Hold CCL Products (India); target of Rs 645: 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. Despite shipping related disruptions in Red Sea during Q3 which resulted in volumes loss of some 800 tons, CCLP managed to log sales growth of 24.1% - sales stood at Rs 664.48 crs vs Rs 535.30 crs in the same quarter a year ago - thus pacing up barely weak revenues in the two quarters of the current fiscal. Aggressive filing up capacities in Vietnam helped shore up volumes: overall volumes rose by a hardly uninspiring 14%. Buoyant of take in domestic branded business also helped galvanize revenue booking. Despite robust of take of wares, OPM nosedived to 16.7% in Q3 when compared to 18.8% in the same quarter a year ago - 16.2% in Q1 & 18.1% in Q2 - which resulted in just over 10% growth in operating profit. Aggressive filling up capacities in Vietnam to make up for production disruption in Q2 precipitated stress in margins. Higher of take of spray dried coffee also did its bit to coerce margins - effect of which was visible so far this fiscal as OPMs in first nine months have declined to 17% from 18.5%, a loss of some 150 bps.

Outlook

Hardly small gestation periods in filling newly commissioned capacities would barely lend flight to return on equity - estimated to fall to 16.4% by FY25 from 20.1% in FY23. Balancing odds, we retain our "hold" rating on the stock with revised target of Rs 645 (previous target Rs 597) based on 30x FY25e earnings over a period of 6-9 months.