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Resilient performance despite Russia issue, decent outlook ahead despite margin headwinds; reiterate BUY

Our view

While it missed estimates, we would rate CCL’s performance as quite resilient given multiple headwinds it faced owing to shipment deferments of freeze dried coffee from key Russia/CIS markets (20% of revenue), sharp green coffee inflation, supply chain constraints and higher energy/logistics costs. While 4Q volumes were soft, overall utilization rates in both India and Vietnam are optimum at about 85% with next phase of expansion expected onstream in Vietnam in 3QFY23 and further expansion plans already being deliberated upon.   The India branded business also remains on track to continue growing at 30‐40% CAGR. Given a strong order book with not much impact of slowdown in Russia business which is operating at 75% of normal, the management has maintained 15% plus volume growth guidance for FY23 while revenue growth can be higher given increased realization. FY24 should be an even stronger growth year with the full expanded capacity in Vietnam expected to be utilized. In the current inflationary environment where some signs of downtrading are also visible, the company is prioritizing volume growth and market share gains which are likely to delay the margin improvement narrative for some time. Once things stabilize, margins should again start trending up with higher FD and value‐added coffee sales, increase in proportion of small pack sales from 18% currently to 25% and some normalization of operating costs. We continue to like the company given its cost and market leadership in instant coffee processing, successful product and market development initiatives in developed markets like US/Europe, strong traction in the India branded business and well‐ planned timely capacity expansions. With a 20‐25% revenue growth and earnings trajectory over next two years with stable 18‐20% ROCE, we see the current valuations at 13x quite attractive post the recent fall and therefore reiterate our BUY rating on the stock.

Result Highlights

* Result summary – 4Q revenue/EBITDA/PAT growth of 13.5%/‐1.1%/7.1% was lower than our expectation.

* Topline – Overall Revenue growth of 13.5% YoY to Rs 3.7bn, standalone business declined 1.5% (impacted by stoppage of shipments to Russia/CIS), subsidiaries grew 45.3% on a base of 12.2% with strong growth from Vietnam & domestic business

Valuation

The company is set to reach a capacity of 55,000mt by FY23 from 38,500mt currently. We cut our EPS estimates by 8‐12% in FY23/24 to factor in slightly lower growth due to Russia‐ Ukraine crisis & lower margin but still reiterate our BUY rating on the company with a revised PT of Rs 511 based on 20x FY24E earnings. We are factoring in a 22%/23%/29% growth in revenue/EBITDA/PAT over FY22‐24E with 20% ROCE and 23% ROE in FY24.

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