CCL Products: Smell the coffee, its richly valued

Efficiently run, leading market share, building capacity, improving growth, strong outlook, Continental Coffee brand doing well, but it is quite expensive.

Jul 27, 2023

Company Overview

CCL Products (India) Ltd. (CCL) is in the business of converting raw coffee beans into instant coffee granules/powder. CCL is amongst the largest green coffee bean processors globally. It is India’s largest exporter of instant coffee (38% market share) and world’s leading supplier to private labels.

CCL company operates as a contract manufacturer and produces products such as Spray Dried Coffee Powder, Spray Dried Coffee Granules, Freeze Dried Coffee, Freeze Concentrated Liquid Coffee, Roasted Coffee Beans, Roast and Ground Coffee, Premix Coffee and Tea. CCL is the second largest manufacturer for private label behind Nestle.

We probably are 8% of the total B2B coffee market.

CCL started to build its own brand and launched Continental Coffee in India which should act as a major growth driver for the future. Continental Coffee had revenues of Rs 150-160 cr in FY23

Share Details

NSE:CCL( cclproducts.com)

Quality: Returns on capital employed in cash

CCL is an efficiently run company. The return ratios are solidly consistent and cash conversion is good.

Growth

Top-line and bottom line growth history has been quite weak. The growth in FY23 has improved the averages and makes the company appear to be growing faster than it has been in the past. The free cash flow has been erratic as the company is in the process of increasing capacity 2X+ between FY22-25.

Growth Momentum

The growth momentum has picked up on account of the performance in FY23, otherwise growth has been quite tepid.

Q1-24 Update

Revenue up 28.6% YoY
PAT up 61.7% YoY
PAT margin 13.0% vs 10.4% (Q1-23)

Q1-24 is pointing towards a better FY24 as compared to FY-23.

Outlook

Strong volume guidance on the back of strong order book.

Forward going, we have given the guidance that for next two to three years we are looking to drive volumes by, 18% to 20%.
Order book visibility was like this. Let's say for, let's say, freeze-dried. Freeze-dried next almost one year or let's say one and a half years. We almost sold out. We are booked fully. Spray-dried, we generally will have varying degrees of visibility. So if you look at next three months, we have 100% visibility. Next six months, we are approximately at 75% visibility. And next one year, we are probably at 50% visibility.

Capacity of 55K MTA capacity at the end of FY 23 to increase to 71-71K MTA by end of FY24 and then increase further to 76-77K by Q2-25 . This implies a 1.4X capacity in the next 2 years

From 37,000, 38,000 metric ton annual capacity, we moved to around 55,000 tons. That plant is fully operational now.
Next year, March, which is like the end of this year. So another 16,000 metric tons will be added at that point of time. And that will take us to around 70,000-71,000 metric tons
Next financial year, quarter two, we are looking to add another 6,000 metric tons of freeze-dried capacity in Vietnam. And that will probably, at a group level, will take us to around 76,000-77,000 metric tons of capacity, both spray-dried and freeze-dried included.

8% to 15% market share implies CCL will be growing faster than the B2B market.

So, all of this put together gave us the confidence that we probably from an 8% market share could easily go to 15% market share.
Very confident that we will be able to drive this kind of volume growth in the next at least two to three years.

Outlook for Continental Coffee is very exciting but at around 7-8% revenue contribution, its too small in the overall business to make an impact.

So that will continue to grow at 30% to 40%. We'll keep driving it as aggressively as we have been

So What????

If I currently hold the stock, I may not continue holding it based on my past returns, expectations for future returns, and the availability of alternative stock ideas. Not withstanding the strong outlook for CCL the stock is richly valued at a PE of 39 hence opportunities for upside based on valuation may be limited. If I hold then I must watch out for the top-line and bottom-line growth seen in FY23 continuing in FY24

If I don't currently own the stock, I may not want to enter it at the current level.

Efficiently run company, return ratios and cash generation is solid
Q1-24 results are positive, pointing to a FY24 being as strong than FY23.
The outlook for the Continental Coffee business is strong
India brand business has a strong growth outlook, but its too small to make an impact on the overall business in then next few years
The issue is the valuation. The business is richly valued at a PE of 39 with limited opportunities to make money at current valuations even if we see the continuation of FY23 growth in FY24.

Please share this post because it will be profitable to others.

It is an analysis of the company data and not a stock recommendation
My analysis can be completely wrong and can change the next minute based on changes in my understanding of the company
I look to own good companies at prices where there is a path to market beating returns over decades

Thank you for reading Money Muscle. This post is public so feel free to share it.

Money Muscle