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CCL Products

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Notes on CCL Products based on my limited understanding :

  • The company operates in producing instant coffee in B2B segment and has clients across world with manufacturing facilities in India and Vietnam.
  • The Company is agnostic to raw material prices as its contracts with customers are based on raw material price with fixed margins. 70% of the cost comprise of raw coffee.
  • The business model is setting up the coffee refining plants, take orders from customers, execute the project on fixed margin and deliver to customer.
  • Company claims to be world’s largest private label instant-coffee manufacturer along with being lowest cost producer due to economies of scale.
  • Current capacity includes 24000 ton spray dried, and 11000 ton freeze dried (high margin business). Within Freeze dried, there are multiple product lines.
  • India Capacity – 14000 ton spray dried, 10000 ton freeze dried. Vietnam capacity – 10000 ton Freeze Dried.
  • Out of 750,000 ton global coffee market, Nestle consumes 250,000 tons in Agglomerated coffee. Excluding Nestle, CCL market share in global coffee market is close to 5-10% , taking its approx capacity of 30,000 tons.
  • Establishing relationship with customers requires years to materialize and are sticky because of long customized products sampling / testing and approvals by the customers.
  • Clients in the coffee industry are extremely particular about taste, aroma, color and other product features and, hence, do not switch easily.
  • Major competitors for CCL in B2B segment are outside India. Highest capacity of competitor is 25000 tons.
  • The company grew at fast pace in the past but, management pointed that after a particular point of volume growth, the growth will subside (after reaching 45000 -50000 ton processing capacity). This is expected after 3-4 years.
  • The top five clients accounted for 37.00% of CCL’s revenue in FY17 (FY16: 56.00%). With a keen focus on customer retention and its long-standing relationships with all major clients, CCL receives repeat orders every year from major clients, mitigating the customer concentration risk to some extent.
  • In Vietnam, current capacity is 10000 tons which will be expanded by 4000 tons by FY19 with capital outlay of $8 million.
  • High margins in selling branded coffee business in India , but this business is minuscule for CCL.
  • The free cash flow generated by that company during last 10 years have gone in building new capacities, working capital (WC) and paying dividends. The WC increase is inline with sales increase over the years.
  • The company manufacturers to re-packers to final product company. Manufacturer to re-packer is bulk business which is low margin and highly competitive, however, re-packer sells to branded player in small pack which is high margin business. Stickiness of business with small packs is high.
  • According to management coffee manufacturing business is closed setup requiring lot of prior experience and economies of scale. Its hard for  new player with 2000-3000 ton capacity to be economical in this space. The trend is bulk coffee manufacturing players venturing into repackaging as coffee manufacturing , if not at huge scale , will not be viable.
  • Given the fixed margin business, many companies are setting up operations to deliver processed coffee. This is creating challenge in the industry with excess capacities , basically excess supply, where as demand for processed coffee is not growing at the same pace. This creates pricing pressure and decline in business volume thus impacting profitability of the company.
  • According to management, CCL is able to compete and gain market share with its superior product mix, high quality and range of products offering which are unparalleled in the market along with economies of scale. 
  • The company keeps the margins constant but works on growing the volumes. The company is also getting small packs orders which is high margin. In India, 70% is bulk business and 30% is small packs. Previously, clients were buying from re-sellers that used to perform agglomeration and CCL was supplying to re-sellers, but now these clients are directly taking the small pack orders to CCL Products.
  • The company also enjoys export incentives from Government but that may not continue after couple of years. The company also enjoys tax rebate from Vietnamese government but that again will expire after couple of years.
  • Most of the orders are received by the business at least a year in advance, Only, 20-30% orders are received during the year. This way company is able plan the delivery execution much in advance and also, gauge, top line, margins and bottom line for next year to a lot a precision.
  • The company operates at full capacity in India and hence is expanding to a new plant in SEZ, that will be operational next year (FY 19-20). The Capex outlay for this plant is close to Rs 300 Cr and will enjoy 5 year tax holiday. The company will have to pay only MAT for SEZ.
  • In Vietnam, the company’s plant is operating at 70% capacity and 100% business is bulk coffee.
  • Operating the plants are viable for the company if they operate at minimum 60% of the capacity.
  • CCL products is trying to enter retail markets (B2C segment – a high margin business) in India with focus on South India. If it succeeds, it will be able to grow topline and bottomline for a longtime. Currently, this segment contributes to 50 Cr topline and for next few years will not contribute to bottomline as focus is on building brand and taking the market share.
  • Operating in this industry is viable only in developing world. That’s the reason why, big players in US are shutting their operations.
  • Transportation of instant coffee is cheaper, as it has lower shipping weight and volume than beans or ground coffee. Moreover, instant coffee offers convenience in preparation, shelf life, which increases its demand among the urban consumers.
  • Major consumers of Instant coffee are in India, South East Asia (Malaysia, Vietman, etc) and Europe. US market is dominated with Filter coffee. In India, South India is the major consumer of coffee.
  • Brazil is the biggest supplier of instant coffee to the world. While there are no duties of raw material (coffee) import in India, that’s not the case in Brazil. Vietnam is also large producer of coffee after Brazil.
  • The company is setting up 5000 ton agglomeration capacity (value added exercise) that includes automated packaging of same capacity outside SEZ that will mainly serve domestic demand. SEZ is for export market. Margins for Agglomerated coffee is 5 % higher than spray dried. 
  • The company has minimal debt of around Rs 180 Cr financed at 5% interest rate.As of FY 18-19, approx 20% of total sales is from premium products and small packs.
  • CCL competitors in B2C segment in India are Nestle Nescafe and Hindustan Unilever’s Bru.
  • As CCL Products business is Cost + Margin, looking just at topline growth will be a misleading way of gauging growth of CCL Products. Instead Topline – Cost of Raw Material will be better way. For instance, In FY 17, price of raw green coffee was $3000 per ton, where as in FY 19 it is $1300 per ton.
  • Agglomerated coffee is also called poor man’s freeze dried coffee. Freeze Dried coffee capital requirements are higher than spray dried coffee.
  • The company mitigates the currency risk with natural hedge arising on export of Products vis a vis import of Coffee Beans both of which are in same currency viz USD.
  • Promoters of the company draw huge salaries . Chella Rajendra Prasad – Rs 8 Cr, Chella Shrishant – Rs 5 Cr.
  • Owner Operator business, but lacks management depth.
  • In FY 2018-19 , one bulk customer moved out of CCL Product, the impact of it was 2000 ton de-growth. Company has acquired 20 new clients in small pack segment in the same year that will make up to 500 ton of lost sales. Note that management pointed out that profitability will remain the same, which points that small pack segment is highly profitable. 

