Highlights
Volume guidance maintained for FY23 despite lower growth in December 2022 quarter
New capex announced in freeze dried coffee
Growth in profitability to be higher on the back of lower effective tax
Decent earnings visibility on the back of volume-led growth
CCL Products (CCL; CMP: Rs 568; Market capitalisation: Rs 7,561 crore) has maintained its volume guidance for FY23 at 20-25 percent and 15-20 percent for FY24.
It has announced a new 6,000 metric-tonne freeze dried coffee (FDC) plant in Vietnam for $50 million, which is expected to start commercial production from the December 2024 quarter.
Capex update
CCL’s brownfield capex of 16,000 metric tonnes was commissioned in the December 2022 quarter. The total capex for this brownfield expansion in Vietnam was $30 million. Another, greenfield expansion of 16,000 metric tonnes, adjacent to its Chittoor plant, at a cost of Rs 320 crore, is likely to begin commercial production from the June 2024 quarter.
On the back of strong client enquiries and a written commitment from one of the customers for the 50 percent capacity, CCL has announced a 6,000 metric- tonne freeze dried plant capacity in Vietnam at a cost of $50 million.
Of this $50 million capex, $35 million will be through debt and the rest will be from internal accruals.
With this, the total capacity of CCL is likely to be around 76,000 metric tonnes by the December 2024 quarter. With capacity expansion in the offing, we expect a compounded annual volume growth rate of 18-20 percent in the next 3-4 years.
December 2022 quarter performance
The results for the December 2022 quarter were in line with expectations. CCL saw a low single-digit volume growth for the quarter, while higher coffee prices led to an increase in realisation.
Lower volumes during the quarter was mainly on the back of the planned shutdown for 20 days in India and some disruption in Vietnam on account of the commissioning of a new brownfield plant of 16,500 metric tonnes.
The business model of CCL is based on a full pass-through of green coffee prices and there was no impact on EBTIDA per kg, with EBITDA almost stable in line with the volume growth.
Despite higher EBITDA, lower other income, higher interest cost and depreciation led to lower PBT. Negative tax led to higher PAT.
The performance of subsidiaries remained muted with a revenue and EBTIDA growth of 14 percent and 9 percent, respectively, while PAT declined by 87 percent.
Outlook and valuations
CCL, on the back of its cost-efficient business model, expertise in coffee blending and capacity addition in higher value-added products, has gained market share by expanding its portfolio and by replacing old processors.
In addition, customers also want to de-risk their supply chain and CCL remains their first preference due to its consistent track record, manufacturing operations in both the countries (India and Vietnam) and timely capacity addition. With these qualities, some customers have signed multi-year contracts with CCL for supplying coffee, leading to decent volume growth for CCL.
CCL has indicated strong volume growth for the March 2023 quarter on account of the commercialisation of additional capacity in Vietnam from the December 2022 quarter of 16,500 metric tonnes.
Supplies from the incremental Vietnam capacity has already started in January 2023 and the management expects 50 percent utilisation from the incremental capacity in FY24. This itself will lead to more than 15 percent volume growth for FY24.
The management expects EBTIDA per kg to remain constant for the next two years while higher share from smaller packs and efficiency improvement to drive higher EBTIDA.
Smaller packs, for which CCL has a capacity of 12,000 metric tonnes, is now utilised till 50 percent. The ramp-up of this, along with a higher share of freeze fried coffee from FY25, will help in margin recovery. The company plans to focus on small packs for the US markets. It is also eyeing newer markets in Europe, thanks to its strong brand visibility in most regions.
We remain positive on CCL, and based on the current estimates, CCL is trading at a P/E multiple of 23x FY24 earnings. Though CCL is trading at premium valuation, based on a 5-year average of 22x, we feel it is justified, given that CCL has demonstrated its ability to outperform the industry growth by a huge margin.
Capacity expansion is on track and margins are likely to improve, given that the branded business revenues will increase over the next 3-4 years and profitability from that segment will be much higher, compared to the B2B business. The risk to our assumption remains disruptions at its Vietnam plant and slowdown in consumption in the US and Europe due to higher inflation.
