CCL Products – How about TAX FREE as a MOAT ?

In its Q1 2015 results, CCL generated a profit of 30 cr of which, Vietnam generated 10 cr and the entire amount was tax free ! Now how do you like this for competitive advantage ? This has been generated by using about 75% of the companies 5000MT capacity, which means that the company will generate at least 40 cr of tax free money this year, the most likely figure should however be in excess of 50 cr as the company is upping its capacity to 10,000 MT shortly. The Vietnam plant runs at a PAT margin in excess of 17%( likely to move into the early 20s). Vietnam today contributes about 50% of the Standalone companies profit. I think it should equal if not overtake the standalone profits in the next 18 months, effectively making 50% of the companies income tax free. No Indian company enjoys a tax rate of 17 % in this business.

I expect the company to generate Cash of over 140 cr this year.

While CCL is spewing cash, and the Vietnam capacity is moving towards 10,000 MT, the game changer still has not yet shown its head above the water. Cash is comforting. Cash will give you a warm feeling, but again if we really wanted comfort we would be getting ourselves Hot Chocolate and not coffee 🙂

Its about time the Continental Brand shows up.

In the motorcycling business, when Bajaj and Hero were going head to head, Bajaj stayed the course and concentrated on high value products and niches and continuously clocked about 18% margins. Hero on the other hand had way higher volumes but clocked just about 7-8% margins, which too were under attack by companies like TVS and Honda. Bajaj furthered its advantage by acquiring KTM and is now competing head on with the likes of Honda.

While CCL has moved up the value chain in production and in many ways is at the absolute peak in the production value chain with capacity in the Liquid Coffee capacity, the advantage is still shaky when compared to the likes of Tata Coffee as brands are bigger business than manufacturing plants. Tata today may not have the efficiency of CCL but it can overnight shut its production, source from CCL and just concentrate on marketing, branding and distribution. CCL has a lot of room to grow in the current business, maybe 2-3x but the next quantum leap will come only when it comes out of the closet.

On the valuation front, the company has a MCap of 2,700 cr. and can easily generate over 140cr  of cash this year, or about 100 crore(after loan payments)  of free cash for each of the next 3 years on a minimum. This is a stable company that trades at about 18 times FY16’s cash generation. The game changers however are yet to show up.

Psssssssssssst buy out a brand or its rights for India like Jockey, Dominoes !