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Multiple tailwinds in place for higher growth

CCL’s consolidated net sales grew sharply by 56% YoY to Rs5.1bn (Centrum est. Rs4.2bn). Sales from Indian operations (Rs3.3bn) recovered strongly growing 50% each YoY and QoQ and sales from Vietnam/subsidiary operations (Rs1.6bn) grew by 68% YoY. The healthy sales growth was on account of strong volume growth of 25% and rest by price realization growth. Coffee bean prices (key RM for instant coffee) have risen by 50-60% in last 1-1.5 years thus driving the sales/kg upward. Since CCL works on fixed GP/kg basis in a rising price scenario GM usually declines. Gross margins declined to 41.3% vs. 50.5% in 1QFY22 and 51.2% in previous quarter. EBITDA/PBT/PAT grew 23/24/20% respectively. With coffee prices on inclining trend and healthy volume growth we expect CCL’s sales/EBITDA/PAT to grow at CAGR 24/20/18% over FY22-24E. We broadly maintain our EBITDA estimates however reduce our EPS estimates by 16% on an average for FY23/24 largely on account of higher depreciation cost and interest cost. CCL has announced it will further expand its capacity in India by 16,500tn by end of FY24 entailing capex of Rs3.2bn. CCL’s capacity is expected to more than double from 35,000tn in FY22 to 72,000tn at end of FY24. We raise our target multiple from 21x to 24x (on account of significant scaling up of capacity and branded business) of FY24E eps and value the company at Rs525 (previous target multiple Rs541). We maintain Buy rating.

Rapidly scaling up its capacity

CCL’s capacity in India stood at 25,000tn and Vietnam at 10,000tn couple of quarter back. The company recently added 3500tn of capacity at Vietnam by debottlenecking. It is further expanding the capacity in Vietnam to take it to 30,000tn by 4QFY23. Total capex for this capacity is $30mn. Post this expansion CCL’s combined capacity will inch up to 55,000tn. Currently CCL is running at 85% of capacity utilization level. Apart from this, company is further expanding its capacity in India by 16,500tn. This new capacity is expected to commence by end of FY24. Thus, CCL’s total capacity will more than double from 35,000tn in FY22 to 72,000tn at end of FY24. New incremental capacity (both in India and Vietnam) will be for Spray Dried Coffee (SDC). The confidence to scale up the capacities is on account better visibility on incremental order wins from new clients.

Branded business continue to grow healthily

Domestic business for CCL includes sales from branded business, institutional sales and private labels for Modern Trade (MT). Domestic business grew by 33% from Rs1500mn in FY21 to Rs2000mn in FY22. Of that ~70% of business is from Continental Coffee brand. Domestic business is now at breakeven at PAT level. However, company’s focus is on scaling up this business significantly. In 1QFY23 (1H is seasonally weak) domestic business clocked sales of Rs500mn (70% branded sales). Branded business grew by 55% YoY for the quarter. Domestic business is expected to grow by 35-40% in FY23.

Valuations

We expect CCL’s sales/EBITDA/PAT to grow at CAGR 24/20/18% over FY22-24E. We maintain Buy rating on the stock with TP of Rs525 (24x FY24E eps).

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