A Boring Business that went 17x in 8 years! A Boring Multibagger Stock! CCL Products Coffee Industry

Summary

This business analysis video from SOIC dives into the stable yet profitable coffee processing industry, highlighting the Lindy effect's role in its longevity. It recommends 'Understanding Michael Porter' for strategic insights and explores the value chain of coffee from growing to retail. Focusing on Continental Coffee Limited (CCL), the video examines its business model, competitive advantages, and growth triggers, including its capacity expansion and B2C initiatives. It also discusses potential risks and the importance of understanding the industry's value chain for investors, concluding with a challenge to viewers to assess CCL's valuation.

Takeaways

• 📚 The video discusses the 'Lindy effect', a concept by Nicholas Nasim Taleb, suggesting that the longer something has existed, the more likely it is to continue to exist in the future, which is applicable to long-standing industries.
• 📘 The speaker recommends the book 'Understanding Michael Porter' for its clear explanation of Porter's Five Forces and strategic concepts, which are valuable for business analysis.
• ☕ The Coffee Processing Industry (CFI) is introduced, highlighting the value chain from coffee growing to retailing, with a focus on the profitability of coffee processors and certain retailers.
• 🌍 Coffee production is dominated by Brazil and Vietnam, with Arabica and Robusta beans being the two main types, each with distinct characteristics and growing conditions.
• 🛠 The script explains the different types of coffee production methods, including Spray Dried, Agglomerated, Freeze Dried, and Liquid Concentrate, each with varying quality and cost.
• 🏭 Continental Coffee Limited (CCL) is profiled as a leading coffee processor in India with a robust business model that mitigates volatility in margins by purchasing green coffee in advance of orders.
• 📈 CCL has demonstrated consistent EBITDA margins between 18-23%, which is impressive for a B2B business, indicating strong pricing power and operational efficiency.
• 🔄 The company has a history of increasing promoter holdings and has been growing its production capacities both domestically and internationally.
• 💡 The video suggests that understanding the value chain is crucial for identifying profitability and that coffee processors add significant value, making them a key part of the industry.
• 🚀 Key growth triggers for CCL include expanding production capacity, establishing packaging units for higher margins, and developing the B2C segment with innovative products.
• ⚠️ Risk factors for investors are highlighted, such as potential market saturation, the challenge of maintaining profitability in the B2C segment, and the impact of increased competition in the freeze-dried coffee market.

Q & A

What is the Lindy effect mentioned in the video script?

The Lindy effect is a concept introduced by Nicholas Nasim Taleb, which suggests that the longer a thing has been around, the more likely it is to have a longer remaining life expectancy. In the context of the script, it refers to the enduring nature of certain industries or stories that have withstood the test of time and are likely to continue to do so.

What is the book recommendation made by the speaker in the video?

The book recommendation made by the speaker is 'Understanding Michael Porter'. The speaker praises it for simplifying Michael Porter's philosophy of the 5 forces, key strategies businesses can adopt, and the concept of white spaces.

What are the two main types of coffee beans mentioned in the script?

The two main types of coffee beans mentioned are Arabica and Robusta. Arabica is known for its lower caffeine content and sweeter taste, while Robusta is harsher and has more caffeine.

What are the four types of coffee produced in the world as discussed in the script?

The four types of coffee produced are Spray Dried Coffee, Agglomerated Coffee, Freeze Dried Coffee, and Liquid Concentrate of Freeze-Dried Coffee. Each type has different production methods, qualities, and market positions.

What is the significance of studying the value chain in the Coffee Processing Industry?

Studying the value chain in the Coffee Processing Industry provides insights into the profitability of different stages, from growing and processing to retailing. It helps identify where the most value is added and where profits are concentrated, such as with coffee processors and some retailers.

What is the difference between CCL Products and Tata Coffee as per the script?

CCL Products is primarily a coffee processor and does not engage in plantation business, focusing on high value-added processing. In contrast, Tata Coffee both processes coffee and owns plantations, involving in the more volatile bulk commodity business of growing coffee beans.

