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Embarking on growth journey

CCL Products (CCL) turned in Q2FY22 results lower than our and consensus forecasts. A shutdown at Vietnam facilities as well nil MEIS contribution restricted overall growth to single digit (up 4.5% YoY). However, CCL has completed its first phase of expansion in Vietnam and, with good order flows in hand, the company has revised up its guidance to more than 15% volumetric growth.

We believe concerns around growth now stand addressed. With new capacity coming in, the momentum is likely to remain robust. Hence, we are upgrading the stock to ‘BUY’ (from ‘HOLD’). Our revised TP is INR507 as we roll forward the valuation (28x PE) to Q3FY23E.

Domestic business drives improvement in margins

i) Consolidated sales jumped 4% YoY driven by 13% YoY growth in volumes. However nil contribution from MEIS restricted top line to single digit. ii) Domestic business benefited from better utilisation of the freeze dry capacity (90%), while Vietnam operations were shut down. iii) Branded business’s contribution to top line for H1FY22 remained at INR850mn (up 40% YoY). iv) A spurt in robusta coffee prices is likely to aid earnings from Q4FY22. v) Capex plans to double Vietnam capacity to 27,000 tons is likely to be executed by Q2FY23. vi) With a strong order book in place, management expects to deliver 15%-plus volume growth during FY22.

Good growth visibility, courtesy new facility coming up in Vietnam

CCL recently commissioned capacity expansion of 3,500 tons in Vietnam. Given strong improvement in demand for instant coffee and a sizable order book in place, the company plans to double its capacity in Vietnam to 27,000 tons by Q2FY23 with capex spend of USD20mn.

The company’s branded business is also showing resilient growth; it plans to scale up operation to pan-India. Meanwhile crop losses in Brazil (due to frost) are likely to favour coffee prices. Globally, robusta coffee prices remains elevated; CCL though is likely to feel the heat only from Q4FY22 given advance order books are in place.

Valuation and outlook: Strong growth imminent; upgrade to ‘BUY’

CCL is likely to embark on strong growth journey over H2FY22 with newer capacities in place. Good order-book as well as increasing acceptance of the CCL brand in the Indian market would help the company deliver more than 15% volumetric growth. All in all, we are upgrading the stock to ‘BUY’ (from ‘HOLD’) with a TP of INR507.

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