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Published on 9/12/2019 11:05:03 AM | Source: ICICI Direct

Update On CCL Products Ltd by ICICI Direct

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Dropping coverage…

CCL Products (India) is the largest producer and exporter of bulk instant coffee from India and has 10% global market share in instant coffee exports. The company is engaged in the manufacture of soluble instant spray dried coffee powder, spray dried agglomerated/granulated coffee, freeze dried coffee as well as freeze concentrated liquid coffee. Its soluble instant coffee is prepared from Arabica and Robusta coffee beans, roasted, blended and processed for aroma and flavour.

The company has a total processing capacity of 35,000 MT per annum, having one of the largest capacity in India (20,000 MT) and Vietnam (10,000 MT). CCL Products' soluble instant coffee manufacturing plant is located in Duggirala Mandal, Guntur District, Andhra Pradesh, India (capacity of 20,000 MT per annum). CCL has set up a freeze dried instant coffee (a premium category of coffee) greenfield plant with capacity of 5,000 tonnes in Chittoor, Andhra Pradesh at an estimated investment of | 350 crore.

CCL Products operates as a B2B player with 93% of overall sales contributed by the B2B segment whereas only 7% sales are through B2C segment (through its brand Continental). As a result, with falling green coffee prices (70% of sales), sales have been de-growing in the last four quarters. Bumper coffee production in Brazil (the world’s largest green coffee producer) has resulted in a decline in coffee prices.

With Brazil being the largest coffee producer, any fluctuation in coffee production in Brazil consequently impacts coffee prices globally. For instance, if coffee production is very good in Brazil but lower in Vietnam, prices witness a significant correction globally, impacting realisations for CCL. Hence, dependence on coffee production makes margin certainty very difficult for CCL’s business.

Given weaker-than-expected sales growth, lower realisations from recently set up 5,000 MT per annum freeze dried instant coffee plant and intensified competition from Brazilian coffee manufacturers in the export markets of late due to bumper coffee crop in Brazil, we are dropping coverage on the stock. 

 

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