Brokerage house Phillip Capital (India) Pvt Ltd has a 'buy' recommendation on Continental Coffee - CCL Products (India) Ltd (CCL), with a target price of ₹680, indicating a 20.5% growth in value for the stock from the current market price of ₹565.
The brokerage maintains its optimism regarding the company's future growth, which will be driven by a solid underlying demand momentum, new client additions, an aggressive capital expenditure plan, scale advantages, and a gradual shift towards the B2C sector.
Additionally, the brokerage claims that the worry over a slowdown in global markets and the high inflation situation won't have an impact on the rise in coffee consumption.
"We expect company to register volume/sales/earnings before interest, taxes, depreciation, and amortisation (EBITDA) and profit after taxes (PAT) compound annual growth rate (CAGR) of 21%/18.5%/23%/22% respectively over FY23E-FY25E," said the brokerage in its report.
According to the report, the company is one of the largest manufacturer and exporter of instant coffee globally. The company's ability to create custom blends as per the client requirements has led to extremely sticky customer base which has created a niche for itself.
Let's look at the top five reasons cited by the brokerage firm for investing in the stock:
Doubling of capacity to drive strong growth in coming years
Over two years, the company plans to double instant coffee processing capacity to 77,000 million tonnes per annum (MTPA) with a project capital expenditure (capex) of ₹9.5 billion across India and Vietnam facility.
"CCL is one of the few companies that have been able to scale up its business on timely manner to cater market demand effectively. Since inception, the company has expanded its capacity by 9% compound annual growth rate (CAGR) i.e. 3,600 MTPA in 1995 to 38,500 MTPA as on FY22," said the brokerage.
Focus on improving product mix to aid better profitability in long run
The company has reportedly been concentrating more on value-added products over the past few years, including the small packs segment, agglomerated coffee, and premium blends like freeze-dried coffee, cold brew, etc.
The margins on value-added products are 15–40% higher than those on spray-dried coffee; they account for 35–40% of total volumes and 50% of total sales.
"Going ahead, the company aspires to increase the contribution from value added segment to more than 50% on volume terms; however, for next 2-3 years the spray dried contribution will remain high due to aggressive capacity addition across India and Vietnam facilities," said the brokerage.
Aims to replicate domestic branded business success strategy to overseas market
As the domestic branded market gains significant traction, the management plans to duplicate a similar focus strategy by entering the B2C market outside of India and launching its own brand, 'Continental', in various foreign supermarkets and online marketplaces. The business started its journey a year ago, taking baby steps, and has since entered a few niche European markets.
"We believe, the company is eventually laying the foundation to scale up the branded business in domestic and international markets which will drive the next leg of growth in long run," said the brokerage.
Strong capex execution to drive profitability
Strong underlying demand and improved order visibility are driving the company's aggressive expansion plan during FY23–FY25, which will ultimately result in more robust growth momentum than in recent years.
"In last three years i.e. FY20-FY22, the company’s volume/sales/EBITDA/profits grew 8%/16%/16%/15% respectively. Over next few years i.e. FY23-FY25E, we expect company’s volume to grow at about 21% CAGR to reach 54K MTPA from 31K MTPA volumes in FY22. During the same period, we expects revenue/EBITDA/PAT to grow at a CAGR of 17% & 23% /22% respectively led by aggressive capex execution, better utilisation, focus on change in product mix and scale benefit," said the brokerage.
Prudent debt management capability
The total debt is broken down into working capital debt of ₹5.4 billion and long-term (LT) debt of ₹3.1 billion. With two outstanding capex projects, a greenfield spray dried plant in India for ₹4 billion and a freeze dried plant in Vietnam for ₹4 billion, the management anticipates LT debt to reach a peak at around ₹7 billion by FY25E.
"The company expects short term debt to reduce from current level with reduction in inventory days from 120 to 90 days as supply chain normalises post covid issue settlement. We believe, the company’s leverage ratio would continue to remain at comfortable level of below 1 time i.e. around 0.7 times by FY25E, despite aggressive capex plans. Post entire capex completion, the company expects to repay freeze dried debt (i.e. ₹2.8 billion) in next 4 years from date of commencement," said the brokerage.