Plantations-Tea & Coffee Initiating Coverage 01 Nov 2018

Jainam Share Consultant Pvt Ltd. Sector : Plantations - Tea & Coffee

Initiating Coverage | Plantations-Tea & Coffee

01 Nov 2018

Vandana Pareek - Research Analyst ([email protected]); 0261-6725518

Investors are advised to refer through important disclosures made at the last page of the Research Report. Jainam Share Consultant research is available on www.jainam.in

01-11-2018 Jainam Share Consultant Pvt Ltd. Sector : Plantations - Tea & Coffee

Index A. Company Overview

1. About……………………………………………………….…………….…….1 2. Investment Rationale……………………………………….…………………2 3. Risk………………………………………………….………………………….3 4. Brief Conclusion……………………………………….………………………..3 B. Industry Overview

1. Global Coffee Industry……………………………………………..………………………………….4 2. Indian Coffee Industry………………………………………………………………………..……….6

C. Business of the Company

1. Instant Coffee Making Process ……………………………….……………….8 2. Product……………………………………………………………………..…10

3. Production Capacity.…..…………………………….………………………..12 4. Subsidiaries……..…………………………………..………………………...13 5. Top Shareholders…………………………………..…………………………15 6. Management………………………………………………………………….15 D. Financial Outlook

1. Profit & Loss………………………………….………………………………..16

2. Ratio…………………………………….………….…………………………..17 3. Balance Sheet…………………………………………………………………18

4. Cash Flow Statement………………………….………………………………18 5. Quarterly Update……………………..…….…………………………………19 E. Analysis 1. Peer Analysis………………………………………………………………….22 2. Valuation………………………………………………………………………23 F. Conclusion

1. Recommendation…………………………………….……………………….26 2. Sources……………………………………………….………………………..26 3. Full Form & Glossary………………………………………………………….27 4. Report Gallery………………………………………………………………….28 5. Disclaimer……………………………………………………………………..29

01-11-2018 Jainam Share Consultant Pvt Ltd. Sector : Plantations - Tea & Coffee

Company Overview

About

CCL Product Ltd. Latest Date 01-Nov-18 Latest Price (Rs) 260.00 CCL Products, (India) Limited, a global coffee manufacturer was founded in the year 1994 52 Week High (Rs) 354.60 with the vision of creating only finest and the richest instant coffee in the world. They are 52 Week Low (Rs) 225.05 among the only companies in the world to produce all four types of soluble coffee from a Face Value(Rs) 2.00 single location. The company is a topmost Industry PE 17.76 producer and exporter of various types of instant coffee. Company is specialized in TTM Period 2018-09 importing green coffee from any part of the world and export processed coffee across the Price/BV(x) 4.26 globe, devoid of any duties. It has distinction of setting up India ’ s first Freeze Dried Instant EV/TTM EBIDTA(x) 13.37 coffee manufacturing plant in the year 2005. EV/TTM Sales(x) 3.16 a) CCL products are currently being exported to more than 85 countries. Dividend Yield% 0.96 b) Currently selling almost 1000 different blends to customers. MCap/TTM Sales(x) 2.93 c) Swiss & Brazilian technology at its plant is purchased from Turnkey. Market Cap (Rs in Cr. ) 3458.00 Currently CCL is planning grab a bigger pie in EV (Rs) 3724.75 the freeze dried coffee by setting up its fourth plant in Chittoor, Andhra Pradesh at an Latest no. of shares (in Cr.) 13.30 investment of Rs. 360 crore.

Source : Ace Analyser, Software Exchange: BSE BSE Code: 519600 Current Market Price: 260.00 Date: 01-Nov-18

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Investment Rationale

 Stable Profit Margin : CCL works on cost plus margin basis because of which there margin remain fixed and they have been able to pass on the cost of raw material to the customers. They place order for green coffee beans only after receiving order for instant coffee because of this approach CCL has been able to maintain their operating profit margin above 19% in last five years. And even adverse volatility in coffee prices will not affect its margin.

 Continuous Expansion : CCL products currently have a combined capacity of 35000 tonne per annum. Currently, Indian capacity is of 20000 tonne per annum which is operating at 98% while the Vietnam based subsidiary has production capacity of 10000 tonne per annum for spray dried coffee and 5000 tonne of liquid coffee ( 2000 tonne in solid terms) which is currently operating at around 60 to 70%. CCL is setting up a freeze dried freeze dried instant coffee greenfield plant in Chittor, Andhra Pradesh at an investment of Rs. 360 crore in which Rs.180 cr. will be through internal accrual and remaining Rs. 180 cr. is the loan component. Freeze dried coffee is a premium product being served to niche market and is globally growing at fast pace.

