“BUY” This Mid Cap FMCG Stock With A Target Price of Rs. 478: HDFC Securities

The prominent brokerage house HDFC Securities has put a buy call on the shares of CCL Products Limited during a period when fast-moving consumer goods (FMCG) stocks were trending upward. From its current market price of Rs. 408, the brokerage expects the stock to reach Rs. 478 in six months, representing a gain of roughly 17%. CCL Products (India) Limited is the worlds largest coffee exporter and producer. According to the brokerage CCL reported a 4% topline growth in Q2FY22 to Rs 337 Cr, due to impact on dispatches of processed coffee beans as lockdown restrictions hindered transportation to Ho Chi Minh City (port city of Vietnam). Also, the reported revenue growth was lower as the company did not realize MEIS (Merchandise Exports from India Scheme) incentives in Q2FY22 (vs. Rs 8.5 Cr in Q2FY21); expects MEIS incentives of ~Rs 15 Cr in H2FY22. HDFC Securities has reported that Gross margins expanded 300 bps to 52.7% on account of higher realization and a higher proportion of premium Freeze Dried Coffee (FDC) volumes. EBITDA margin expanded 38bps to 24.4%, offset by higher freight and employee costs. Vietnam operated at peak utilisation levels of 95-100% in Q2 while India capacity operated at 90%. India branded sales grew 38% YoY to ~Rs 52 Cr in Q2FY22 driven by growth in retail consumption; growth was 40% (45% excluding Army sales) at Rs 85 Cr in H1FY22. Mr. Praveen Jaipuriar is appointed as the CEO of the company w.e.f. 29th Oct21 while Mr. KVLN Sarma (COO) resigned w.e.f. 27th Oct21.Advertisement The brokerage has claimed that Worldwide CCLs coffee is being consumed at the rate of 1,000 cups per second. CCL exports its processed coffee to more than 90 countries and supports more than 250 brands with sustainable supplies - both quality and quantity. CCL has on offer more than 1000 recipes for the clients to choose from. It has a combined state-of-the-art manufacturing capacity of ~38,500 MTPA, which is spread over Duggirala (Guntur District of AP), Kuvvakolli (Chittoor District, AP), Switzerland, and Vietnam. Having succeeded in placing their coffee on the world markets, CCL launched its Continental Coffee brand for the Indian market, which should act as a major growth catalyst, going ahead. With the help of its rich experience in the international markets, it has developed 250+ blends, claiming they are superior to its competitors blends. HDFC Securities has further added that On May 27, 2021, we had initiated coverage on the stock (Link) with a recommendation to Buy at LTP and add on dips to Rs 289-295 band for base case fair value of Rs 376 and bull case fair value of Rs 405. The stock had achieved our base case target on July 02, 2021 and bull case target on July 05, 2021. According to the research analysis of the brokerage CCL is amongst the largest green coffee bean processors globally. It is Indias largest exporter of instant coffee (38% market share) and the worlds leading supplier to private labels (~10% global market share). Over the past two decades, it has increased its capacity by 10x without diluting equity and has also managed to keep its debt in check. Its business model is strong and robust, by virtue of it being a sticky business; it has the best-in-class technology, superior economies of scale and resilient margins. The management has revised its volume guidance from 10-15% given earlier to above 15% now for FY22. The revision in guidance came on the back of strong order booking, the upcoming peak season for Q3 & Q4 and the commissioning of 3,500 MT of Vietnam facility in Q2FY22. The company is on the track to double its Vietnam capacity by Q2FY23 (from 13,500 MT currently). It has sold entire capacity for FY22 and is now booking orders for FY23 which has been an exceptional situation. HDFC Securities has further noted that We expect earnings CAGR of ~24% over FY21-24E on the account of a) doubling of Vietnam Capacity (company enjoys tax break here), b) higher share of small packs & packing capacity ramp-up, and c) increasing share of India branded business in the overall revenue mix. On the back of strong operating performance coupled with a better working capital cycle, we expect superior FCF generation and gradual expansion in RoCE by 591 bps over FY21-24E. With enhanced revenue growth visibility, the stock is likely to re-rate if the company continues to maintain a strong margin profile. We think the base case fair value of the stock is Rs 431 (19x Sept23E EPS) and the bull case fair value is Rs 478 (21x Sept23E EPS). Investors can buy the in stock Rs 385- 393 band (17x Sept23E EPS) and add more on dips to Rs 352 (15.5x Sept23E EPS). At LTP of Rs 389, it quotes at 17x Sept23E EPS. The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.