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CCL Products Ltd (CONCF)
CCL Products, largest exporter of bulk instant coffee from India, with
capacity of 33000 MT across India, Switzerland, Vietnam, is expected
to see robust earnings growth at 33.3% CAGR (FY14-17E) to | 152.4
crore (FY17E). Growth may primarily be led by higher contribution to
revenue from its newly commissioned Vietnam plant having favourable
location, duty and tax structure for export of instant coffee globally.
Highlights:
• Largest instant coffee manufacturer: With a capacity of 20000 MT
in India, 10000 MT in Vietnam (expandable further by 10000 MT)
and 3000 MT in Switzerland, CCL Products (CPL) is the largest
instant coffee producer and exporter from India. The company has
expanded its capacity from ~9000 MT in FY06 to ~33000 MT in
FY14 and extended its presence from India to other global
markets to cater to the specific needs across markets.
• Increased capacity to aid volume growth: The company’s new
capacity in Vietnam (10000 MT), commissioned in H2FY14 is
expected to aid the volume growth of CCL from FY15E onwards.
Hence, we expect the company’s total coffee sales to increase to
~28000 MT by FY17E from ~19500 MT in FY14.
• Savings in costs to aid margins: With CCL’s plant in Vietnam, the
company would be saving ~50% in logistics cost for exports to
Asian countries (~US$100-150/tonne) as transportation cost from
Vietnam ($1200-1600/container) is much lower than that from
India ($3000-3600/container). Further, with the proximity of
capacity near the coffee producing region in Vietnam (Dak Lak)
CCL’s transportation cost for importing raw material (30% was
sourced from Vietnam) and lead time for acquiring the same (two
to three months) would also get halved, consequently aiding
EBITDA margins for CCL. We expect margins to increase to 23.3%
by FY17E from 20% in FY14.
• Higher margins, lower taxes to drive earnings: CCL Products has
been granted a four year tax holiday (from the year it starts
making a profit) and subsidised tax at 5% till the fifteenth year by
the Vietnam government as it is the largest coffee exporter from
the region. Hence, we expect improving margins coupled with
lower taxes to drive CCL’s earnings growth at a robust 33% CAGR
(FY14-17E) to | 152.4 crore by FY17E.


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What’s the story?
CCL Products Ltd, the largest producer and exporter of bulk instant coffee from India, has expanded its
capacity ~10x to ~33000 MT (FY14) in the past two decades by expanding its footprint into three
geographies, India (producing since 1995), Switzerland (entered in FY11) and Vietnam (set up in FY14).
The company is the largest instant coffee exporter both from India as well as Vietnam with capacity of
~20000 MT and ~10000 MT, respectively. CCL’s recent expansion in Vietnam (second largest coffee
producer in the world with ~15% of global production producing ~22 million bags of coffee), however, is
expected to be the key revenue and earnings growth driver for the company following the favourable
location and trade benefits for trading instant coffee from Vietnam.
Triggers from Vietnam...
• CCL’s greenfield Vietnam plant for instant coffee (located in the green coffee hub of Dak Lak and
expandable by further 10000 MT) is currently operating at ~25% capacity. It is expected to get scaled
up to ~60% utilisation by FY15E and 80-85% by FY17E driving CCL’s consolidated sales volume to
~28000 MT by FY17E from ~19500 MT in FY14, a CAGR of ~13% in FY14-17E. The company has
also shifted its 5000 MT liquid coffee capacity from India to Vietnam (expected to be commissioned in
FY15) as liquid coffee is the preferred beverage, especially for Asian countries
• The advantage of increasing capacity in Vietnam as against India stems from the fact that Vietnam
has a favourable duty structure for importing countries and taxation policy for CCL Products. The
instant coffee import duty rates for China, Thailand, Korea and Japan are 8%, 60%, 8.5% and 12.3%,
respectively. However, in case of import of instant coffee from Vietnam, the rates are 3.3%, 0%, 0%
and 3.3%, respectively. Further, CCL’s Vietnam plant has been given a tax holiday for four years from
the year its starts recording profits with further reduced tax of 5% till the fifteenth ear. We believe
these benefits make exports from Vietnam comparatively attractive for importing nations as well as
CCL, thereby aiding it to extend its footprint into the under-penetrated Asian markets easily. Further,
as the plant scales up capacity (+90%), CCL can further expand its Vietnam plant by 10000 MT as it
has the required approvals and set-up in place
• The capacity in Vietnam would also aid the margins of CCL by reducing the logistics cost for CCL in
acquiring raw materials (~30% of its green coffee bean requirement was from Vietnam) and
distribution of final product to the target Asian countries. Also, with the location of the plant in
proximity to the producing country, the effective lead time for acquiring green coffee is expected to
decline to ~1.5 months from two or three months earlier. Further, the transportation cost for
delivering instant coffee to Asian countries (Japan, Korea) is expected to witness ~50% reduction as
cost of transportation from Brazil/India to Japan is around US$3000-3600/container while for Vietnam
to Japan it is only US $1200-1600/container)
Apart from exporting bulk instant coffee to ~70 countries, CCL has also entered the higher margin
branded coffee business (~| 2500 crore market growing at ~10%) in India through its in-house coffee
brand ‘Continental’ (currently sold only in Andhra Pradesh). The branded coffee business currently
accounts for ~5% (~| 30 crore) of its revenues (FY14) and is expected to gain traction as the company
increases its distribution pan-India. The company has tied up with Future Retail to drive the growth of its
branded coffee sales. Being a higher margin product, CCL’s margins are expected to expand further as
the company launches the product nationally.
Robust earnings growth + strengthening balance sheet +attractive valuations = Re-rating of stock
Led by higher sales volumes from the newly commissioned capacity in Vietnam, we expect CCL’s
revenues to post a healthy CAGR of 12.5% in FY14-17E to | 1021.7 crore in FY17E. Margins are estimated
to increase to 23.3% by FY17E (20% in FY14) following savings in operational costs and increasing
contribution of branded coffee sales. Consequently, higher margins, lower interest costs and lower taxes
(CCL’s effective tax rate is expected to slip to 25.6% in FY17E from 35.3% in FY14) are expected to drive
CCL’s earnings at a robust 33.3% CAGR (FY14-17E) to | 152.4 crore in FY17E. Further, with no capex
requirement in the near term, reducing debt and higher free cash flows, we expect the dividend payout
by CCL to remain high at ~22% (FY17E) with return ratios (RoE and RoCE) improving to 23.5% and
27.9%, from 18.3% and 19.2%, respectively.
Historically, CCL Products has traded at a modest level. Led by growth in capacity, expansion into higher
margin branded business, operational & tax benefits from Vietnam driving robust earnings growth, debt
to equity expected to decline to 0.1x by FY17E (0.7x in FY14) and return ratios to witness improvement,
we believe CCL Products is all set for a re-rating. We value the stock on a weighted average of P/E (15x
FY17E EPS of | 11.4) and EV/EBITDA (9x FY17E EBITDA) ascribing a fair value of | 150-170.

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