 Largest Exporter: CCL products is India’s largest manufacturer and exporter of instant coffee. According to the data of year 2017, out of the total export of instant coffee from India, CCL product accounts for 37% of the total export.

Source : Coffee Board of India, Website

 Domestic Expansion: Continental Coffee Private limited subsidiary of CCL Products is serving the domestic market. They are taking initiatives to strengthen its brand in domestic retail coffee market under the brand name ‘Continental’. They have started placing vending machines and around 750 machines has been placed and there target is of around 3000 machines. CCL is targeting revenue of Rs. 70 crore in FY19E from the brand.

 Cost Control: Company has been continuously saving fuel costs for its boiler by using rice husk and recycled solid waste as fuel. During production, 40% can be derived from the coffee beans for the productive usage and the rest 60% is in the form of solid waste. More than 90% of the waste generated is being recycled. The solid waste generated is being used as fuel for the boiler. The ash that comes from the boilers is being supplied to brick manufacturer.

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Risk

 Coffee Prices: Unexpected fluctuation in green coffee prices may adversely affect the profitability of the company.

 High Competition: India’s instant coffee market is a duopoly of the firms Nestle and Bru which account 55% and 45% of market share.

 Adverse Currency Movement: CCL is an exported oriented unit and its 90% of the revenue is generated from export so any sharp movement in currency may cause risk. It import approx. 60% of its raw material, and all its transactions are in USD which provides it natural hedge.

 Slowdown in Demand: Reduction in demand for instant coffee from Europe and other countries may slowdown the export of CCL as Europe coffee market is growing at CAGR of 1.2% and at Global level consumption level is increased at 2.2% CAGR only.

 Agro – based Product: Reduced rainfall in some areas due to drastic change in the ecosystem will result in change of quality of the coffee beans used as the raw material to produce instant coffee.

Brief Conclusion

Company being India’s largest manufacturer and exporter of instant coffee working with cost plus margin basis and having global reach in more than 85 countries and selling around 1000 different blends to customers. They are currently expanding its production capacity by installing additional 5000 Tonnes capacity being operational in FY19. They stands strong due to its product taste and quality and are trying to build it brand name 'Continental' and have started placing vending machines with target of installing 3000 machine.

We recommend our Investors to “Buy” the stock with potential upside of 23% with horizon of 2 years.

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Industry Overview

Global Coffee Industry

Coffee has gained the status of being third most preferred beverage worldwide after water and tea. Coffee is the second most traded commodity in the whole world after oil.

The opportunity in the instant coffee market is likely to rise at a CAGR of 4.80% from 2017 to 2025. The increasing awareness regarding the harmful effects of aerated drinks is also expected to shift the preference of consumers towards coffee, which subsequently, is anticipated to propel the worldwide market for instant coffee in the near future.

2.2% CAGR

Source : International Coffee Organisation, Website

 Global coffee consumption increased at 2.2% CAGR between FY 2013-14 to 2016-17. In FY 2016-17, 15.89 cr. bags (60 Kg each) were consumed.

 Out of the total world coffee consumption 69.1% of the coffee is consumed by importing countries like EU, USA, Japan, Russia and Canada while remaining 30.9% of the coffee is consumed by the Exporting countries like Brazil, Ethiopia, Indonesia, Philippines and India.

 Consumption of Exporting countries is growing at CAGR of 2.3% while importing countries coffee consumption is growing at a CAGR of 2.1%.

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Source : International Coffee Organisation, Website  Europe is the largest consumer of coffee in the world from past many years and is growing at a CAGR of 1.2% with consumption of approx. 5 crore bags (60 kg) every year.

 Asia & Oceania is the second largest consumer of coffee after Europe with total consumption of 3.47 cr. bags and is growing with CAGR of 4.2% which is highest as compared to other continents.

Coffee Consumption

Source : International Coffee Organisation, Website

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Indian Coffee Industry

Coffee industry which has been growing at a CAGR of around 3.1% currently is expected to grow at 5.9% annually from 2018-2021.

