CCL Products Ltd – Q3 2013-14

CCL Products Ltd has come a long way from being a contract manufacturer of Nestle to a preferred partner to global coffee giants. With its 30,000 MT annual capacity it not only has become the largest processor of coffee in Asia, but has also become one of the cheapest ones. With plants in Duggirala(Andhra Pradesh), Switzerland and Vietnam CCL has begun to focus on creating its in house brand “Continental Coffee” as a product with high quality and an affordable price, much like a Godrej Product.

Its Q3 results are just out and seem to be encouraging. Before getting into the numbers here is a little more background of the company. Domestic capacity is 20,000MT and Vietnam is 10,000MT.  While the domestic capacity utilisation is on full throttle, the Vietnam plant production has only stabilised in Q3 and can hope to break-even (annual) by the year end.

Closer look at the Q3 numbers reveal this:

1. Foreign contribution to EBIT is 1.8cr this qtr but has an interest burden of 3.23cr which yields and absolute loss of 1.51cr.
2. The same on a 9 month basis has eroded 8.73 cr of standalone profits largely due to the 13.26 cr of interest the company has paid in the last 9 months.
3. In order for the foreign subsidiaries to break even and justify existence this year, the 4th quarter would have to contribute a sales of at least 65-70 cr with a PAT margin of 16% to break-even on an annual basis, which seems rather unlikely. Therefore it is safe to assume that the subsidiary will have eroded at least 7-8 cr of the standalone profits not allowing the consolidated profits to exceed 65 cr which in turn translates to an EPS of about 4.8-5.0 per share.
4. The standalone profits however can be in excess of 73 cr in the current year.

That being said the share at the CMP of Rs 40 is trading at 7.5 times current year earnings and about 5.5 times FY14-15 earnings. CCL’s current M.Cap is 538 cr. Its is quite likely that the company will generate 95-100 cr profits next year with Vietnam beginning to contribute too.

Tata Coffee its closest competitor looks like it will generate a profit of 90 cr this year and it trades at a M.Cap of 1700 cr and a PE of 19. If Tata were to acquire CCL today the market would add another 1700-1800 cr M.Cap due to the profits that CCL can maintain in the future. Would TATA Coffee pay at least 1000cr for this ? More importantly will you get in when CCL is available at 540 cr ?

I know i would.