We had first recommended CCL Products as a trading idea around Rs. 80 levels in Aug’14. Further, we came out with a research report in Jan15 with a HOLD recommendation. Reports on the same can be accessed as below:

• Fresh Recommendation Report: CCL Products - Brewing for Good Times
• Update Report: CCL Products - Delivering on Guidance
  
  

After an encouraging FY15 performance, CCL Products continued with its strong performance in Q1FY16. Sales growth was strongest in many quarters while operational and financial leverage led to an up-tick in EBITDA and profit margins. In its conference call, the management appeared very confident on meeting its FY16 guidance. Below are the highlights on Q1FY16 results and the future outlook.

Strong Up-tick in Sales as well as Margins: Despite the fact that Q1 is a seasonally weak quarter for coffee business, CCL reported 25% growth in sales and ~200bps expansion in margins across its Indian and Vietnam operations. The management has started tying up its manufacturing capacity and raw material procurement in advance – a practice which will give a lot of predictability to sales and margins in the future. A combination of slightly better product mix, improved utilization at Vietnam and cost efficiencies resulted in the margin expansion for CCL Products in Q1FY16.

The management re-iterated its ability to meet its sales of 25,000 MT for FY16. Based on the order bookings and coffee price trends, the management hopes to close FY16 with revenues in excess of Rs. 1,000 crores and maintain its current margins. Over the long term, the management sees huge potential in Vietnam. It expects to reach 100% utilization by FY17 and double its capacity to 20,000MT by FY18. The tax holiday and other concessions conferred by the Vietnam Government will also help in further improving the profit margins over FY15-18. CCL Products domestic branded coffee business is expected to grow at a good rate over next few years.

Valuations: At the CMP of Rs. 207, the stock trades at 27x trailing 12-month P/E. While this is certainly not cheap, we recommend a HOLD on CCL Products due to strong growth prospects in the company.

Key Risks: Increasing competition remains the key risk. However, CCL Products has been able to withstand the Russian Rouble depreciation, Euro zone slowdown and sharp decline in coffee prices over the past two years. This is a testimony to the company’s strong fundamentals.

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Dhruvesh Sanghvi is a Research Analyst registered with SEBI having registration No: INH000000875.

• Fresh Recommendation Reports: These reports are first-time initiation reports on the concerned stock. Usually these reports are followed by updates on the same.
• Update Reports: These reports include result update, event updates, annual report analysis and/or any other information that may be useful for the investor in relation to the concerned stock. Most of these update reports will have our current view on the same.

• Buy: This means buying the concerned stock at current market price.
• Buy on Dips: This means buying the concerned stock on the explained fall in price.
• Hold: This means holding the concerned stock until further update.
• Sell Partial: This means selling half of the existing position in the concerned stock.
• Exit: This means completely exiting the concerned stock.

4. Explanation of Indicative Target Price: Achievement of Target Price does not imply Exit / Sell Partial. We will explicitly release Exit/ Sell Partial Report at an appropriate time. If required, Indicative Target Price could be revised based upon business performance, market environment or any other important event.
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
• Disciplinary History: None
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• Details of Associates: Not Applicable
• Disclosure with regards to ownership and Material Conflicts of Interest:
1. Neither Dhruvesh Sanghvi, Prospero Tree Financial Services, its associates, its Research analysts hold any position in the subject company.
2. Neither Dhruvesh Sanghvi, 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 Dhruvesh Sanghvi, 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 Dhruvesh Sanghvi, 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 Dhruvesh Sanghvi, 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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