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Recommendations India

CCL Products review and analysis

August 28, 2014, Thursday, 10:01 GMT | 05:01 EST | 13:31 IST | 16:01 SGT
Contributed by Nirmal Bang

CCL Products (India), or CCL, is among the world’s leading and India’s largest processor and exporter of instant coffee with exports to more than 67 countries. It has ~10% global market share in instant coffee exports, if one excludes Nestle’s captive consumption. CCL is one of the very few companies globally that have successfully scaled up this business and increased its capacity ~10 times since inception in 1995, and that too without equity dilution. With the ramp-up at its Vietnam plant, revenue/ EBITDA are likely to post 22.1%/20.3% CAGRs, while with zero tax facility in Vietnam and lower debt, net profit would grow at 38.6% CAGR over FY14-FY16E. CCL stock trades at an attractive valuation of 9.7x/6.3x FY16E P/E and EV/EBITDA, respectively. Market leader status with a strong free cash flow of Rs3.4bn, a likely 1,097bps rise in RoCE at 23.3% from 12.3% over FY14-FY17E and a debt-free status by FY17 are likely to result in a strong re-rating. We have assigned Buy rating to it with a TP of Rs140 based on 15.0x/9.5x FY16E P/E and EV/EBITDA, respectively, up 56% from the CMP.

Newly commissioned plant at Vietnam to drive growth: CCL commissioned its 10,000tn instant coffee plant in Vietnam in 2HFY14, which will drive consolidated volume by 28.2%/11.4% in FY15E/FY16E versus 3.3%/13.0% in FY13/FY14, respectively. The Vietnam plant offers four benefits: 1) Logistical advantage of ~US$150/tn because of proximity to coffee-growing zone, 2) Better raw material availability, with lead time lower by one-and-ahalf months as Vietnam is the second-largest green coffee grower, 3) Favourable duty structure and close proximity to coffee-consuming ASEAN nations like Japan, Korea, China, etc, and 4) No income-tax for first four years and tax exemption of 50% for next five years.

Working capital cycle improves: Higher working capital needs of the Indian plant at 36.1%/29.0% are mainly on account of higher inventory at 128/115 days in FY13/FY14, respectively, as a significant portion of green coffee beans is imported. CCL can source green coffee beans in 24 hours for its Vietnam plant, while in India it takes two months for raw material transit and import clearance, and, therefore, the working capital cycle for the Vietnam plant is likely to be at least six weeks lower than its Indian plant. In the wake of faster rampup of its Vietnam facility likely from FY15, we expect consolidated working capital needs to reduce from 39.7%/32.4% in FY13/FY14 to 27.7%/26% in FY16E/FY17E, respectively.

Lower capex, better working capital to drive healthy cash flow/return ratios: Following healthy revenue CAGR of 22.1%, EBITDA is likely to post a 20.3% CAGR, while with zero tax facility at the Vietnam plant and lower debt, net profit is likely to register a 38.6% CAGR over FY14-FY16E. As CCL has completed a major portion of its capex, it is likely to incur only maintenance capex. With strong profitability, lower capex and improving working capital cycle, free cash flow generation is likely to be very healthy. We expect CCL to generate free cash flow of Rs3,405mn over FY14-FY17E, which will be utilised to repay its Rs2,921mn debt and also improve dividend payout. Despite better volume and strong profitability, capital employed may remain flat over FY14-FY17E, leading to a healthy improvement in RoCE from 11.2%/12.3% in FY13/FY14 to 20.2%/23.3% in FY16E/ FY17E, respectively.

Foray into retailing of instant coffee: CCL ventured into branded coffee market with launch in Andhra Pradesh (AP) and aims to achieve revenue of Rs3bn/Rs5bn in the next three/five years, respectively. We contacted few department stores in AP and found out that its branded coffee gets sold in less than 15 days, which itself speaks for the quality and value offering.