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CCL Products

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Coffee Industry

  • The largest producer of Coffee in the world is Brazil (40%) followed by Vietnam (20%). India produces about 5% of the world coffee production. Japan is the largest consumer of coffee, followed by countries like Russia, Italy, Germany, Eastern Europe, US, etc.
  • 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% , with its capacity of 35,000 tons.
  • In bulk coffee segment clients are extremely particular about taste, aroma, color and other product features and, hence, do not switch easily.
  • 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.
  • Agglomerated coffee is also called poor man’s freeze dried coffee. Freeze dried coffee capital requirements are higher than spray dried coffee.
  • Caffeine is addictive so this gives a broader view that demand of the product will continue to persist.

About CCL Products

  • 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.
  • 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 FY17, price of raw green coffee was $3000 per ton, where as in FY19 it is $1300 per ton.
  • Company claims to be world’s largest private label instant-coffee manufacturer along with being lowest cost producer due to economies of scale.
  • Margin profile of the company (EBITDA ~ 20-25%) suggests company has pricing power.
  • 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.
  • Establishing relationship with customers requires years to materialize and are sticky because of long customized products sampling / testing and approvals by the customers.
  • Most of the orders are received 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 of precision.
  • The free cash flow generated by the 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 manufactures 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.
  • The company has minimal debt of around Rs 180 Cr financed at 5% interest rate. As of FY19, approx 20% of total sales is from premium products and small packs.
  • 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. CCL claims to be the lowest cost producer.

Capacity

  • Current capacity includes 24,000 ton spray dried, and 11,000 ton freeze dried (high margin business). Within freeze dried, there are multiple product lines.
  • India capacity – 14,000 ton spray dried, 10,000 ton freeze dried. Vietnam capacity – 10,000 ton freeze dried.
  • The company operates at full capacity in India and hence is expanding to a new plant in SEZ, that will be operational in 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.
  • In Vietnam, current capacity is 10,000 tons which will be expanded by 4,000 tons by FY19 with capital outlay of $8 million.
  • Major competitors for CCL in B2B segment are outside India. Highest capacity of competitor is 25,000 tons.
  • Operating the plants are viable for the company if CCL products operate at minimum 60% of the capacity.
  • The company is setting up 5,000 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. 

Entry into B2C Segment

  • CCL products is trying to enter retail markets (B2C segment) in India with focus in south india. If it succeeds, it will be able to grow topline and bottomline for long time. Currently, this segment contributes 50 Cr topline and for next few years will not contribute to bottomline as focus is on building brand and taking the market share.
  • High margins in selling branded coffee business in India , but this business is minuscule for CCL.
  • CCL competitors in B2C segment in India are Nestle Nescafe and Hindustan Unilever’s Bru.
  • Nestle is into the business of selling agglomerated form of coffee and Bru sells Spray Dried powder which is in chicory blend. Whereas, CCL has made a new category which is agglomerated Spray-Dried coffee.

Growth Prospects

  • 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 45,000 -50,000 ton processing capacity). This is expected after 3-4 years.
  • USA may be a big opportunity for CCL products. Demand for instant coffee is 75000 ton USA alone. Currently CCL is supplying 2000 ton only.
  • Growth may come in India as the consumption of is only 20,000 tons compared to Japan at 35,000 and USA at 80,000 tons. A positive change in consumer lifestyle (specifically driven by western culture) with increasing higher disposable income.

Other Facts

  • Coffee manufacturing business is closed setup requiring lot of prior experience and economies of scale. Its hard for  new player with 2,000-3,000 ton capacity to be economical in this space. The trend is bulk coffee manufacturing players venturing into re-packaging as coffee manufacturing , if not at huge scale , will not be viable.
  • CCL keeps the blend confidential. CCL has around 1000 different blends and catering to over 90 countries currently. These blends requires substantial R&D investment, thus not easily replicable.
  • 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.
  • CCL has recently entered in USA market which will lead to doubling of their revenues in USA. It took them 3-4 years to get the approval. This creates an enter barrier for competitors as they can’t one fine day decide to enter USA market.
  • 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.
  • CCL does not own any coffee plantations instead they procure green coffee from Chikmagalur in Karnataka, India as well as imports premium variety like Robusta and Arabica from Vietnam and Ethiopia respectively and then does the processing
  • CCL products 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.
  • In FY 2019 , one bulk customer moved out of CCL Product, the impact of it was 2,000 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. 

Risks:

  • Inability of company to import raw material / Imposition of import duties on raw material
  • Risk of bad debts as the company has concentrated clients. But looking at the past records and their relations even such risk is avoided till an extend.

Advantages of coffee plant in Vietnam
Vietnam is the 2nd  largest cultivator (20% of global cultivation) of coffee beans. What is more interesting is that Vietnam grows a type of coffee called Robusta coffee beans. Instant Coffee is majorly manufactured using Robusta Coffee beans which are cheaper than the Arabica coffee beans which are cultivated in Brazil – the largest cultivator of coffee (40% share).
Robusta coffee beans are cheaper than Arabica coffee beans by around 10% and thus Vietnam has a natural cost advantage when it comes to making instant coffee. Also, Vietnam is part of ASEAN and enjoys duty-free access to several markets and thus it is probably cheaper to make and export coffee from Vietnam to European and other countries than exporting it from India.

Further Read:

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 Blog

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

Research Report@ms89_meet ccl pro. ltd.

Arjun Badola Blog –

http://arjunbadola.blog/ccl-products-india-ltd-analysis-the-moat-business-you-might-be-looking-for/

https://arjunbadola.blog/Why-I-Sold-CCL-Products-(India)-Ltd/

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

Questions:

  • Tata Coffee says that its new Vietnam plant of 5,000 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 400 Cr 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 24,000 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 FY19 concall, 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?
  • 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?

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 CCL Products FY14 Concall

CCL Vietnam has infrastructural build up for 20,000 tons. Current Vietnam capacity is 10,000 ton that will be increased by 4,000 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 from Vietnam. Total capex for Vietnam plant (10,000 ton) is $50 million including working capital.  This is the same number mentioned by Tata Coffee in FY19 con call on capex for 5000 ton freeze dried plant in Vietnam.

Notes from CCL Products FY15 Concall

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 15,000 ton to 20,000 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.

Agglomerated coffee has the other name as granulated instant coffee or coffee granules. Agglomerated coffee looks like a hybrid between spray-dried coffee and freeze-dried coffee. This coffee is in a form of granules (bubble-shaped), volatile and easy to be broken.

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Written by AMIT SAXENA

October 25, 2018 at 4:17 am

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