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Brewing Value…

CCL Products India (CCL) is one of the largest producers of Instant Coffee for private labels. The company has manufacturing plants at strategic locations in Coffee growing areas i.e., India and Vietnam. Apart from its B2B prominence, CCL has recently ventured into the retail space through its own Brands, Continental, Malgudi & THIS and reported stellar growth to carve 5% market share in the growing domestic Instant Coffee Market. CCL’s brands have a strong E-commerce presence, which accounts for ~8% of its revenue of its retail arm.

The company is well placed to capitalize on burgeoning global Instant Coffee consumption. Further, it is setting up 12,000MT (currently at 5500MT) small pack capacity and it is now shifting from Bulk B2B supply to small pack B2B supply directly to the retail store for its clients. This coupled with Coffee price tailwind, will yield superior margin in the coming years. We feel that the company is well poised for a robust growth in both the revenue and profit in the medium term. We initiate coverage on CCL Products India with BUY rating and Target Price of Rs496.

* One of the largest Instant Coffee manufacturers for the Global Private Labels: CCL is one of the largest instant coffee manufacturers for the private labels, with over 250 clients. CCL offers more than 200 instant Coffee recipes/blends to its B2B clients to choose from. Further, CCL enjoys locations of its plants in the close vicinity of the fastest growing Instant Coffee market of South East Asia and the Robusta Coffee Heartland of India and Vietnam. Its Swiss Granulation facility gives it an easy access to one of the largest Coffee markets i.e., Europe and Russia.

* Tailwinds from the global coffee price movement: Drought in the key Arabica growing region i.e., Brazil and a recent lockdown in the Robusta growing regions, particularly Vietnam have pushed the Coffee prices higher over the last two quarters. ICE Robusta Coffee future rose by over ~40% over the last one year. Price of Arabica Coffee too, is expected to remain elevated in the coming quarters. As domestic Robusta prices had been lower than global prices during the last harvest, CCL closed FY21 with a large Green Bean Robusta inventory (Robusta accounts for ~90% of its Coffee bean requirement), which will last for its contractual requirement for the entire upcoming season this year. This will provide short term boost to the operating margin of CCL in the short run.

* De-risked Revenue stream; robust medium term growth outlook: CCL has a highly diversified geographical mix of revenues. Europe, Russia, India and the US account for 25%, 25%, 12% and 10% of the revenue respectively. Within these, India (its branded retail business) and the US B2B business are growing faster than the other markets. The company’s retail business is expected to grow at a CAGR over 35% in the medium term, de-risking its revenue mix further. Diversified geographical presence and own retail brands provide strong revenue outlook and CCL expects its sales volume to double in the next 3-4 years to 50,000MT.

* Valuation & Risks: Rising Instant Coffee consumption will continue to drive revenue growth for the company in the coming years. Value additions like higher contribution from Freeze Dried (FD) products and small packaging for private labels will improve its margins to 26-27%, from the present ~24%. Further, the company’s retail business under its owned brands, like Malgudi, Continental & THIS is showing stellar growth. The company’s robust RoIC profile and OCF generation capacity offer significant headroom for valuation expansion. We initiate coverage on CCL Products India with BUY rating and target price (TP) of Rs496 based on DCF method; it implies valuation at PE multiple of ~24x on FY23E earnings.

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