For further research

How to spot a multi-bagger?

Global Coffee Crisis

Below documentary details decline in production of raw coffee due to climatic changes. CCL Product can be negatively hit with dearth of raw material.

Valuepickr

https://forum.valuepickr.com/t/ccl-products/965

https://forum.valuepickr.com/t/business-model-canvas-a-step-before-self-reinforcing-business-model/6660/2

Dinesh Sairam

https://valuationinmotion.blogspot.com/2018/11/ccl-products-india-valuation-freshly.html

Research Report@ms89_meet ccl pro. ltd.

Research on competitors – Tata Coffee, OLAM and DEK. Read their annual report and concalls for comprehensive research.

Research through Credit Rating reports.

Questions:

  • What will be the impact if exporting countries (Brazil) start charging export duties on coffee?
  • Will company be able to compete with ongoing technological changes in  instant coffee production?
  • Tata Coffee says that its new Vietnam plant of 5000 MTPA (Freeze Dried Coffee) with fetch Rs 400 Cr Turnover when utilized at full capacity. When we compare CCL Products with 35000 MTPA Capacity, its turnover is mearly 1100 Cr. How can can Tata Coffee Generate 400Cr Turnover from 5000 MTPA plant, while CCL Products is able to generate only 1100 Cr Revenue from 35000 MTPA plant? Note that CCL Products claims that its 24000 MTPA ton India Plant operates at full capacity and remaining in Vietnam operates at 70% capacity.
  • Freeze dried production facility is only in India and Vietnam only has Spray dried production facility. Vietnam has better margin in India. Why? Given the fact that Freeze Dried is higher margin business, shouldn’t it be other way round?
  • In FY 18-19 Con call, company talks about 30 Cr dividend from vietnam subsidiary and further adds it to consolidated net profit of 155 Cr. How does it makes sense?

Links

Vietnam has become the fourth biggest instant coffee exporter worldwide

https://economictimes.indiatimes.com/industry/cons-products/food/ccl-eyes-a-bigger-pie-of-indias-instant-coffee-market/articleshow/70670968.cms?from=mdr

https://www.thedollarbusiness.com/magazine/instant-coffee—brewing-profits-instantly/25484

Notes from FY 2013-14 Con Call

CCL Vietnam has infrastructural build up for 20,000 tons. Current Vietnam capacity is 10,000 ton that will be increased by 4000 ton in FY 19 with $8 million investment.

Vietnam contribution in FY14-15 would be 2000-3000 ton.

Total Debt on consolidated basis is approx 350 Cr. In Vietnam debt is $30 million secured on long term basis which includes working capital debt. As interest rates in vietnam is high 16%, company has merged working capital loan in long term debt that is financed cheaply.

Working Capital Cycle is very small in Vietnam compared to India (~6 months difference) because raw material can be directly sourced in Vietnam. Total Capex for Vietnam plant (10000 ton) is $50 million including Working Capital.  This is the same number mentioned by Tata Coffee in FY 19 con call on capex for 5000 ton freeze dried plant in Vietnam.

Notes from FY 2014-15 Con Call

Total Business of about 20,000 tons across the year. Next year , Total Business is expected to be 25,000 tons.

India Capacity Increased from 15000 ton to 20000 tons this year. Close to 4600 ton production from Vietnam this Fiscal.

Sales in US markets ~ 3000 tons

Relationship with clients spans from 15-20 years.

Written by AMIT SAXENA

October 25, 2018 at 4:17 am

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