Source : Coffee Board of India, Website

 Robusta consist 56% of the total coffee export from India of about 223536.318 tonnes in 2017 and export is growing at a CAGR of 9.98% from 2015 to 2017. Robusta is a bitter tasting coffee bean with 50% extra caffeine.  Following Robusta, Instant coffee is the second largest exported coffee product in term of quantity of about 115258.461 tonnes in 2017 and export is growing at a CAGR of 7%.

Instant Coffee

Source : Coffee Board of India, Website

Revenue in the instant coffee segment amounts to Rs. 1495.46 Cr. in year 2017-18 and in growing at a CAGR of 4.9% annually from 2014 to 2018.

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Source : Coffee Board of India, Website

Among the total export instant coffee from India 24% of the quantity is exported to Russian Federation only, following Turkey of about 15% in terms of quantity.

Growth Drivers

 Currently India’s annual coffee per capita consumption is 0.1 Kg as compared to that of Finland which is 11.9Kg so still there is a great opportunity available in domestic market  It is expected that India’s instant coffee industry will grow at 15% year on year.

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Business Of The Company

Instant Coffee Making Process

Source : Jainam Share Consultant, Company

 Green Coffee Beans storage: Coffee seeds (beans) of Coffea fruits obtained after removing the pulp that are not yet been roasted. And these beans are stored in silos for further processing. There are two types of coffee beans Arabica and Robusta.

Source : Pinterest, website

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 Cleaning & Grading: Coffee beans are cleaned to remove any kind of impurities and dust particles. After cleaning beans are graded on basis of different category of speciality, premium, standard, etc.

 Roasting: Roasting is a precise process which is done as per requirement of the customers. Roasting is a critical process as Aroma and flavour of final product is decided in this process.

 Grinding: The beans are cooled down to room temperature. Then these roasted beans are sent for grinding.

 Extraction & Clarification: During the extraction process, soluble solids and aromas are efficiently extracted and the coffee aromas are gently obtained to achieve the desired aroma profile. Ground coffee is extracted with softened water. The extraction process is then followed by the clarification of the coffee extract.

 Spray Drying: In spray-drying the coffee extract is sprayed into a stream of hot air at the top of a tall cylindrical tower. As the droplets fall, they dry, becoming a fine powder by the time they reach the bottom. The powder may then be texturised into granules to facilitate dosage and dissolution. The quality of the aroma and flavour are preserved thank to the very fast drying occurring during this process.

 Agglomeration: Spray dried powders require further agglomeration, an additional process stage is used involving powder wetting, after drying and cooling. Control of wetting is carried out with water and/or saturated steam in an agglomeration chamber equipped with a rotating impactor.

 Freeze-drying: In this process, first, the coffee is allowed to sit so the water evaporates naturally, leaving a concentrated coffee solution. This concentrate is then frozen to around – 40 Degree Celsius. The remaining water freezes into ice crystals. Sublimation (a natural process similar to evaporation) is used to remove the ice, leaving behind dry grains of coffee.

 Liquid Coffee: This process consists of a crystallization section, where part of the water is converted into solid ice crystals with the use of a refrigeration system. The ice crystals are then separated by filters, centrifuges or with the help of wash columns.

 Packaging: Finally, the soluble coffee is packaged into jars, cans, sachets / pouches and bag-in- box, of varied sizes, shapes, styles and materials.

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Product

In Spray dried coffee the concentrated coffee is sprayed from a high tower in a large hot chamber, in this process the droplets falls, the remaining water evaporates. The high temperature involved in this method tends to affect the oils of the coffee, which leads to loss of more flavour as compared to freeze dried coffee. SPRAY DRIED COFFEE Price – Rs. 540/kg POWDER

Spray dried powders require further agglomeration, by the process of converting the coffee powder into granules. An additional process stage is used involving powder wetting, after drying and cooling. Price – Rs. 570/kg SPRAY DRIED COFFEE GRANULES

In freeze drying coffee granules, coffee is allowed to sit so the water evaporates naturally, leaving the concentrated coffee solution. This concentrate is then frozen to around -40 Degree Celsius. This method preserves the coffee flavour to a great extent. Price – Rs. 790/kg FREEZE DRIED COFFEE GRANULES

Freeze concentration process consists of a crystallization section, where part of the water is converted into solid ice crystals with the use of a refrigeration system. The ice crystals are then separated by filters. There is no loss of aromas or other volatile components. Price – Rs. 410/kg FREEZE CONCENTRATED LIQUID

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Chicory is a natural plant product used to add flavour to drinks. It is a perfect blend of coffee and chicory which create a stronger coffee at a lower cost as compared to pure soluble coffee. This coffee blend is available in both forms – Spray dried forms as well as granules.

