CCL Products - Delivering on Guidance

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  • Update Report
  • 8-Jun-2015

We first recommended CCL Products at Rs. 80 levels in August-2014 (CCL Products - Vietnam Expansion to Drive Growth). Later we again recommended it at Rs. 103 levels in Sep-2014: High Fund Interest, Valuation Re-rating Likely. We later released a detailed report: CCL Products - Brewing for Good Times. Since then, the stock has touched highs of Rs. 215 and currently trades at Rs. 180/share.

CCL Products' FY15 performance has been encouraging on all fronts - strong ramp-up in Vietnam operations, full utilization of Indian capacity and reduction in debt & working capital. This combined with strong volume outlook given by the management leads us to believe that the CCL story still has steam left. We recommend existing shareholders to stay invested in the story while new investors can look to accumulate the stock around Rs. 170 levels.

A. Strong Ramp-up in Vietnam Operations
The utilization levels at Vietnam facility improved from 25% in FY14 to 46% in FY15, indicating strong ramp-up. Equipped with latest technology and better product quality, realizations from the Vietnam plant are higher by Rs. 10/kg as compared to Indian plant. As such, EBITDA margins from Vietnam operations have been healthy at over 20% despite not reaching full levels of utilization. The management has guided for ~70% utilization for FY16, indicating that strong ramp-up in Vietnam will continue.

B. All Round Improvement in Balance Sheet
Strong ramp-up in Vietnam, full utilization in India coupled with healthy margins aided strong free cash-flow generation in FY15. Also, given that capex requirements for the future are significantly lower than free cash flow generation, the company has opted for debt repayments. Its debt-to-equity ratio declined to 0.6x while its RoCE improved by 420bps in FY15. Going ahead, we expect the balance sheet improvement to continue

C. Valuations still Reasonable, Long Way to Go
CCL Products have multiple levers for future growth – ramp-up in Vietnam, resolution of issues at Switzerland plant, deeper penetration in US and Africa and gradual pick-up in retailing. This could ensure that sales and earnings grow at the healthy rate over next few years. At the current price of Rs. 185/share, the stock trades at 25x trailing earnings. While this may not be cheap, the strong future growth could offer steady returns to shareholders. We recommend existing shareholders to stay invested with 24 month price target of Rs. 250.

Key Risk
Large fall in coffee prices could impact sales realizations, although earnings may not be impacted in a big way.
Historical Stock Performance.


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DISCLOSURES by RESEARCH ANALYST UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014 is as under:
• Introduction: Prospero Tree Financial Services is an independent equity research proprietorship firm of Mr Dhruvesh Sanghvi.
• Business Activity: Prospero Tree Financial Services is committed in providing honest views, opinions and recommendations on financial markets opportunities.
• Report Written by: Dhruvesh Sanghvi
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• Disclosure with regards to ownership and Material Conflicts of Interest:
1. Neither Mr Dhruvesh Sanghvi, Prospero Tree Financial Services, its associates, nor its Research analysts have any position in the subject company. However, his relatives holds the shares of Balaji Telefilms.
2. Neither Prospero Tree Financial Services, its associates, Research Analysts, nor its relatives, have more than 1% ownership of the subject company at the end of the month immediately preceding the date of publication of this report.
3. Neither Prospero Tree Financial Services, its associates, Research Analyst nor its relatives, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance.
• Disclosure with regards to Receipt of Compensation:
1. Neither Prospero Tree Financial Services or its associates, or Research Analyst has received any compensation or other benefits from the subject company or the third party in connection with the research report in past twelve months.
2. Neither Prospero Tree Financial Services or its associates, or Research Analyst have managed or co-managed public offering or securities for the subject company in past twelve months.
• Other Disclosures:
1. The Research Analyst has not served as an officer, director, or employee of the subject company.
2. The Research Analyst is not engaged in market making activity for the subject company.


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