CCL Products India Ltd
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Initiating Coverage CCL Products India Ltd A Hot Brew… 09 SEP 2019 09 SEP 2019 Company Report BUY Target Price: Rs 284 CMP : Rs. 239 Potential Upside : 19 % MARKET DATA No. of Shares (Cr) : 13.30 Market Cap (Rs Cr) : 3093 Free Float : 55% Avg. daily vol (6mth) : 78309 CCL Products India Ltd 52-w High / Low : Rs 306 /Rs 225 Bloomberg : CCLP IN Tea & Coffee Promoter holding : 45.28% A Hot Brew… Price performance 150 100 50 May-18 Jan-19 Sep-19 Sensex CCL Products Financial Summary Shareholding pattern Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE DPS Mar-19 Q-o-Q Change March (Rs Cr) (Rs Cr) (Rs Cr) (Rs ) (%) (x) (%) (%) (Rs) Promoters 45.28 - FY18 1138 239 148 11.1 10.1 25 21.7 18.8 2.5 FPIs 25.84 (6.04) FY19 1081 245 155 11.6 4.5 24.5 19.6 17 3.5 FY20E 1252 293 170 12.8 9.9 18.7 18.8 17.7 3.2 DIIs 2.61 401 FY21E 1464 350 222 16.7 30.6 14.3 21.2 20.1 4.2 Public (Others) 26.27 (1.61) Source: Company, Axis Securities, CMP as on 9th Sep 2019 Tanvi Shetty – Asst. Manager - Research Suvarna Joshi – Sr. Manager - Research 2 | [email protected] | (+91 22 4267 1758) | [email protected] | (+91 22 4267 1740) 09 SEP 2019 Company Report CCL Products India Ltd Investment Rationale Sector: Tea & Coffee Steady growth in Asia to lead growth of CCLP largest exporter High Entry Barriers Coffee Consumption Instant Coffee market In B2B segment Leads to economic moat World coffee industry is a USD Instant coffee (IC) or Soluble ~40% of global IC market Expertise in developing 100bn market growing at a coffee is USD 28bn market (~3.7lakh MT) is constituted by customized coffee blends is (9lakh MTPA) projected to rate of 5.5% over 2015-19 regional brand owners and achieved over 25 years grow at 4.5% CAGR over private labels experience in coffee conversion; 2018-2024E. Indian IC market difficult to replicate by growing at +15% p.a. Factors As per ICO, coffee volumes competition driving consumption growth: Currently, CCLP has ~10% (consumption) estimated to Shifting consumption to IC from market share in the global grow at a stable 3% CAGR tea owing to ICs convenience (private label) IC market Long standing and diversified over next 5 years the same as Growing affordability growing at ~6-7% p.a. client base with >50% sticky 2015-19 Rising millennial population order book led by expertise in customising blends and offering CCLP operates as a B2B player Asia is the largest consumer of further value addition as cost European Union (EU) & United has 35,000MTPA (28% share instant coffee with >40% share competitive prices States (>40% of world of Indian IC capacity) making it with huge potential to grow led consumption) are the largest by the largest exporters to consumers, having grown at B2B/private label coffee Offers low operating costs Easy availability of RM (green manufacturers versus peers given superior 1.4%/2.9% CAGR over coffee coffee beans) technology (ability to convert year 2015 -19 respectively Rising disposable income low grade green coffee to most CCLP (37% market share of Low per capita consumption at premium blend), economies of less than 2kg per year Indian IC exports) positioned at South & East Asia offers next scale and duty & tax incentives the cusp of a huge growth leg of growth. These regions Europe is the 2nd largest opportunity coming from grew fastest with 6% CAGR vs consumer of Instant Coffee with Immune from volatility in RM 2% CAGR for Rest of World Deepening existing relationship 9% share followed by Russia (green coffee) prices due to over Coffee Year 2015 - 2019 ( 5%). Americas too is amongst Higher share of value added back-to-back contracts with the major consumer of IC products (small packs, blends) customers 3 09 SEP 2019 Company Report CCL Products India Ltd Investment Rationale Sector: Tea & Coffee Capacity Additions, Vietnam plant Foray into high margin Healthy Financial value added products strategically positioned Branded Retail business & Valuation -to expand margins Easy access to green coffee Freeze Dried Coffee (FDC), ‘Continental Coffee’ launched We expect, CCL Products to beans allows enough being a value added product, by CCLP as its brand to post Revenue/EBITDA/PAT procurement benefit. CCLP’s enjoys higher margins (~1.5x capitalize on domestic instant CAGR of 16%/19%/20% over plant located at Dak Lak vs Spray Dried Coffee) province (main coffee growing coffee market (growing at 15% FY19-21E driven by region) of Vietnam, world’s 2nd CAGR) opportunity Volume growth (capacity largest coffee producing nation Commissioning of 5,000MT FDC capacity in Q1FY20 to additions at India & Vietnam) By 2021 Continental Coffee to help expand margins in wake Transition to higher margin Immense Logistic cost savings be a pan India Instant Coffee given proximity to end of rising demand for premium value added products (FDC, coffee in USA brand. 