Long Term Call: Buy CCL Products, target price Rs 267 - Axis Securities

Long Term Call: Buy CCL Products, target price Rs 267 - Axis Securities

CCL Products has been growing its market share in different segments and the company management has impressive track record of following the best corporate practices while offering value to shareholders. CCL Products has been on radar of TopNews team for the last few years and despite competition in coffee segment, this company has been showcasing impressive track record. Axis Securities has recommended long term BUY call for CCL Products with target price of Rs 267. The call has been initiated by Axis Securities after CCL Products announced its quarterly and yearly results.

Detailed analysis and investment rationale by Axis Securities follows...

Despite a flat revenue growth at Rs 265Crs YoY (lower than our estimate Rs 283 Crs) in Q4FY20, CCL Products (CCLP) posted a robust GM expansion at 58.8% (1343 bps expansion YoY) on back of higher share of freeze dried coffee (FDC).This resulted in an EBITDA growth of 31% YoY at Rs 71 Crs (7% higher vs our estimates), with EBITDA margin at 26.7% (expansion of 610 bps YoY) offset by higher employee expenses (up 54% YoY) and other expenses (up 24% YoY) . PAT came in at Rs 42Crs up by 18% YoY (estimated at Rs 38 Crs). Management stated that the muted revenue growth was on the back of delayed shipments during last 10 days of Q4FY20, which was later dispatched during Q1FY21. Capacity utilization in Vietnam plant stood at ~65-70%with no major disruptions in the region due to the pandemic, whereas in India and SEZ unit it was ~80% and ~50% .CCLP’s domestic business posted a revenue of Rs 90Crs driven by its Continental brand which contributed Rs 55Crs (up 40% YoY). Company guided for normalized sales during FY21E with all its plants running at pre-Covid utilization levels in June’20.Management remains confident of EBITDA growth & healthy margin sustainability owing to improved product mix. We expect CCLP to post Sales EBITDA/PAT CAGR of 9%/11%/12% over FY20-FY22E driven by superior product mix (ramp up of FDC unit/ packing unit in FY22) &expansion of Vietnam capacity. We raise our Target P/E multiple to 17x (earlier 12x) on the back of strong growth outlook amid the uncertain global growth environment.

As a result our TP is also revised upwards to Rs. 267 (earlier Rs. 198) . Maintain BUY.

Key Highlights:

· COVID-19 impact on operations: During the last 10 days of Q4FY20, sales shipments were delayed due to unavailability of containers owing to COVID-19 pandemic. However management indicated that there was no loss of sales as the pending shipments were delivered in April as situations improved. Q1FY21 could be impacted as operations remained shut in April, while in May the production levels stood at 33% and June reporting normalized operating levels.

· Ramp up of SEZ unit (FDC plant) boosted margins: SEZ unit in Chittoor commissioned in Q1FY20 to produce higher margin FDC operated at ~50% in FY20 which has led to substantial improvement in product mix thus driving a 31% growth in EBITDA at Rs 71 Crs and margin at 26.7% (up 610 bps YoY) thereby outperforming our estimates.

· Capex plans to drive growth: We believe company’s planned 3,500 tonnes capacity addition in Vietnam (to be commissioned by Q3FY21 and agglomeration and packing capacity (to be set up by FY22 ) augurs well for CCLP’s long term growth outlook driven by higher volumes and improved realizations (growing small packs business).The capex for these plants is estimated at $8mn and $12mn respectively.

· On domestic business: Company reported Rs 90 Cr sales for FY20 vs its target of Rs100 Crs as domestic sales were impacted due to lockdown and reduced institutional sales. However, branded retail business revenue contribution was at Rs 55 Crs (growth of 40% YoY) driven by healthy traction in in-home consumption and encouraging consumer response to the brand.

· FY21 guidance: Management guided to close FY21 at normalized levels provided no further disruptions occur and ensure recovery for most of its lost sales during April & May. It remained confident of EBITDA growth of 10-15% & margins sustainability in FY21E on the back of a healthy order book and improved product mix.

Analyst Views: