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Brewing Value…

Despite recent outbreak of COVID in few of its key markets like Russia and the UK, and continued supply chain issues, CCL Products India (CCL) reported good performance on almost all parameters. Absence of MEIS benefit during the quarter, compared to Rs85mn in the same quarter of the previous year weighed on the topline growth, despite good volume growth. On account of ramp up of supplies to the new clients and rising revenue of its branded retail business, the company is expediting its capacity additions, as the entire current capacity is presold. The management has upgraded the volume growth guidance from the earlier 10-15% to over 15% for FY22.

Further, the company has guided that the impact of higher Coffee prices will lead to disproportionate rise in the topline from 4QFY22 onwards. Also, the new hiring in the Branded Retail business suggests that the company is on the course of deepening its brand presence both in terms of geographies as well as product offerings, upping the ante in the burgeoning domestic branded Coffee market. We feel that the company is well poised for a robust growth in both the revenue and profit in the medium term. We reiterate our BUY rating on CCL Products India with Target Price of Rs496.

* Good quarterly performance continues despite headwinds: CCL reported 4.5% YoY growth in the topline to Rs3366mn, despite outbreak of COVID in Russia, infection detection in the vicinity of its Vietnam plant and Supply chain issues. Absence of the MEIS benefits too impacted the topline growth. The company expects Rs150mn MEIS benefits in 2HFY22. The volume growth stood at ~11% in 1HFY22. EBITDA margin stood at 24.5%, up 39bps YoY and 238bps QoQ. EBITDA grew 6.2% YoY and 14.4% QoQ to Rs823mn. Net profit during the quarter stood at Rs494mn, up 4% YoY and 12.6% QoQ. Branded retail business grew 40% during the quarter to ~Rs850mn and is expected to reach ~Rs2bn mark during the year.

* Demand recovery gathers steam, volume growth guidance upgraded:

CCL reported significant uptick in demand by the end of the previous quarter. The new clients added in the US are ramping up very well. The company is running almost at the peak capacity in all its plants and the entire capacity is presold. The management upgraded the volume growth guidance for FY22 from earlier 10-15% to over 15%. The company is expediting its capex and now the 3500MT expansion in Vietnam will be operational by 3QFY22 and doubling of Vietnam capacity will be operational by 2QFY23.

* Coffee price tailwinds to stay, Impact to be visible from from 4QFY22:

The damage of the Coffee plantations in Brazil due to the drought will take at least two years to recover as the new coffee plants take 3-5 years to mature. Consequently, the Coffee prices are likely to be elevated for almost 2 years. The impact of higher Coffee prices will start aiding the topline from 4QFY22, though the margin is likely to stay firm as the company works on mark-up basis.

* Valuation & Risks:

Instant Coffee demand is seeing a sustained uptick and new clients are ramping up faster than earlier expected. Further, its branded retail arm continues to grow rapidly, which will now expand its reach beyond South India. The company is set to deliver superior performance in the coming years. We hold our conservative volume CAGR estimate of 12.4% during FY21-24E. The company’s robust RoIC profile and OCF generation capacity offer significant headroom for valuation expansion. We reiterate our BUY rating on CCL Products India with target price (TP) of Rs496 based on DCF method; it implies valuation at PE multiple of ~23.7x on FY23E earnings.

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