The Hindu Business Line : CCL Products: Buy

INVESTORS can consider taking exposure in the CCL Products stock, which, at the current price of Rs 340, trades at about 13 times its trailing 12-month earnings.

Its value-addition business model serves as an automatic hedge against the commodity cycle. CCL has, over the past five years, been posting 40 per cent-plus returns on shareholder funds.

Its foray into the freeze-dried coffee segment should perk up its operating margin, which stands at 30 per cent.

CCL Products, a coffee processor, derives about 95 per cent of its revenues from exports to the European Union, Russia, Japan and the US. It does not own any plantations; as such, its earnings are less likely to be affected by the commodity cycle.

The value of its products moves more or less in tandem with the prices of coffee; its business model, thus, serves as a hedge against fluctuations in the prices of coffee.

Aided by higher volumes, the operating margins have doubled in the last five years to 30 per cent. Lower interest outgo has raised profit margins. Higher volumes and a better product mix could further widen its margins. CCL plans to diversify into freeze-concentrated liquid coffee.

CCL Products is expected to commence production of freeze-dried coffee by November; the plant would have a facility to produce 1,500 tonnes per annum.

Its foray into the higher value-add freeze dried coffee, which commands a 50 per cent premium over spray-dried coffee, would widen its margins this fiscal, only a part of which would be captured this year.

The company is on an expansion spree; it had expanded its processing capacity by 40 per cent in FY-05 to 5,000 tonnes. It plans to progressively increase its spray-dried coffee capacity to 10,000 tonnes and on a global basis to 20,000 tonnes by FY-09.

CCL Products proposes to meet a large part of its capital requirement from borrowings; a return on capital employed in excess of 36 per cent and a debt-equity ratio of less than one justify the proposal for borrowed funds.

Its growth trajectory of a 45 per cent rise in revenues and a 54 per cent jump (both adjusted for the extraordinary item relating to taxes) in FY-05 earnings — has continued into the June quarter with the two figures touching 81 per cent and 95 per cent respectively.

CCL plans to set up an instant coffee plant in Uganda along with its subsidiary, Associated Coffee Merchants International.

The Ugandan authorities have offered tax incentives for the project.

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