What is the business model of CCL Products that helps sustain its margins?

CCL Products' business model involves purchasing green coffee beans and storing them as soon as they receive an order from a client. This practice helps to sustain the company's margins by reducing fluctuations in the per-kilo EBITDA earned.

What are the competitive advantages of CCL Products as discussed in the script?

The competitive advantages of CCL Products include high switching costs for customers, customized manufacturing, global presence with tie-ups, R&D resulting in over 1000 unique coffee blends, and economies of scale due to its large production capacity.

What are the growth triggers for CCL Products mentioned in the script?

The growth triggers for CCL Products include expansion of manufacturing capacities and facilities, establishing small packaging units for higher margins, potential expansion of Freeze Dried coffee production, and the development of the B2C business.

What are the risk factors associated with CCL Products' business model?

The risk factors include competition in the Freeze Dried coffee market, the possibility of slow growth or operating deleverage, and the challenge of making the B2C business profitable, which requires long-term investment and strategic thinking.

Outlines

00:00

📚 Introduction to Boring Industries and Book Recommendation

The script begins by addressing investors and introducing the concept of 'boring' industries as stable and enduring, citing Nicholas Nasim Taleb's Lindy effect. The presenter then recommends a book, 'Understanding Michael Porter,' which simplifies Porter's strategic philosophies and the value chain concept. The summary also introduces the Coffee Processing Industry (CFI), discussing its value chain, the types of coffee beans, their production, and the various stages of coffee processing, leading to the production of different types of coffee.

05:01

☕️ Coffee Processing Techniques and Industry Analysis

This paragraph delves into the different methods of coffee processing, including Spray Dried, Agglomerated, Freeze Dried, and Liquid Concentrate, detailing their characteristics and market positioning. It then shifts focus to the value chain in the coffee industry, highlighting the profitability of coffee processors and retailers. The script introduces Continental Coffee Limited (CCL), discussing its business model, the stability of its margins, and its strategy to mitigate volatility in coffee pricing.

10:02

🌐 Global Coffee Market and CCL's Business Model

The script provides an overview of the global coffee market, including the size of the instant coffee segment and the overall coffee industry. It discusses the Indian coffee industry's trends and CCL's position as a leading coffee processor. The paragraph outlines CCL's business model, emphasizing its pricing power and the stability of its EBITDA margins over time, and compares it to other Contract Research and Manufacturing Services (CRAMS) businesses.

15:04

🏭 CCL's Competitive Advantages and Market Position

This section examines CCL's competitive advantages, including high switching costs for customers, customized manufacturing, global presence, R&D capabilities, and economies of scale. It also discusses CCL's growth potential, comparing its production capacity with that of its competitors and highlighting its status as a market leader with significant expansion plans.

20:06

📈 Growth Triggers and Expansion Strategies for CCL

The script identifies key growth triggers for CCL, such as manufacturing capacity expansion, establishment of packaging units, and the development of new coffee production facilities. It also mentions the company's foray into the B2C segment and the potential for increased sales and market share, emphasizing the importance of tracking EBITDA/KG as a key metric.

25:08

🛑 Risk Factors and Market Challenges for CCL

The paragraph discusses potential risks for CCL, including competition in the freeze-dried coffee market, the steady nature of the business which may not appeal to all investors, and the challenges of building a profitable B2C business. It also addresses the importance of having a long-term mindset and the need to manage expectations regarding the company's growth and profitability.

30:11

🌟 CCL's Future Outlook and Investor Considerations

The final paragraph provides an outlook for CCL, considering its market share growth, capacity expansion, and the potential for the company to become the world's largest coffee processor. It challenges viewers to weigh the company's thesis against its antithesis and to consider their own investment perspectives. The script concludes with an invitation for viewers to engage in discussion and a teaser for the next video on financial planning.

