Hold CCL Products (India); target of Rs 597: CD Equisearch

CD Equisearch's research report on CCL Products (India)

CCL Products produces several varieties and blends of coffee including spray dried coffee powder, spray dried agglomerated, freeze dried coffee etc. Seemingly strong growth in revenue growth last fiscal (26.5%) veils much of the loss in volumes due to plant shutdown in India for maintenance for some three weeks and pre-commissioning trails in Vietnam at its new spray dried plant. With the new capacity at Vietnam up and running, CCLP had started commercial sales from this facility in the fourth quarter of previous fiscal. With coffee prices remaining firm during much of the last financial year, the company has seen greater velocity in volumes of spray dried coffee when compared to that of freeze dried coffee. CCLP's cost plus pricing model along with higher of take of spray dried coffee (lower margin yielding compared to freeze dried coffee) explains much of barely robust growth in operating profit (8.9%) in Q3, thus squeezing OPMs by over 300 bps. Discernible increase in finance costs (Rs 11.49 crs Vs Rs 3.81 crs) shriveled earnings before tax by 5.5% to Rs 70.54 crs (Vs Rs 74.68 crs). Post tax earnings though advances by some 255 not least due to write back of taxes.

Outlook

Despite encouraging outlook for instant coffee industry globally, near discretionary nature of coffee spends it appears can have adverse effect on demand. With current valuation a bit digressed from historical averages and little scope of further re-rating, we maintain "hold" rating on the stock with revised target of Rs 597 (previous target: Rs 511) based on 25x FY24e earnings.