CCL Products Ltd.

Initiating Coverage
Stock Update

CCL Products Ltd.

January 23, 2023

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 CCL Products Ltd.

Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon

Coffee Rs. 532 Buy in Rs. 528-538 band and add further on dips in Rs. 475-484 band Rs. 587 Rs. 627 2-3 quarters
Our Take:
HDFC Scrip Code CCLROEQNR CCL Products Ltd. (CCL) is in the business of converting raw coffee beans into instant coffee granules/powder. The company is not only
BSE Code 519600 India’s largest coffee processor, but it has the world’s largest single location plant and has top private label instant coffee manufacturers
NSE Code CCL across the globe as its clients. While prima facie it looks like a commodity conversion business, unlike tea or other commodities, coffee
Bloomberg CCL IN processing is a specialist job as the flavour and consistency has to be maintained batch after batch irrespective of the input quality or
CMP (Jan 20, 2023) 532 grade. Not many companies have been successful in doing this and hence, globally, coffee business has very little competition and high
Equity Capital (RsCr) 26.6 profitability.
Face Value (Rs) 2
Equity Share O/S (Cr) 13.3 Worldwide CCL’s coffee is being consumed at the rate of 1,000 cups per second. CCL exports its processed coffee to more than 90
Market Cap (RsCr) 7083 countries and supports more than 250 brands with sustainable supplies — both quality and quantity. CCL has on offer more than 1000
Book Value (Rs) 102
recipes for the clients to choose from. It has a combined state-of-the-art manufacturing capacity of ~54,000 MTPA, which is spread over
Avg. 52 Wk Volumes 386286
Duggirala (Guntur District of AP), Kuvvakolli (Chittoor District, AP), Switzerland, and Vietnam. Having succeeded in placing their coffee on
52 Week High 572
the world markets, CCL launched its ‘Continental Coffee’ brand for the Indian market, which should act as a major growth catalyst, going
52 Week Low 315
ahead. With the help of its rich experience in the international markets, it has developed 250+ blends, claiming they are superior to its
competitors’ blends.
Share holding Pattern % (December, 2022)
Promoters 46.26
Valuation & Recommendation:
Institutions 29.39
CCL is amongst the largest green coffee bean processors globally. It is India’s largest exporter of instant coffee (38% market share) and
Non Institutions 24.35
Total 100.0
world’s leading supplier to private labels. Over the past two decades, it has increased its capacity by 15x without diluting equity and has
also managed to keep its debt in check. Its business model is strong and robust, by virtue of it being a sticky business; it has the best-in-
class technology, superior economies of scale and resilient margins. With commercialisation of incremental capacity (16,500 MTPA) at
Vietnam, the management is confident on achieving 20-25% volume growth in FY23 and 15-20% volume growth in FY24 respectively. In
addition to 16,000 MT greenfield expansion at Chitoor announced in Q1FY23, the company has announced another 6,000 MT Freeze
Dried Coffee (FDC) expansion at Vietnam on the back of written commitment from a client for five years for ~50% of the expanded
capacity. Such aggressive expansions demonstrates strong traction that CCL is witnessing in order inquiries across various markets. With
* Refer at the end for explanation on Risk Ratings
these capacity additions, CCL’s capacity is likely to reach ~76,000 MT by FY25 which could result in robust 20%+ volume growth over next
Fundamental Research Analyst 3-4 years.
Harsh Sheth
[email protected]

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 CCL Products Ltd.
We expect revenue and earnings to grow at a CAGR of 28% and 27% respectively over FY22-25E on the account of a) doubling of Vietnam
Capacity (company enjoys tax break here), b) upcoming capacities at Chitoor (Q1FY25) and Vietnam (FDC, Q3FY25) b) higher share of
small packs & packing capacity ramp-up, and c) increasing share of India branded business in the overall revenue mix. With enhanced
revenue growth visibility, the stock is likely to re-rate if the company continues to maintain a strong margin profile, and the high expected
debt levels due to planned capacity additions may not impact valuations to a great extent.

We think the base case fair value of the stock is Rs. 587 (22x Sept’24E EPS) and the bull case fair value of is Rs 627 (23.5x Sept’24E EPS).
Investors can buy the stock in Rs 528-538 band (20x Sept’24E EPS) and add more on dips in Rs. 475-484 (18x Sept’24E EPS).