Keywords

💡Boring Industries

The term 'Boring Industries' in the context of the video refers to sectors that are stable and do not undergo significant changes over time. It is associated with the Lindy effect, which suggests that the longer something has existed, the more likely it is to continue existing. This concept is central to the video's theme, as it discusses the enduring profitability of such industries, using the coffee processing industry as an example.

💡Lindy Effect

The 'Lindy Effect' is a concept named by Nicholas Nasim Taleb, which posits that the future life expectancy of some non-perishable things, like a technology or an idea, is proportional to their current age. In the video, the Lindy effect is used to describe why certain industries, like the coffee processing industry, remain profitable over time because they have a history of survival and are likely to continue to do so.

💡Michael Porter

Michael Porter is a renowned authority on competitive strategy and a key figure in the field of business. The video recommends a book titled 'Understanding Michael Porter', highlighting his philosophy of the Five Forces model and other strategic concepts. Porter's work is significant to the video's theme as it provides a framework for analyzing the competitive dynamics within industries, including the coffee processing industry.

💡Value Chain

The 'Value Chain' is a concept introduced by Michael Porter that describes the sequence of activities a company goes through, from raw material sourcing to final product delivery. In the video, the value chain is used to analyze the coffee processing industry, identifying stages like growing, picking, processing, and milling, which contribute to the profitability of the industry.

💡Coffee Processing Industry (CFI)

The 'Coffee Processing Industry' is the focus of the video's business analysis. It discusses the various stages of coffee production, from growing coffee beans to the different types of coffee products made by processors. The industry is presented as an example of a 'boring' yet profitable industry, illustrating the application of business analysis concepts.

💡Arabica and Robusta

Arabica and Robusta are the two main types of coffee beans discussed in the video. Arabica beans are noted for their lower caffeine content and sweeter taste, while Robusta beans are described as harsher and higher in caffeine. These distinctions are important as they affect the type of coffee products that can be made and the preferences of different consumer markets.

💡Spray Dried Coffee

Spray Dried Coffee is one of the four types of coffee products mentioned in the video. It is produced at high temperatures, which can sometimes result in the loss of aroma, making it a cheaper form of coffee. The video uses this term to illustrate the different processes and their impact on the quality and cost of coffee products.

💡Freeze Dried Coffee

Freeze Dried Coffee is another type of coffee product highlighted in the video. It is considered premium due to the process that retains the coffee's aroma and is typically more expensive. The video explains that this type of coffee has higher profit margins, making it a significant aspect of the coffee processing industry's profitability.

💡Agglomerated Coffee

Agglomerated Coffee is described as a method that involves soaking spray dried coffee to make larger granules, often referred to as 'poor man's freeze-dried coffee'. The video mentions this type of coffee in the context of brands like Nestle, indicating its market positioning and consumer appeal.

💡Continental Coffee Limited (CCL)

Continental Coffee Limited (CCL) is the largest coffee processor based out of India, as mentioned in the video. The company is discussed in detail, including its business model, competitive advantages, and growth prospects. CCL serves as a case study to demonstrate the application of business analysis concepts in the coffee processing industry.

💡CRAMs

CRAMs, which stands for Contract Research and Manufacturing Services, is a business model discussed in the video. The speaker compares different types of CRAMs, including those in the pharmaceuticals and beverages industries, to illustrate the varying dynamics of asset turns, margins, and working capital intensity. CCL is categorized as a CRAM in the coffee industry, providing insights into its business operations and financial performance.

Highlights

The concept of the Lindy effect is introduced, suggesting that businesses that have survived for a long time are likely to continue to do so.

Book recommendation 'Understanding Michael Porter' is made, emphasizing its value in simplifying business strategies and concepts.

The importance of studying the value chain in business analysis is highlighted, with a specific focus on the Coffee Processing Industry.

Differentiation between Arabica and Robusta coffee beans is explained, along with their respective growing conditions and characteristics.

The process of coffee bean picking, processing, and milling is described as the first stage of the coffee industry's upstream process.

