet risks of slowdown in off take in rapidly expanding markets like China looms large. Weighing risks against potential business growth (average earnings growth nearly 32% over the next two years), we recommend investors buy the stock for a target of Rs 258 based on 21x FY17e earnings (peg ratio: 0.7), over a period of 9-12 months.
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CD Equisearch Pvt Ltd Nov 4, 2015
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Recommendation
Emerging trends in global soluble coffee markets presage a gargantuan rise in demand from developing markets,
including Asia, Africa and Middle East. Little surprise much of the growth would come from Asian countries - China,
India and ASEAN region. Market research firm, Euromonitor, expects global sale of instant coffee to touch $35bn by 2018
from $31 bn in 2013. It ranks China as the fourth-largest global market for RTD coffee in terms of volume, and fifth in
terms of value. It reckons that RTD coffee packaged in either cans or plastic bottles provides convenience to Chinese
consumers with busier lifestyles.
Led by favorable industry shifts, CCL posted yet another year of industry-beating performance: volumes in India jumped
by some 17%. Tata Coffee, an instant coffee manufacturer, too posted 16% jump in dispatches despite demand headwinds
in Russia - the largest market of soluble coffee globally. Risk of excess capacities impacting trade margins looms though.
To derisk its trade portfolio from Russia and CIS, Tata Coffee forayed in China, Angola, Pakistan and Mongolia.
Product innovation holds the key in this overly crowded industry. CCL’s slew of product launches (read: value added) in
Vietnam have bore fruit - margins shot up as a result. Commencement of liquid coffee plant in Vietnam would also do its
bit to boost margins. And so would its initiative to increase share of small pack business. Realizing that competitive
intensity is rising, Tata Coffee too would use its arsenal on product and packaging innovation.
Yet CCL needs to do more to stabilize capacity in Vietnam: despite full year of operation capacity utilization stood at just
46%. It needs to also sort out pressing issues of commencing the liquid coffee plant and doubling capacity to 20000 tonnes.
The former would not see commercial production before the next fiscal and the timeline for the latter is yet to be resolutely
determined. Higher capacity utilization in Vietnam and commencement of new capacity of 5000 mt in India (by Dec 2015)
would foment volume growth (annual: 18.3%) over next two years.
Higher throughput would doubtless shore up margins and asset turnover ratios. Both fixed and total asset turnover ratios
would reach decadal peaks by FY17. Free cash flows would get a boost from healthy internal accruals. CCL's parsimonious
domestic retail expansion strategy would limit investments in capital assets and brand building. To tap Indian retail
market, CCL has started exploring opportunities in private label market across India.
The current stock valuation of 21.9x FY16e EPS of Rs 9.61 and 17.2x FY17e EPS of Rs 12.28 leaves little margin of error.
Risks abound. Growing affluence in China could impede growth of RTD coffee as people trade up to specialist coffee shop
purchases. Congestion at Vietnam ports could impact shipments. Yet durable earnings growth (nearly 32% average
growth) and wider narrow moat, as manifested in gut-wrenching return on capital, would attract growth seeking
investors. We therefore recommend a buy on the stock with target of Rs 258 based on based on 21xFY17e earnings, over a
period of 9-12 months.
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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