Financial Summary
Particulars (Rs Cr) Q3FY23 Q3FY22 YoY-% Q2FY23 QoQ-% FY21 FY22 FY23E FY24E FY25E
Net Revenues 535 423 26% 507 6% 1242 1462 2098 2484 3035
EBITDA 101 92 10% 98 3% 298 331 403 514 634
APAT 73 58 26% 58 26% 182 204 257 332 421
Diluted EPS (Rs) 5.5 4.4 26% 4.3 26% 13.7 15.4 19.3 25.0 31.7
P/E (x) 39.1 34.8 27.7 21.4 16.9
EV/EBITDA 25.1 23.0 19.3 15.4 12.4
RoE-% 18.1 17.5 19.0 21.0 22.5
(Source: Company, HDFC sec)

Q3FY23 Result Highlights

In Q3FY23, CCL reported 26.5%/5.7% YoY/QoQ revenue growth. The volume was lower at ~5-6% on account of maintenance shutdown of
Indian plant and partial production of Vietnam plant (additional capacity). However, the management is confident of making up for lower
growth with incremental volumes from Vietnam, and maintained its volume growth guidance of 20-25% for FY23 and 15-20% for FY24.
9MFY23 volume growth stood at ~18% YoY.

High coffee inflation resulted in ~20% increase in realisations, which optically drove EBITDA margin 310bps lower to 18.8% but as the
company operates on cost plus model, there was limited impact on EBITDA/kg.

Interest cost increased 200% YoY to Rs 11 Cr on account of higher interest cost, commissioning of capacities and increase in working
capital requirements. PAT grew by 26% YoY on account of lower tax. India operations tax rate was lower in Q3FY23 as it came under MAT
after claiming additional depreciation as per IT Act pertaining to the packing capacity.

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 CCL Products Ltd.
Capex, Capex and some more Capex: CCL has already started trial runs and will commercialise the new 16,500 MT of capacity in Vietnam
(taking the total capacity in Vietnam to ~30,000 MT). In Q1FY23 it had announced plan of another ~16,000MT of spray dried capacity near
its Chittoor plant which will cost ~Rs 320 Cr. The capex is likely to be funded by both, debt and internal accruals. According to the
management, the plant will be commissioned by the end of FY24 and is expected to generate RoE of ~20% which is higher than its existing
ROE, given the modern technology at the new plant.

Further, in Q3FY23, the company has announced expansion plan for addition of 6,000 MT of Freeze Dried (FD) capacity in Vietnam. This
plant is expected to get commercialized by Q3FY25. The cost is around USD 50 mn which includes the debt of USD 30 mn. The reason for
this expansion are: a) the existing FD capacity has been pre-booked till FY24, and b) commitment by an existing customer to procure
~3000 MT p.a. or 50% of the capacity for five years. The increasing wallet share from existing customer demonstrates CCL’s credibility as
supplier.

Post this expansion Vietnam will have total capacity of 36,000 MT split between 30,000 MT of spray dried (SD) and 6,000 MT freeze dried
coffee (FDC). On consolidated level, post ongoing expansion, CCL’s total capacity would stand at 76,000 MT giving an assurance of ~18-
20% volume growth over next 3-4 years. While the capex would stretch the debt on books and limit the FCF in near term, the company’s
ability of generating cash as demonstrated by past track record gives us confidence about the long term viability of its model.

CCL is the second largest manufacturer for private label behind Nestle. Post capacity expansion, CCL’s capacity would be more than 2x the
third largest player.

Disruptions caused by Covid-19 and Ukraine war have caused various large players to de-risk their supply chains by reducing over
dependence on any particular country/region. In this scenario, CCL with its ability to source and supply from any part of the world stands
to gain market share.

Domestic business is ready for a takeoff: The performance of domestic branded coffee business (under Continental brand) was subdued
in Q3FY23 on account of restructuring in domestic business. However, CCL has guided domestic business revenue of Rs 250 Cr (~25%+YoY
growth) in FY23, out of which 70% will be branded coffee business. The segment has been operating at break-even level and expected to
turn profitable in FY23. The company is currently re-investing all profits back into the business and is enhancing its presence in the
domestic market by widening its distribution network and conducting mass media campaigns to support its product launches.

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 CCL Products Ltd.
Key Risks
Currency volatility: CCL derives ~90% of its revenue through exports, thus being exposed to currency fluctuations. However, ~75% of its
raw material is also imported and hence it creates a natural hedge for all transactions taking place in US dollars.

Duty changes across operating countries: CCL supplies coffee to over 90 countries from India and Vietnam. Any unfavorable change in
import or export duty rates in any country or imposition of non-tariff barriers could impact the competitiveness of supply from Vietnam
and/or India.