Four types of coffee produced globally are detailed, including Spray Dried, Agglomerated, Freeze Dried, and Liquid Concentrate of Freeze-Dried Coffee.

The profitability of different stages in the coffee industry's value chain is discussed, with coffee processors and some retailers identified as the most profitable.

Continental Coffee Limited (CCL) is introduced as the largest coffee processor in India, with a focus on B2B manufacturing and a growing B2C business.

CCL's business model is analyzed, explaining how they manage to stabilize their margins by purchasing green coffee in advance of orders.

The discussion of different types of CRAMS (Contract Research and Manufacturing Services) businesses in India, comparing CCL with others like Syngene and Varun Beverages.

CCL's competitive advantages are explored, including their high ROCE, pricing power, and the business's ability to pass on margin volatility.

The growth of CCL's production capacity over the years is outlined, with future expansion plans detailed, expected to significantly increase their capacity.

CCL's B2C business development is discussed, including the challenges and opportunities it presents, such as the establishment of packaging units and product diversification.

Risk factors for the coffee processing industry are presented, such as market competition, potential deleverage, and the challenges of establishing a profitable B2C business.

The potential for CCL to become the world's largest coffee processor is considered, along with the implications for market share and valuation.

Homework for viewers is given, encouraging them to perform their own valuation analysis of CCL based on its growth projections and historical performance.

An invitation to the next video is extended, where the presenter will discuss financial planning for a child's education, offering practical insights into long-term financial strategy.

Transcripts

Hi investors, welcome to SOIC

In today’s business analysis video

we'll be discussing a very boring & profitable industry

Boring industries are quite exciting to study

because such business doesn’t change for years

Nicholas Nasim Taleb terms it as Lindy effect

The more a thing survives, it keeps surviving further

Like some stories survived because they have stood the time

so this is the idea of Lindy effect

More in the Lindy effect; we hear old stories, why do they survive?

Because they are surviving in some form or other

there is a high probability that this story will survive in future as well

Today’s book recommendation by me; Understanding Michael Porter

I’ve studied a lot of Michael Porter’s books

but this is one the books which is absolutely terrific

Why terrific, let me tell you?

This book simplifies Michael Porter’s philosophy of 5 forces with ex's

simplifies key strategies businesses can adopt

simplifies concept of white spaces

Also, to any businessman who’s viewing this video

I’ll highly recommend reading this book

Because this will also help you a lot in your own business as well

This book also suggests studying value chain of a business

value chain as in if you are studying any chemical business

you also study its feedstock source, where final product is sold & end users

You study the complete value chain

That will you an idea of where the profitability lies

Similarly, we will speak about Coffee Processing Industry (CFI)

Let’s start addressing the value chain of CFI

1st part in value chain of CFI; Growing the coffee

Where does Coffee grow?

Largest production happens in Brazil & then in Vietnam

since we are discussing the value chain, let me also tell

There are 2 types of Coffee beans, 1 is Arabica & 2 is Robusta

Arabica has lesser caffeine content & sweeter in taste

Robusta is harsher in state & with more caffeine content

Arabica’s growing season is in b/w end of October to January

It's grown in Brazil at higher altitudes

For beans to grow sufficient height is required

Whereas Robusta can grow in lower altitudes

currently Vietnam is major manufacturer of Robusta in the world

Usually Arabica grows in Brazil & Robusta grows in Vietnam

However, in India farming of both species happens

These are the 2 types of Coffee beans that can be produced

Then happens the picking of coffee beans followed by processing, milling

Post milling green coffee beans are obtained

Growing, picking, processing & milling inclusively

we can term it as first stage of upstream process

Then begins the process of roasting & processing

In roasting different types of coffee are produced

What type of coffee do processors make?

There are 4 types of coffee produced in the world currently.