1st launched in South consumer markets of Japan, Small Packs) China and emerging ASEAN India in 2014 a traditional countries coffee consuming region EBITDA Margin expansion of Incremental volume growth to 120 bps to 23.9% in FY21E be supported by 3,500MT over FY19 aided by value Tax & duty benefits accrue to Vietnam plant expansion FY20 A&SP investments guided CCLP because of: to be Rs. 30cr (50% higher added products and B2C Reduced or NIL duty owing to YoY; FY19 it spent Rs. 20cr) business most favored nation status to Growing pie of higher margin Vietnam by most countries; Small packs segment. Small ROE to further improve from NIL tax for CCLP over lifetime packs fetches ~5% higher Branded B2C segment 19.6% in FY19 to 21.2% in at its Vietnam operations if it realization vs bulk packaging. revenues to double in FY20 at FY21E meets stipulated conditions Growing customer’s demand Rs. 70cr as per management We initiate coverage on CCL aided capacity addition plans Products with "BUY“ rating with Enables to cater to Japanese (packing & agglomeration Overall Domestic business a 15-18 months target price of market demand for premium facility in Sullurpet, India) for freeze concentrated liquid small packs revenues to stand at 15% by Rs.284/share valuing it at 17x coffee variety FY21 as per management FY21 P/E 4 09 SEP 2019 Company Report CCL Products India Ltd Growth in Coffee Consumption Sector: Tea & Coffee Brewing World Coffee Consumption World Coffee Consumption Breakup World coffee industry is a USD 100bn market growing at 5.5% Philippines Indonesia Canada CAGR over 2015-19 4% 3% 3% Russia Vietnam As per ICO, coffee consumption (volumes) growth expected to Brazil Japan 3% 2% 14% 5% maintain 3% CAGR over coffee year 2019-20 (same as coffee Ethiopia year 2015 up to 2019) at 168 million bags 2% United States China Key drivers for world coffee consumption: 16% 2% Korea South Improved standard of living leading to growing coffee culture European Union Other 2% 28% 15% Rising demand from millennials (growing food outlets & café culture) Mexico Switching consumption to coffee from other beverages (growing 1% rate of coffee vending machines across Corporate Institutions & Offices) Rising World Coffee Consumption European Union (EU) & United States are the key coffee consuming nations globally (>40% of world consumption) Both regions reported volume CAGR of 1.4%/2.9% respectively 170,000 over last 5 coffee years 163,887 159,460 Value growth expected to be 7.8%/8.1% CAGR over 2019-24, 160,000 bags) highlighting shift to premium coffee 152,729 153,839 Over 50% coffee is imported by EU & US followed by Japan and 150,000 145,637 Russia '00060Kg 140,000 (In CCLP at the cusp of huge growth opportunity 130,000 2014-15 2015-16 2016-17 2017-18 2018-19 arising from growing developed markets Source: ICO (International Coffee Organization), US Dept. of Agriculture, Axis Securities 5 09 SEP 2019 Company Report CCL Products India Ltd South & East Asia- Next leg of growth in coffee consumption Sector: Tea & Coffee South & East Asian nations reported 6% CAGR in coffee Vietnam being the second largest green coffee producer globally consumption (ROW CAGR at 2% ) over CY* 2015-19 South & East Asia accounting for ~30% of Green coffee exporters reported higher CAGR (8-10%) production including countries like Vietnam, Indonesia, Philippines etc. Brazil 19% Vietnam Coffee importers reported 7-8% CAGR including markets like 7% Taiwan, China, South Korea etc. 4% Indonesia India 32% 9% Key drivers for growth of IC consumption in ASEAN Colombia 5% Honduras Low average per capita consumption (less than 2kg) against 5% Ethiopia matured western markets of over 10kg 3% 11% 2% 3% Uganda Shifting consumer preference towards coffee from tea Peru Rising disposable incomes in emerging markets Mexico Others Cost efficient and easy availability of green coffee (Robusta**) beans (30% of world’s share comes from South & East Asian countries) Robusta capital of the world – Vietnam leads in production Vietnam Low per capita consumption in Asian countries huge growth potential Dominated by South & East Asian countries ~64% Indonesia 16 India 12.2 13% 5% 12 3% 1% Malaysia 7.6 1% 8 5.8 Thailand 5.3 4.5 3.3 Philippines 4 1.3 1.1 1.0 0.8 41% 24% 0.1 Brazil 0 Uganda Capitaperyear(2018)) US UK 6% 2% Cote dchr(39)Ivoire India 3% Brazil China 1% Kgper Finland Tanzania Vietnam Thailand In ( Indonesia Others Switzerland Netherlands **Robusta is the cheaper variety of coffee bean vs Arabica bean; its harsher taste profile makes it more suitable Note: ROW – Rest of World; *CY: Coffee Year i.e.