CHICORY COFFEE Price – NA

It is a white coffee without pre-added sugar, which is a mix of only instant coffee and creamer. It is customised using various combinations as per the requirements of the customers. Price – NA

2 IN 1 COFFEE

3 in 1 coffee is a premium mix of white coffee that includes instant coffee, creamer and sugar. This coffee is needed to be mixed only with hot or cold water for a perfect cup of coffee. This variant is also available in decaffeinated and chicory mix variants.

3 IN 1 COFFEE Price – NA

Decaffeinated coffee is the coffee that has almost all the caffeine removed. Coffee beans go through a specialised process of decaffeination that removes up to 97% of caffeine. This process than leaves just 2-3mg of caffeine in a cup of coffee. Price – NA DECAFFEINATED COFFEE

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Production Capacity

Production Capacity (35000 Tonnes)

CCL Products Ngon Coffee Grandsaugreen SA (India) Limited Company Limited

14000 Tonnes 10000 Tonnes 3000 Tonnes Freeze Dried Freeze Dried Agglomerated

6000 Tonnes 2000 Tonnes Freeze Dried Liquid Coffee

*Additional 5000 Tonnes Freeze Dried (FY19) Source : Jainam Share Consultant, Company

CCL product has received an approval from the development commissioner of Visakhapatnam Special Economic for setting up Freeze Dried Instant coffee manufacturing unit in Special Economic Zone at Kuvakolli Village, Varadaiah Palem Mandal, Chittor District, Andhra Pradesh at an investment of Rs. 300 crore. Management is expecting 50% capacity utilisation in first year from Chittor plant.

The plant will add 5,000 tonnes per annum to its capacity, taking the total to 35,000 TPA. As the plant is in tax free zone some impact on profit will also be seen.

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Subsidiary

 Continental Coffee Private Limited: Continental Coffee Private Limited is a wholly owned subsidiary of the CCL Products, which was incorporated in 2011 with an objective of promoting instant coffee brands of the Company in the domestic market.

Domestic Sales

Own Brand Institutional Sales Private Label ( Continental Xtra, (all the defense (Reliance and Speciale, Strong) establishment) Spencer's)

 Jayanti Pte Limited: Jayanti Pte Limited is a wholly owned subsidiary of the CCL Product Ltd. incorporated in Singapore for the purpose of promoting instant coffee projects in various countries. This is only an investment based company, hence no operational gain is earned.

Proportion (%) of ownership interest Name *2018-19 2017-18 2016-17 Grandsaugreen SA - 100 100 Ngon Coffee Company - 59 59 Limited

* The Board has decided to wind up M/s. Jayanti Pte Ltd by transferring the shares held by it in M/s.Grandsaugreen SA and M/s. Ngon Coffee Company Limited, to the parent Company, thereby making both the Companies directly owned by CCL as 100% Subsidiaries.

 Grandsaugreen SA: Grandsaugreen SA is a wholly owned subsidiary of Jayanti Pte Limited and step down subsidiary of the Company incorporated in Switzerland under Swiss law in 2008 and started its commercial operation in the year 2009. This is an agglomeration and packing unit, engaged in manufacturing of Instant/Soluble Agglomerated/granulated Coffee , as well as the supplying of Spray-Dried coffee , and Freeze Dried Coffee . This enables CCL products to cater to the European Market with short lead time.+

 Problems: Swiss plant is facing issue on account of unfavourable trade relationship between Switzerland and European Union. Import duty levied by European Union on Switzerland supply is 9% as compared to supply from India or Vietnam there is a 3.1% duty.

 Revised target market: Switzerland is a blended market of Freeze dried as wall as agglomerated coffees. Two or three major major local brands are competing in the local Swiss market with extremely high margin. CCL will take their base product to

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Switzerland and will repack the agglomerated coffee and will sell in local market at much higher premium.

 Ngon Coffee Company Limited: Ngon Coffee Company Limited established in the year 2011 under the laws of Vietnam. Ngon Coffee state-of-the-art Soluble Instant Coffee Manufacturing Plant is located at Cu Kuin Industrial Complex, Cu Kuin District, Dak lak Province, Vietnam with a current combined capacity of more than 10000 MTs, per annum. Ngon Coffee is engaged in the manufacture of Instant/Soluble Spray Dried Coffee.

