CCL Products: A Multibagger in the Making? 

You know why cigarette stocks find favour with investors despite being sin stocks. Well, that's because cigarettes are addictive, and investors expect growth despite all the adverse regulations the industry attracts.

Well, if you are looking for such businesses without having to take exposure to sin stocks and regulatory risks, you have coffee with its delightful aroma and caffein kick that its consumers can't do without,

In today's video, I'll talk about one such business - CCL Products, that claims to be the world's largest instant coffee exporter and private label manufacturer across the globe.

95% of CCL's finished products are sold as white label to global coffee brands and retailers for their private labels. This is a B2B business, unlike Nestle that sells instant coffee under its own brand directly to consumers.

Here, CCL makes the products, while its client prices and markets under its own brand. The final seller could sell it at a price 20% to 100% higher than what they buy from CCL. This model allows CCL's clients to focus on branding and retailing while outsourcing manufacturing and quality control to CCL.

The global instant coffee market volume is estimated at 9 Lac MT, of which 50% is served by brand owners with captive capacity, and rest by B2B players like CCL Products.

As such, CCL's addressable market is at 4 to 4.5 Lac MT, where it commands 7 to 8% market share.

88% of business comes from export markets.

And top five clients constituted 26% of its total revenue in FY22. 60% of the business is from existing clients, and the rest of new.

It offers freeze dried coffee, spray dried coffee, agglomerated coffee along with specialty coffees.

Freeze fried coffee is processed at low temperatures and is a relatively longer and expensive process where aromas and flavours are retained. Freeze dried margins could be higher by 10%-15% as compared to spray dried.

Its Coffee production Capacity in India is 25 MT, of which 11 MT is freeze dried. Vietnam capacity is having been expanded to 30 MT in the last quarter of FY23, all spray dried.

The company has a trading and value addition unit in Switzerland that allows it better access to European countries' clients and supermarkets with no additional taxes.

Here's what makes the company a differentiated player in what could have been a B2B commoditized player.

Being one of the largest, the company enjoys economies of scale.

With strong R&D and tech process, the company is able to undertake capex at low capital costs. It makes some of the equipments inhouse. And is able to meet customers' demands for customization. It offers over 900 blends. With tech-based processes, it can also manufacture high quality coffee with low grades of green coffee, thus getting relatively better yields on raw beans.

Its main plants are based in Andhra Pradesh and Vietnam, both strategically located to coffee plantations and enjoy low-cost labour advantage. In Vietnam, the business is tax free, and the country is the second largest in coffee plantation after Brazil. Being in Vietnam also allows easy access East Asian markets. In India, South India accounts for 70% of coffee consumption.

Diversified sourcing and client base lower regional concentration risk.

The company does not own coffee plantations. Over more than two and a half decades, the company has established not just a strong customer base, but also a strong sourcing network from across countries. It works on cost plus basis. As such, raw material prices are hedged through back-to-back sale contracts and protect from inventory risk.

There is a natural hedge for currency fluctuations as raw material is procured in dollars, and exports comprise 88% of revenue.

All this is evident in margins that have not gone below 20% in last 10 years.

The company has a packaging facility of 12500 Tons with scalability upto 25000 tons for small packs that allows it to target more than the bulk business, offers higher margins by 10% to 15%and has 60 percent utilisation. Further, it is enhancing product portfolio to specialty and flavoured coffees that have less competition and better margins. These could be 5 to 10 pc of the portfolio but contribute 10 to 15 pc value.

The growth triggers in the business include revenue from capacity increase at Vietnam from incremental capacity at Vietnam from 13500 MT to 30,000 MT. The utilisation at enhanced capacity is expected at 50% in FY24.

The company also plans to add and commercialise spray dried capacity of 16000 T In India by first quarter of FY25,

It will also be commercializing 5500 T of freeze-dried capacity at Vietnam.

With all these, peak debt is expected at Rs 12 bn, which will keep debt to equity well below 1 time.

Now let me share the company's extension from B2B to business to consumer business, and its ongoing evolution to be a branded FMCG player.

Through its subsidiary CCPL, the company is expanding domestic business. It comprised 12% of the revenue at Rs 2.5 bn. Of this, almost 64% was from its own brand under Continental range. It is now ranked third in domestic instant coffee market worth Rs 25 bn, with share of 5%. The company has achieved break even in India business. But this is more of an incubation phase where company wishes to reinvest all profits and expand as of now than focus on cash generation. Domestic instant coffee market is expected to grow at a faster rate than global coffee market. The company is targeting institutional clients like Reliance, coffee chains, startups and consumers through smaller packs and is focusing on increasing touch points.

It is also getting into high potential categories like plant-based meat that has potential to grow 10 times from Rs 3 bn market.

Coming to Financials indicators, the return on capital and equity stand at 16% and 20% respectively versus an average ROE of 19% over 5 years.

The 5-year average operating profit margin is at 22%. The dividend payout is 25%.

The Director's remuneration was 7.6% of net profit, within prescribed ceiling in FY22. The promoter stake in the company is at 46.3%, up from 45.9% in last three years.

The management has guided for a volume and EBITDA growth of 18%-20% in the coming years, and over 20% margin target.

The stock is trading at a price to earnings or PE ratio of 30X, against a 3-year median PE of 27 times and 5 year median of 22 times.

Overall, it expects global market share is expected to go up to 10% from 7 to 8 percent.

It faces competition from Nestle, Tata Coffee, Olam Group, Tata Coffee owns plantations while nestle is a conglomerate with multiple business.

With huge growth potential in the business, the company indeed deserves to be on your watchlist. And in the very long term, it could be an FMCG brand to reckon with. Let me know if you agree with me.

Before I end, please note that today's discussion is for knowledge purpose only and does not imply any view on the stock.

Do like the video if you found it useful. In any case, I would appreciate your feedback and comments.

For more such updates, subscribe to Equitymaster Youtube channel.

Thank you for watching... Goodbye.