Stock Pick from Tea & Coffee Sector

Here Is Why:

• The Indian operations have significant profitability with market leadership in the domestic market.
• Its Vietnam operations have the potential to boost profitability for the company.
• CCL’s foray into the branded coffee market will be a game-changer for the company.

Our choice scrip recommendation in this issue is India’s largest manufacturer and exporter of instant coffee, CCL Products. The company commands market share of approximately 33 per cent in India, while in the second position is Nestle at approximately 29 per cent of coffee production in India. Further, the company has market share of approximately 10 per cent and 36 per cent in India’s overall and instant coffee exports respectively. The coffee process is a challenging business where creating the perfect blend is crucial, which the company has successfully mastered. The company’s cost-efficient business model, rich experience, and long-standing relationships with customers give it an edge over its competitors.

CCL Products manufactures soluble instant spray-dried coffee powder, spray-dried agglomerated / granulated coffee, freeze-dried coffee, as well as freeze-concentrated liquid coffee. The company's coffee is prepared from carefully chosen Arabica and Robusta coffee beans, roasted and processed to perfection for an aroma and flavour that provides consumers with real satisfaction instantly. It is an export-oriented unit with the ability to import green coffee into India from any part of the world and export the same to any part of the world, free of all duties. CCL’s state-of-the-art coffee manufacturing plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India. CCL was set up in 1994 and commenced commercial operations in 1995.

CCL has expanded its capacities globally with presence at three locations, namely India, Vietnam, and Switzerland. The Indian operation has capacity of 15,000 MT with spray-dried powder capacity of 7,000 MT, spray-dried granulation capacity of 4,000 MT and freeze-dried capacity of 5,000 MT. The Indian operations have considerable capacity utilisation of more than 75 per cent. Further, the Indian operations are significantly profitable with steady margins of 17 to 21 per cent since FY09.

CCL’s Vietnam operations consist of spray-dried capacities of 10,000 MT. Further, the company is in the process to shift its 5,000 MT capacity of liquid concentrate from India to Vietnam due to customer demand. The Vietnam operations were running at low capacity utilisation of 25 per cent. However, the company is expected to increase this capacity utilisation to more than 50 per cent by this year end. The company’s operation has advantages such as proximity to raw material source, preferential access to customers in Southeast Asia, better quality, greater efficiency and most importantly, tax benefits. Its Switzerland operation has 3,000 MT of agglomeration and packing capacity for value-addition purposes.

CCL’s foray into the branded business in India is expected to boost its performance in the near future. It has entered into agreements with leading supermarkets to acquire shelf space for its own brand, ‘Continental’. The company’s management is bullish about the branded opportunity and aims to capture a sizeable market share over the next few years. Coffee conversion is a challenging business owing to the technology and expertise involved, and complexity in blending. The company’s rich experience makes it unique in its market. Further, the newly commissioned greenfield Vietnam facility with proximity to raw material and customers as well as tax benefits is expected to boost growth and lead to significant cost savings for the company. Hence we recommend this stock for a one year time horizon.