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CCL Products (Buy)
CMP: ₹261.9
Target: ₹321
CCL Products produces several varieties and blends of coffee including spray dried coffee powder, spray dried agglomerated/ granulated coffee, freeze dried coffee and freeze concentrated liquid coffee. It is also certified to supply organic coffee, rainforest alliance coffee, UTZ certified coffee and fair trade coffee, in any combination.
The stock currently trades at 22.5x FY19 EPS of ₹11.64 and 18.7x FY20e EPS of ₹13.97. Setting up agglomeration unit in India is aimed at enhanced value addition for agglomerated products generally command 4-5 per cent higher margins compared to spray dried products. Customisation holds key for margin gap between bulk and small packs vary widely.
Thanks to enhanced value addition and increased volumes, earnings would growth in high teens in current fiscal. On balance, we retain our buy recommendation on the stock with revised target of ₹321 (previous target: ₹349) based on 23x FY20e earnings (average three year historical P/E: about 28x), over a period of six months.
Risks: Excess capacity globally in both spray and freeze dried markets pose no puny risks for existing businesses for competitive intensity in this market is barely reduced by low barriers to entry. Churning out value added products coupled with quality control mechanisms partly help reduce pressure on prices precipitated by increasing competition.
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