Advantage of having plant in Vietnam:

 Raw material availability: Vietnam is the second largest producer of green coffee beans in the world after Brazil. Vietnam rapid expansion in coffee production which was only 6,000 tons in 1975 and now is almost 2 million.

 Tax Benefit: Company is exempt from income tax for four years starting from the first year it generates taxable profit (from 2015 to 2018) and after that will be entitled to 50% reduction in income tax for for nine succeeding year (from 2019 to 2027).

 Market Presence: Presence in Vietnam help the company to cater to the coffee needs of ASEAN countries and this is in close proximity to many South -East Asian nations, Korea, China, etc. Most of these countries have granted Vietnam a most favored nation status with reduced or NIL duty structures in addition to having savings on logistics.

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Top Shareholders

Name of Share holders No of shares Percentage Valuequest India Moat Fund Ltd. 1879283 1.41 Sudhir Koneru 1002410 0.75 Smallcap World Fund, Inc 10642173 8.00 Schroder International Selection Fund Asian 1281803 0.96 Smaller Companies Naveen Bikkasani 1000000 0.75 Malabar India Fund Ltd. 2950645 2.22 India Whizdom Fund 1946771 1.46 Georgalis Heleanna Gabrielle 2109100 1.59 Fidelity Investment Trust Fidelity Emerging 1176652 0.88 Asia Fund Fiam Group Trust For Employee Benefit Plans 5776687 4.34

Management

Name Designation About  More than 25 years of experience in International Coffee Industry. Mr. Challa Rajendra Prasad Executive Chairman  CCL Products was promoted by Mr. Prasad in 1995.

 Mr. C. Srishant is a lawyer by education Mr. Challa Srishant Managing Director  Has more than 10 years experience in the coffee industry  Member of Institute of Compliance Officer, Ms. Sridevi Dasari Company Secretaries of Company Secretary India.  Member of ICAI from the year 1988. Mr. V. Lakshmi Narayana Chief Financial Officer  He has 30 years experience in finance in India

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Financial Information

Profit and Loss

Report Date (in cr.) Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sales 716.83 880.57 932.13 976.49 1136.67 Raw Material Cost 419.98 555.33 546.29 544.06 719.51 Change in Inventory -5.08 11.37 -0.44 -7.86 28.94 Power and Fuel 38.34 41.61 41.83 35.72 43.26 Other Mfr. Exp 54.28 53.29 62.49 69.74 61.72 Employee Cost 17.03 18.60 22.83 27.60 32.52 Selling and admin 27.62 41.06 42.83 52.07 62.66 Other Expenses 11.40 10.82 10.67 7.34 7.04 Other Income 2.62 3.02 1.22 1.23 4.85 Depreciation 29.10 26.82 28.38 33.25 34.09 Interest 17.06 13.61 10.82 11.17 7.83 Profit before tax 99.57 133.82 166.76 188.91 201.82 Tax 35.15 39.84 44.64 54.35 53.70 Net profit 64.42 93.98 122.12 134.56 148.13 Dividend Amount 15.97 19.96 33.26 33.26 33.26

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Ratio

Performance Ratios 2014 2015 2016 2017 2018 ROA 9.26 12.64 15.63 16.32 14.95 ROE 20.41 24.27 26.22 23.65 21.65 ROCE 19.04 22.76 25.91 26.85 23.02

Efficiency Ratios 2014 2015 2016 2017 2018 Receivable Days 49.05 45.31 47.09 53.99 55.29 Inventory Days 74.22 64.16 62.85 61.51 58.68 Payable Days 15.32 16.05 13.66 5.73 4.36

Financial Stability 2014 2015 2016 2017 2018 Total debt/equity (x) 0.83 0.54 0.41 0.23 0.42 Current Ratio (x) 1.49 1.66 1.52 2.31 2.86 Interest Ratio (x) 6.84 10.83 16.42 17.91 26.78

Du Pont Analysis 2014 2015 2016 2017 2018 PATM (%) 13.89 15.19 17.89 19.34 17.75 Sales / Total Assets(x) 198.49 259.01 223.44 248.34 306.31 Assets to Equity (x) 56.89 50.56 40.64 26.87 22.17 ROE (%) 20.41 24.27 26.22 23.65 21.65

Valuation Ratios 2014 2015 2016 2017 2018 EPS (x) 4.84 7.06 9.18 10.12 11.14 P/E (x) 10.50 25.28 21.24 33.84 24.99 P/BV (x) 1.92 5.63 5.09 7.25 5.00 EV/EBITDA (x) 6.41 14.79 13.53 20.05 16.29

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Balance Sheet

Report Date (in cr.) Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Equity Share Capital 26.61 26.61 26.61 26.61 26.61 Reserves 326.18 394.97 483.19 601.70 713.33 Borrowings 292.07 229.18 210.31 142.00 310.95 Other Liabilities 80.17 110.96 81.16 77.87 82.71 Total 725.03 761.72 801.27 848.18 1133.6 Net Block 361.13 339.97 417.31 393.28 371.13 CWIP 38.88 53.43 - 0.16 226.39 Investments 1.50 1.50 1.50 1.51 1.48 Other Assets 323.52 366.82 382.46 453.23 534.6 Total 725.03 761.72 801.27 848.18 1133.6 Receivables 106.75 113.22 128.14 162.74 182.03 Inventory 137.95 173.53 148.60 182.76 183.16 Cash & Bank 34.38 26.63 18.68 16.79 44.21 No. of Equity Shares 13.30 13.30 13.30 13.30 13.30 Face value 2 2 2 2 2

Cash Flow Statement

Report Date (in cr.) Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Cash from Operating Activity 124.79 104.71 160.98 101.78 145.15 Cash from Investing Activity -58.25 -19.17 -86.97 -19.60 -246.71 Cash from Financing Activity -41.51 -93.29 -81.96 -84.32 128.93 Net Cash Flow 25.03 -7.75 -7.95 -2.14 27.37

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HY1 FY19 Update

 Turnover stood around 586.89 cr. during the period ended 30 September, 2018 as compared to 545.94 cr. during the period ended 30 September, 2018.

 Net profit is 86.64 cr. as against 73.46 cr. for the corresponding period of financial year 2017-2018. During the second quarter company got some more profitable contracts from Vietnam which also contributed significantly to the bottom line.

 Revenue earned from the domestic market is 40 cr. For HY1 FY19 which is more than 46cr. that they have earned in FY18. The projection for this year is about 100 cr. During last month company has launched its new product Malgudi.

 Management has revised its FY19 net profit growth estimate to 15-20% YOY which was previously 10-20% and also improved its top-line guidance to 5-10% from 0-10% previously. The reason for higher estimate is due to increase in contribution form value added products.

 The company has commenced its trial production in this Q3 in the SEZ plant and will apply for necessary permission for the certification by the end of this quarter and by Q4 they are excepting to receive all the necessary client approval as well as certifications. They are targeting to start commercial production from April 1, 2019. Management is expecting 50% capacity utilisation in first year from Chittor plant.

 Capacity utilization for FY19 will range from 90-95% for Indian business which is stable in last few years and 75-80% for Vietnam based business which in previous year was 60-70%.

 The company is planning to set up new agglomeration and packing unit capacity of about 5000 tonnes for agglomeration and 3000 tonnes for packaging unit by next financial year, the investment will be approximately around $12 million (86.44 cr.)*. For this they have already purchased some additional land four years ago.

 In Vietnam based plant they are doing a little bit of line balancing to increase the capacity to around additional 3500 tonnes by next year. The projected cost for improvement of line balancing in Vietnam is around $8 million (57.63 cr.)*.

 Company is targeting around Rs.20 crore for advertisement.

 Currently company is focusing on certain customer and if due to this volumes come and the demand for Spray Dried increases substantially, than company will go for another 10,000 tons of capacity expansion in Vietnam.

* $1 = Rs. 72.04 as on 15 Nov. 2018

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HY1 FY19 - Profit & Loss

Particular ( in Cr.) H1FY19 H1FY18 % change Gross Sales 585.21 543.13 7.75 Less: Excise Duty Net Sales 585.21 543.13 7.75 Other operating income Net Sales & Other Operating Income 585.21 543.13 7.75 Total Expenditure 445.25 439.89 1.22 (Increase) / Decrease In Stocks -16.90 -35.44 Raw Material Cost 347.68 374.17 -7.08 Excise Duty Manufacturing Expenses 85.60 79.76 7.33 Electricity , Power & Fuel Cost Employees Cost 28.88 21.40 34.93 PBIDT (Excl OI) 139.96 103.25 35.56 Other Income 1.68 2.81 -40.24 Operating Profit 141.64 106.06 33.55 Interest 5.68 3.87 46.81 Exceptional Items PBDT 135.96 102.19 33.05 Depreciation 18.17 16.92 7.42 Proft / Loss from ordinary activities before tax 117.79 85.27 38.13 Tax 31.14 24.81 25.53 Profit after Tax 86.64 60.46 43.30

