Buy CCL Products; target of Rs 264: ICICIdirect

ICICIdirect.com's report on CCL Products

CCL Products, the largest exporter of bulk instant coffee, has a combined capacity of 35000 tonnes per year in India, Vietnam and Switzerland. The company commissioned its Vietnam facility in FY14 with a capacity of 10000 tonnes per year. With better utilisation of this facility in FY15E, sales witnessed 32.8% growth while profitability posted 54.9% growth in 9MFY15. We expect CCL to expand the capacity of its Vietnam facility to 15000 tonnes by FY17 as this facility has the advantage of favourable location along with relaxed duty & tax structure. We expect robust CAGR of 14.8% and 35.5% in sales and earnings, respectively, in FY14-17E.

Led by higher sales volumes from the newly commissioned capacity in Vietnam, we expect revenues to post a healthy CAGR of 14.8% in FY14-17E to Rs 1084.8 crore in FY17E. Margins are estimated to increase to 22.0% by FY17E (20% in FY14) following savings in operational costs and higher contribution of retail packs exports. Consequently, higher margins, lower interest costs and lower taxes (CCL’s effective tax rate is expected to slip to 24.0% in FY16E and 22% by FY17E from 35.3% in FY14) are expected to drive earnings at a robust 35.5% CAGR (FY14-17E) to Rs 160.2 crore in FY17E. Further, with no major capex requirement in the near term, reducing debt and higher free cash flows, we expect CCL’s dividend payout to remain high at ~21% (FY17E) with return ratios (RoE and RoCE) improving to 24.3% and 27.5%, from 18.3% and 19.2%, respectively.

"Led by growth in capacity expansion into higher margin branded business, operational & tax benefits from Vietnam driving robust earnings growth, debt to equity expected to decline to 0.1x by FY17E (0.7x in FY14) and return ratios expected to witness an improvement, we believe CCL Products is all set for a re-rating. Historically, the stock has traded between 5x and 20x one year forward earnings. However, with the sustainable strong growth in revenues and earnings in the medium term, the stock is expected to command a premium to its historic averages. We value the stock on 22x FY17E EPS of Rs 12.0 to arrive at a target price of Rs 264 per share. We maintain our BUY recommendation on the stock", says ICICIdirect.com research report.

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