The demand for freeze dried coffee the world over is set to increase due to its unique process of preserving natural coffee flavour. Higher growth in freeze dried instant coffee than the traditional spray dried segment would be beneficial for a company like CCL products.

Business

CCL Products, formerly Continental Coffee, is a south-based exporter-cum-manufacturer of instant/soluble coffee. The principal products include powdered and granulated instant coffee, agglomerated coffee, spray dried coffee (SDC), and freeze dried coffee (FDC). The products are sold in the form of trade sales, institutional sales, and bulk sales. The company’s products are also sold through private labels. The company already has two exclusive marketing agents each in the US and UK to sell its products in UK, European Union Counties and CIS Countries and North America, South East Asian Countries respectively. Both the agents together contribute around 60% to 65% of the total exports. For technology it has tie-up with Niro of Denmark and strategic soluble services of UK, world leaders in coffee technology.

Domestically, CCL mostly has institutional clients like Border Security Force (BSF) and Indian Railway Catering and Tourism Corporation (IRCTC), Indian Airlines, etc. The products are sold under the brand name of “Continental Speciale”. The domestic market contributes around 5% to 10% of the total sales.

Investment rationale

The company’s margins could improve due to an increase in the FDC capacity. Freeze dried is a unique process, which preserves the natural coffee flavour. And due to this, FDC is invoiced at a price twice than SDC in the foreign market. The company has been predominantly using the spray dried process to produce instant coffee. Now, post-expansion the capacity of FDC has gone up to 4,000 MTPA. The total cost of expansion was around Rs 200 crore mainly through term loan financing.

The total production capacity stands at 14,000 MTPA in 2006-07, which mainly includes 10,000 MTPA of SDC. There has also been continuous capacity enhancement in SDC in the last few years.

The company’s financial performance could improve in the FY2008-09, as compared to FY2006-07, due to optimum utilisation of the production capacity. Last year, post-expansion, the FDC plant was affected by a fire accident. This had affected the unit’s operations for three to four months. The net profit was affected in the first half of the FY2006-07 due to higher overhead costs. Now as the FDC unit is running smoothly, the margins improvement was seen in the last quarter of FY2006-07. With margins remaining intact and they may improve further due to higher sales growth in FDC, CCL could see higher growth profitability in the current financial year.

Financials

Despite deceleration in the margins, the basic fundamentals of the company remain strong. Irrespective of margins getting impacted, the company has been continuously increasing production at 32.15% CAGR over the last three years. The company’s sales had been growing on a y-o-y basis from the last five years and generating strong cash flows every year. However, the change in the net profit has been volatile and comparatively lower due to higher coffee prices and higher interest cost. In the last three years, net sales and profit has grown at a CAGR of 30.40 % and 7.34% respectively. On a consolidated basis, the net sales and net profit for the FY2007-08 are Rs 408.83 crore and Rs 38.46 crore respectively. CCL imports around 75% of the raw material requirement and the remaining is sourced from the domestic market. To source quality raw material at reasonable prices the company has a strategic stake of 74.9% in Associated Coffee Merchants, UK. In the last three years due to higher prices of coffee beans, the raw material cost has increased at a CAGR of 27.28%, whereas the sales realisation increased 11.29%.

Valuations & concerns

From the valuation angle, the company’s FY2006-07 diluted earning per share is Rs 27.93, considering the current market price, the price to earning multiple is 5.84 times. The valuation looks attractive at the current levels in comparison with the peers in the industry. CCL has a subsidiary in Singapore to promote the products in the international market and this is an added advantage over and above the marketing tie-ups. However, considering the company is in a commodity-based business and does not own any coffee plantations in the country, CCL is faced with a risk of an increase in coffee bean prices being a major raw material. The company sources a majority of its raw material from Brazil, which is the largest producer of coffee beans. Any decrease in the production would result in higher prices and would affect the company margins adversely. Also, a change in the sales mix could also impact the margins.

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