Slower ramp-up in branded business: The company is cautiously expanding its Continental brand in the domestic market. Although it has
been well-received so far, any adverse customer response could impact the growth prospects and financials.

Credit risk: With ~95% of CCL’s business being B2B in nature, the company is exposed to credit risks. However, most of the business is
repetitive and with established clientele. The company does not have record of any major bad debts in its history.

Supply chain disruptions: In a year of high uncertainty in the macro environment and geopolitical relations, disruptions in the supply
chain are an important risk to monitor.

Covid recurrence could impact demand for coffee while Vietnam supplies could also get impacted due to lockdowns, etc.

Company Background
CCL was formed in 1994 and commenced its commercial operations in 1995. It is an Export Oriented Unit (EOU), with the ability to import
green coffee into India from any part of the world, and export the same to any part of the world, free of all duties. CCL has adopted Swiss
and Brazilian technologies at its plants, which have been purchased from world renowned pioneers in turnkey instant/soluble coffee
technologies. This has enabled it to produce international quality soluble coffee with over 250 blends, which are currently being exported
to more than 90 countries worldwide. Today, the company is India’s largest manufacturer and exporter (38% market share) of instant
coffee and the largest player in the private label market (with 10% market share). CCL operates through four plants: two in India and one
each in Vietnam and Switzerland.

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 CCL Products Ltd.
Financials
Income Statement Balance Sheet
Particulars (Rs Cr) FY20 FY21 FY22 FY23E FY24E FY25E As at March FY20 FY21 FY22 FY23E FY24E FY25E
Net Revenues 1139 1242 1462 2098 2484 3035 SOURCE OF FUNDS
Growth (%) 5.3% 9.1% 17.7% 43.5% 18.4% 22.2% Share Capital 27 27 27 27 27 27
Operating Expenses 853 945 1131 1695 1990 2428 Reserves 902 1061 1224 1418 1643 1940
EBITDA 286 298 331 403 494 607 Shareholders' Funds 928 1087 1251 1445 1669 1966
Growth (%) 16.5% 4.2% 11.2% 21.7% 22.7% 22.8% Borrowings 392 475 561 701 841 808
EBITDA Margin (%) 25.1% 24.0% 22.6% 19.2% 19.9% 20.0% Net Deferred Taxes 46 49 73 73 73 73
Depreciation 47 49 57 77 96 110 Other Non-Current Liabilities 9 5 4 8 10 12
Other Income 4 3 4 6 7 9 Total Source of Funds 1376 1617 1895 2337 2704 2964
EBIT 243 252 278 332 406 507
Interest expenses 18 17 16 36 45 53 APPLICATION OF FUNDS
PBT 225 235 261 296 360 454 Net Block 724 798 882 1230 1524 1644
Tax 59 53 57 49 56 64 CWIP 100 149 160 80 40 20
APAT 166 182 204 247 304 390 Investments 1 0 0 0 0 0
Growth (%) 7.1% 9.9% 12.1% 21.0% 23.1% 28.3% Long Term Loans & Advances 48 50 36 76 89 109
EPS 12.5 13.7 15.4 18.6 22.9 29.3 Total Non-Current Assets 873 997 1079 1386 1653 1773
Inventories 260 320 519 632 749 832
Trade Receivables 268 299 320 431 476 590
Cash & Equivalents 39 120 56 47 16 8
Other Current Assets 69 52 96 118 136 150
Total Current Assets 636 791 991 1228 1377 1579
Trade Payables 25 20 46 63 68 91
Other Current Liab & Provisions 109 151 129 213 258 297
Total Current Liabilities 134 171 175 277 326 389
Net Current Assets 502 620 817 952 1051 1191
Total Application of Funds 1376 1617 1895 2337 2704 2964

