Company Profile -
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, positive triggers will start pouring in which makes it a lucrative investment even after recent run up.
Why to Buy?
Newly commissioned plant in Vietnam to drive growth
CCL commissioned its greenfield 10,000tn project in April 2013 for manufacturing instant coffee in Vietnam at a total investment of US$40mn (including working capital). Commercial production from the plant started in 2HFY14. Vietnam plant to achieve 55%/75% capacity utilisation rates in FY15E/FY16E, respectively, resulting in consolidated volume growth of 28.2%/11.4% in FY15E/FY16E.
Working capital cycle improves
Working capital requirement for CCL’s Indian plant stood at 36.1%/29.0% in FY13/FY14, respectively. Higher working capital at the Indian plant is mainly on account of higher inventory at 128/115 days in FY13/FY14, respectively, as a significant portion of green coffee beans is imported. Working capital cycle for its Vietnam plant is expected to be at least six weeks lower compared to the Indian plant, as the transit time for raw materials and finished goods is likely to be significantly lower compared to the Indian plant. The company can source green coffee in 24 hours for its Vietnam plant, while in India it takes two months for raw material transit and import clearance. With faster ramp-up of its Vietnam facility likely from FY15, we expect consolidated working capital requirement to reduce from 39.7%/32.4% in FY13/FY14 to 27.7%/26% in FY16E/FY17E, respectively.
Debt-free balance sheet likely by FY17
Currently, CCL has debt of Rs2,921mn with the D/E ratio at 0.83x. Out of Rs2,921mn debt, Rs1,180mn is of Indian operations while the balance Rs1,741mn is of overseas operations, mainly pertaining to the Vietnam plant. We expect CCL to generate a healthy free cash flow of Rs3,405mn over FY14-FY17E, which is likely to be utilised to repay the entire debt and also improve dividend payout.
Business model isolated from volatility in coffee bean prices
CCL remains unaffected by fluctuations in green coffee bean prices or coffee prices as it places orders for green coffee only on receiving an order for instant coffee and makes back-to-back arrangements for green coffee beans. In other words, CCL operates on fixed margins without carrying the risk of coffee price volatility. In India, CCL procures green coffee beans by importing them (75%) from global markets (Vietnam, Indonesia, African countries) as well as from the domestic market (25%), primarily from Chikmagalur in Karnataka.
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, positive triggers will start pouring in which makes it a lucrative investment even after recent run up.
Why to Buy?
Newly commissioned plant in Vietnam to drive growth
CCL commissioned its greenfield 10,000tn project in April 2013 for manufacturing instant coffee in Vietnam at a total investment of US$40mn (including working capital). Commercial production from the plant started in 2HFY14. Vietnam plant to achieve 55%/75% capacity utilisation rates in FY15E/FY16E, respectively, resulting in consolidated volume growth of 28.2%/11.4% in FY15E/FY16E.
Working capital cycle improves
Working capital requirement for CCL’s Indian plant stood at 36.1%/29.0% in FY13/FY14, respectively. Higher working capital at the Indian plant is mainly on account of higher inventory at 128/115 days in FY13/FY14, respectively, as a significant portion of green coffee beans is imported. Working capital cycle for its Vietnam plant is expected to be at least six weeks lower compared to the Indian plant, as the transit time for raw materials and finished goods is likely to be significantly lower compared to the Indian plant. The company can source green coffee in 24 hours for its Vietnam plant, while in India it takes two months for raw material transit and import clearance. With faster ramp-up of its Vietnam facility likely from FY15, we expect consolidated working capital requirement to reduce from 39.7%/32.4% in FY13/FY14 to 27.7%/26% in FY16E/FY17E, respectively.
Debt-free balance sheet likely by FY17
Currently, CCL has debt of Rs2,921mn with the D/E ratio at 0.83x. Out of Rs2,921mn debt, Rs1,180mn is of Indian operations while the balance Rs1,741mn is of overseas operations, mainly pertaining to the Vietnam plant. We expect CCL to generate a healthy free cash flow of Rs3,405mn over FY14-FY17E, which is likely to be utilised to repay the entire debt and also improve dividend payout.
Business model isolated from volatility in coffee bean prices
CCL remains unaffected by fluctuations in green coffee bean prices or coffee prices as it places orders for green coffee only on receiving an order for instant coffee and makes back-to-back arrangements for green coffee beans. In other words, CCL operates on fixed margins without carrying the risk of coffee price volatility. In India, CCL procures green coffee beans by importing them (75%) from global markets (Vietnam, Indonesia, African countries) as well as from the domestic market (25%), primarily from Chikmagalur in Karnataka.
With positive future outlook of the stock, we expect stock is likely to sustain growth momentum and stock price is likely to reflect the same. Hence, we recommend the stock for the target price of 130.
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