Brokerage firm, Axis Securities has placed a BUY call on CCL Products with a target price of Rs. 267 on the stock.
Healthy outlook amid COVID-19 led uncertainty
"Despite a flat revenue growth at Rs 265Crs YoY (lower than our estimate Rs 283 Crs) in Q4FY20, CCL Products (CCLP) posted a robust gross margin expansion at 58.8% (1343 basis points expansion year on year) on the 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% year on year). Profit after tax came in at Rs 42 crores up by 18% year on year (estimated at Rs 38 crores)," Axis Securities has stated in its research report.
a) 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.
b) 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.
c) 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.
d) 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.
e) 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.
Valuation & Outlook
"We remain positive on CCL Products given its1) expertise in customized blends 2) cost efficient business model 3) largest manufacturer and exporter of instant coffee 4) presence in Vietnam- most competitive market for instant coffee production 5) capacity additions in value added products (FDC & small packs) and 6) foray into high margin branded retail business (Continental Coffee) .
We maintain BUY but revise our target price upwards to Rs 267 (earlier Rs 198) on the back of revision in our target P/E multiple to 17x its FY22E EPS (vs earlier 12x)," Axis Securities has stated in its report.
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