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HY1 FY19 - Balance Sheet

Particulars ( in Cr.) 2018/09 2018/03 ASSETS Non-current assets Property plant and Equipment 386.43 371.09 Capital Work Inprogress 369.45 226.39 Other Intangible assets 0.04 0.04 Financial assets 4.91 4.77 Other non current assets 38.06 36.88 Current assets Inventories 189.03 183.16 Financial assets 324.07 226.32 Other current assets 38.03 84.91 Total Assets 1350.02 1133.55 EQUITY AND LIABILITIES Equity 811.99 739.94 Non-current liabilities Financial Liablities 223.95 181.75 Deferred tax liabilities (net) 41.29 39.15 Current liabilities Financial Liabilities 254.20 154.39 Provisions 3.98 - Other current liabilities 14.60 18.32 Total Equity and Liabilities 1350.02 1133.55

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Analysis

Peer Analysis

Olam International Particular Tata Coffee Ltd. CCL Products Ltd. Ltd. Leading agri-business Tata Coffee is coffee operating from seed to company owned by CCL Products, (India) shelf in 66 countries, the Tata Global Limited, a global supplying food and Beverages, subsidiary coffee manufacturer industrial raw materials of Tata Group. founded in 1994. to over 22,000 About Produce some of the Company is a topmost customers worldwide. finest Indian Origin producer and exporter Global leadership Green Coffee Bean, of various types of position in Edible Nuts, Instant Coffee, Pepper instant coffee. Cocoa, Spices and and Tea. Vegetable Ingredients, Coffee and Cotton. Capacity 8400 MT 35000 MT 29250 MT Market Cap. (in 1814.47 3295.10 31311.25 Cr.) Sales* (in Cr.) 360.18 1136.67 38849.80 Sales Growth ( 5 3.00% 10.00% 9.00% yrs)** (in Cr.) PAT (in Cr.) 186.94 148.13 2772.59 ROA (%) 6.74 14.95 3.44 ROE (%) 17.16 21.65 8.50 Total 0.88 0.42 1.46 Debt/Equity (x) Asset Turnover 0.56 1.15 1.23 Ratio (x) EBITDA Margin 16.86 20.97 10.40 (%) ROCE (%) 11.17 23.02 - EPS (Rs.) 5.71 11.13 8.89

* In the above table sales figure indicate total amount green coffee sold during the year. And the sales of Olam International is converted into INR on basis of value on 31st December 2017.

** Instant coffee past 5 years sales growth is being considered.

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Valuations

Scenario 1 assumption: Currently, global coffee consumption has been growing with a CAGR of 2.3% from past 4 years. So assuming revenue growth to be conservative, it is assumed that sales will grow with a CAGR of 2.3% till FY20.

Part 1 - Based on Profit after tax margin

 It is assumed that sales will grow with a CAGR of 2.3% till FY20 which resulted into the Rs.1189.90 cr.

 In column A, we have assumed 5 years average PATM (%) which is 12% and in column B, we have assumed 3 years average PATM (%) which is 13%. We have not taken into consideration margin expansion due to the growth of domestic retail brand.

 Also, management has mentioned in the concall that their main focus is on the volume rather than margin.

FY 20 (E) Particular 5 years avg. PATM (%) - A 3 years avg. PATM (%) - B SALES (in Cr.) 1189.90 1189.90 PATM (%) 12 13 PAT (in Cr.) 141.68 158.41 P/E (x) 20.74 20.74 MCap (in Cr.) 2671.66 3018.64 No. of shares (in Cr.) 13.30 13.30 Price (Rs.) 200.83 226.91

Part 2 - Based on Profit before Interest, Depreciation and tax margin

 It is assumed that sales will grow with a CAGR of 2.3% till FY20 which resulted into the Rs.1189.90 cr.

 In column A, we have assumed 5 years average PBIDTM (%) which is 21% and in column B, we have assumed 3 years average PBIDTM (%) which is 22%. We have not taken into consideration margin expansion due to the growth of domestic retail brand.

 Also, management has mentioned in the concall that their main focus is on the volume rather than margin.

