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Alagappan Arunachalam

INVESTORS can consider taking exposure in the CCL Products stock (Rs 465), which trades at about 16 times its trailing 12-month earnings. Commencement of operations at its freeze-dried plant offers potential for revenue and earnings growth. Though its performance during the third quarter was lacklustre, this appears to be only a temporary blip. Its value addition business model insulates it from the coffee commodity cycle. The value of its product tends to move in tandem with prices of coffee beans.

CCL Products, an instant coffee manufacturer, derives about 95 per cent of its revenues from exports to the European Union, Russia, Japan and the US. Though the company is relatively insulated from coffee price trends, its dependence on exports exposes it to fluctuations in the forex market. Depreciation of the major currencies against the rupee tempers its realisations.

During the December quarter, earnings inched up by only 4 per cent and revenues registered a 13 per cent growth. CCL Products, however, maintained its operating margin. Higher depreciation and an increase in interest outgo cut its earnings growth during this period.

Capacity appears to be the stumbling block to its growth prospects, as CCL Product's utilisation levels are in excess of the installed capacity. CCL Products has lined up a slew of plans till FY09; this includes a coffee facility in Uganda, which it plans to set up along with its subsidiary Associated Coffee Merchants International.

It also plans to expand its spray-dried capacity by 1,000 tonnes every year over the next four years taking its capacity to 10,000 tonnes at a cost of Rs 25 crore. The Ugandan facility would serve as better export base as it provides superior geographical location and access to beans of different origin. CCL Products proposes to fund its requirements by an FCCB offer; a low debt-equity ratio and high return on capital employed justify this proposal.

Commencement of operations at its Rs 65-crore freeze-dried facility would serve a better product mix and is expected to widen its margins as freeze-dried coffee is estimated to command a 50-per cent premium over spray-dried coffee. Revenues are set to flow in from this facility during the fourth quarter as works appears to have been completed, which is suggested by the higher depreciation.

A high operating margin provides it leverage on the earnings front. CCL Products, besides its attractiveness, would serve as a low-risk investment as it has been maintaining a consistent operating margin of 30 per cent and returns of about 40 per cent on shareholders' funds over the past five years.

By tapping foreign currency debt, its profitability on funds employed is expected to widen given low cost of borrowings, besides serving as a partial hedge to fluctuation in the forex market.

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