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 CCL Products Ltd.
Cash Flow Statement Key Ratios
Particulars (Rs Cr) FY20 FY21 FY22 FY23E FY24E FY25E Particulars FY20 FY21 FY22 FY23E FY24E FY25E
Reported PBT 225.3 234.8 261.3 296.1 360.1 453.8 Profitability Ratios (%)
Interest Expenses 47.1 49.4 57.5 77.1 96.2 109.7 EBITDA Margin 25.1 24.0 22.6 19.2 19.9 20.0
Depreciation 65.6 53.5 84.5 78.5 129.3 144.8 EBIT Margin 21.4 20.3 19.0 15.8 16.3 16.7
Working Capital Change -147.1 -91.5 -206.2 -145.5 -129.5 -154.9 APAT Margin 14.6 14.7 14.0 11.8 12.2 12.9
Tax Paid -53.5 -25.9 -39.0 -48.9 -55.8 -63.5 RoE 18.8 18.1 17.5 18.3 19.5 21.5
OPERATING CASH FLOW ( a ) 90.3 170.9 100.7 180.2 304.1 380.2 RoCE 18.9 17.5 16.5 16.8 17.4 19.2
Capex -63.8 -154.6 -189.9 -240.0 -350.0 -210.0 Solvency Ratio (x)
Free Cash Flow 26.5 16.3 -89.3 -59.8 -45.9 170.2 Net Debt/EBITDA (x) 1.2 1.2 1.5 1.6 1.7 1.3
Investments and Others -24.8 1.8 0.0 0.0 0.0 0.0 Net D/E 0.4 0.3 0.4 0.5 0.5 0.4
INVESTING CASH FLOW ( b ) -88.4 -152.8 -189.9 -240.0 -350.0 -210.0 Per Share Data (in Rs)
Debt Issuance / (Repaid) 52.6 90.3 91.6 140.0 140.0 -32.7 EPS 12.5 13.7 15.4 18.6 22.9 29.3
Interest Expenses -40.8 155.0 151.5 125.0 45.0 -21.0 CEPS 16.0 17.4 19.7 24.4 30.1 37.6
Share Capital Issuance 0.0 0.0 0.0 0.0 0.0 0.0 BV 69.8 81.7 94.0 108.6 125.5 147.8
Dividend -89.8 -26.6 -66.5 -53.2 -79.8 -93.1 Dividend 4.3 2.0 5.0 4.0 6.0 7.0
Others 0.0 0.0 0.0 0.0 0.0 0.0 Turnover Ratio
FINANCING CASH FLOW ( c ) -37.2 63.7 25.1 50.8 14.7 -178.6 Cash Conversion Cycle (days) 186.8 203.6 232.6 197.5 194.8 182.3
NET CASH FLOW (a+b+c) -35.3 81.8 -64.2 -9.0 -31.2 -8.4 Debtor days 85.9 87.7 79.8 75.0 70.0 71.0
Inventory days 111.4 123.5 167.5 136.1 137.3 125.0
One-year Share Price Chart Creditors days 10.5 7.7 14.7 13.6 12.5 13.8
600 Valuation (x)
500 P/E 42.7 38.9 34.7 28.7 23.3 18.2
P/BV 7.6 6.5 5.7 4.9 4.2 3.6
400
EV/EBITDA 26.0 25.0 22.9 19.2 16.0 13.0
300 EV / Revenues 6.5 6.0 5.2 3.7 3.2 2.6
200
Dividend Yield (%) 0.8% 0.4% 0.9% 0.8% 1.1% 1.3%
(Source: Company, HDFC sec)
Jul-22
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HARSH Digitally signed by

HARSH RAJENDRA
RAJENDRA SHETH
Date: 2023.01.23
SHETH 08:57:22 +05'30'

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 CCL Products Ltd.
HDFC Sec Retail Research Rating description
Green Rating stocks
This rating is given to stocks that represent large and established business having track record of decades and good reputation in the industry. They are industry leaders or have significant market share. They have multiple streams of cash flows and/or strong balance sheet to withstand downturn in
economic cycle. These stocks offer moderate returns and at the same time are unlikely to suffer severe drawdown in their stock prices. These stocks can be kept as a part of long term portfolio holding, if so desired. This stocks offer low risk and lower reward and are suitable for beginners. They
offer stability to the portfolio.

Yellow Rating stocks

This rating is given to stocks that have strong balance sheet and are from relatively stable industries which are likely to remain relevant for long time and unlikely to be affected much by economic or technological disruptions. These stocks have emerged stronger over time but are yet to reach the
level of green rating stocks. They offer medium risk, medium return opportunities. Some of these have the potential to attain green rating over time.

Red Rating stocks

This rating is given to emerging companies which are riskier than their established peers. Their share price tends to be volatile though they offer high growth potential. They are susceptible to severe downturn in their industry or in overall economy. Management of these companies need to prove
their mettle in handling cyclicality of their business. If they are successful in navigating challenges, the market rewards their shareholders with handsome gains; otherwise their stock prices can take a severe beating. Overall these stocks offer high risk high return opportunities.

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