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FY 20 (E) Particular 5 years avg. PBIDTM (%) - A 3 Year avg. PBIDTM (%) - B SALES (in Cr.) 1189.90 1189.90 PBIDTM (%) 21 22 PBIDT (in Cr.) 256.22 267.47 EV/EBITDA(x) 16.29 16.29 MCap (in Cr.) 3706.97 4090.35 No. of shares (in Cr.) 13.30 13.30 Price (Rs.) 293.69 307.48

Scenario 2 assumption: According to the current scenario Asia coffee consumption is growing at a CAGR of 4.2% from last 4 years. So the growth of sales is assumed to grow with a CAGR of 4.2%.

Part 1 - Based on Profit after tax margin

 It is assumed that sales will grow with a CAGR of 4.20% till FY20 which resulted into the Rs.1234.51 cr.

 Also, management has mentioned in the concall that their main focus is on the volume rather than margin.

FY 20 (E) Particular 5 years avg. PATM (%) - A 3 years avg. PATM (%) - B SALES (in Cr.) 1234.51 1234.51 PATM (%) 12.00 13.00 PAT (in Cr.) 146.99 164.35 P/E (x) 20.74 20.74 MCap (in Cr.) 2781.83 3141.82 No. of shares (in Cr.) 13.30 13.30 Price (Rs.) 209.12 236.18

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Part 2 - Based on Profit before Interest, Depreciation and tax margin

 It is assumed that sales will grow with a CAGR of 4.20% till FY20 which resulted into the Rs.1234.51 cr.

 Also, management has mentioned in the concall that their main focus is on the volume rather than margin.

FY 20 (E) Particular 5 years avg. PBIDTM (%) - A 3 Year avg. PBIDTM (%) - B SALES (in Cr.) 1234.51 1234.51 PBIDTM (%) 21.00 22.00 PBIDT (in Cr.) 265.82 277.50 EV/EBITDA(x) 16.29 16.29 MCap (in Cr.) 4063.45 4253.71 No. of shares (in Cr.) 13.30 13.30 Price (Rs.) 305.46 319.76

01-11-2018 25 Jainam Share Consultant Pvt Ltd Sector : Plantations - Tea & Coffee

Conclusion

Recommendation

CCL product is currently in expansion stage trying to grasp both domestic and global market by increasing production capacity and brand promotion. Company is currently expanding its production capacity by installing additional 5000 Tonnes capacity by setting up a freeze dried instant coffee Greenfield plant being operational in FY19. In India they have started placing vending machines with target of installing 3000 machine.

The demand of instant coffee is growing at only 2.2% is the major concern due to which export demand will slowdown and will directly affect company’s sales. Duopoly in domestic market is also a concern for expansion in domestic market.

Company stands strong due to its product taste and quality and it trying to build it brand name in domestic market.

We recommend our Investors to “Buy” the stock with potential upside of 23% with horizon of 2 years.

Sources

 Annual Report  CCL Products (INDIA) website  Conference Call  BSE website  Singapore Exchange website  International Coffee Organisation website  Coffee Board of India website  Web based Software – Ace Analyser

Head of Research: Tejas Jariwala

Guided By: Jimit Zaveri

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Full Form & Glossary

Abbreviation Full Form BV Book Value CAGR Compound Annual Growth Rate CAPEX Capital Expenditure COGS Cost of Goods Sold DPS Dividend Per Share EBIT Earnings before interest and taxes EBITDA Earnings before interest, tax, depreciation and amortization EPS Earning Per Share EV Enterprise Value FY Financial Year GP Gross Profit HY Half Year MCap Market capitalization NAV Net Asset Value NII Net Interest Income NOI Net Operating Income NOPAT Net Operating Profit after Tax NPV Net Present Value OCF Operating Cash Flow OI Operating Income P&L Profit & Loss P/E Price/Earnings Ratio PAT Profit After Tax PATM Profit After Tax Margin PBT Profit Before Tax QOQ Quarter on Quarter RE Retained Earning ROA Return on Assets ROCE Return on Capital Employed ROE Return on Equity ROI Return on Investment ROIC Return on Invested Capital RONA Return on Net Asset TTM Trailing Twelve Month WC Weighted Average Cost of Capital YOY Year over Year

01-11-2018 27 Jainam Share Consultant Pvt Ltd Sector : Plantations - Tea & Coffee

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01-11-2018 28 Jainam Share Consultant Pvt Ltd Sector : Plantations - Tea & Coffee

Disclaimer

Research Analyst Details

Name: Vandana Pareek Email Id: [email protected] Ph: +91 0261-6725518

Analyst ownership of the stock: No

Details of Associates: Not Applicable

Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

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