1 is Spray dried coffee;

Spray Dried Coffee is prepared at a high temperature of 200C

many a times aroma fades away & is a cheaper form of coffee

It's one of the cost-effective methods with less cost & capex

It's the cheapest form of method of producing coffee today i.e., Spray Dried method

connected to Spray dried there is Agglomerated method

In agglomerated if you are a consumer of Nestle

Coffee costing 200-250 Rs are agglomerated coffee

Agglomerated coffee is also known as poor man's freeze-dried coffee

In agglomerated, spray dried coffee is soaked

the granules are made bigger

Spray dried is an instant & powdery in form

Agglomerated is present in kind of bean format with a bit of granules in it

Nestle’s 150-200 Rs range of coffee is agglomerated coffee

3rd type: Freeze dried coffee and it is one of the most premium coffees

To prepare it, a cold room is required for the coffee processor

As shown in video you can see how post roasting

how they are putting the beans into cold room

Why do they put it in a cold room @ -40C to -60C?

To retain the aroma of coffee

Most of the Coffee’s like Beanies, Nescafe Gold, Davidoff & CCL

All these coffees are example of freeze-dried coffee

You can get to know by just looking at the cost

on an average a normal packet costs around 500-600 INR (100-200 gms)

So, in freeze dried coffee the aroma of coffee gets sustained

The margins for freeze dried coffee are 10-20% higher than spray dried coffee

This is why it is a higher margin product

last is Liquid Concentrate of Freeze-Dried Coffee

The classic e.g., are concentrates of cold brew

If you are staying in foreign country

there is a huge trend in USA

of buying concentrates of cold brew from retailers & brewing it at home

It is also one of the most expensive form

since it is in liquid form i.e., highest in quality & a bit expensive

This is with the processors in value chain

we understood different types of products

After processors there is packaging, shipping, grinding, growing & drinking

After grinding & growing there is retailing

retailers like Starbucks, Cafe Coffee Day come into picture

These are also the type of coffee shops that are present

Within complete value chain if you look

most profitable part lies with the coffee processors

Because coffee processors are adding the real value

2nd most profitable aspect of value chain lies with some of the retailers

some retailers doing coffee retailing like Starbucks; able to add lot of value

as they are building customer experience

These are the 2 aspects of value chain where the maximum of profits lies

coffee producers or growers are doing a commoditized business

wherein pricing of coffee is volatile

That’s why you always need to study the value chain of Industry

So today we’ll discuss about Continental Coffee Limited

it's the largest coffee processor based out of India

We’ll study the Pros, Cons, Thesis, Antithesis

also study the competitive advantages of the business

CCL products is primarily a B2B manufacturer of coffee

They supply it to Private labels & Supermarkets

There is a B2C business getting built as well

Total sales are of 1624 crs out of which 200 crs are B2C sales

Almost 10-30% sales are from B2C sales

This business was first promoted in 1995 by Mr. Challa Rajendra Prasad

He has been the founder & promoter of the business

Today his son Mr. Challa Srishant is the promoter of the business

and is been running the business

It’s a promoter or family led business

The holdings of promoters are getting increased over the period of time

Today it is close to 46%. This is how the business was started in 1994

After that interestingly this business started making tie ups

We anyhow will look into their production facilities or capacities

Why we want to study this business is because

in 2010 this business started killing its volatility in margins

Let’s calmly discuss the business model of this business

Thera exists 3 stages in here; 1 is purchase of green coffee

2 is coffee processing & 3 is coffee sale to end clients

Let's suppose a client of the business by name Trader Joe’s or Walmart

If Walmart gives them the Coffee order

the moment as they receive the order of Walmart

at the same time, they buy & store green coffee beans

What happens with this? The fluctuations in margins

i.e., the per kilo EBITDA that you are earning gets sustained

There won’t be much fluctuation in the margins

This is the unique thing of this business model

This business has pricing power

Where there exists a pricing power

we definitely want to study such businesses

Over a period of time if you closely look at their margins;

you’ll find in 2022 the EBITDA margins were 23%

23% in 2020, 21% in 2019,22% in 2017

The margins are operating in the range of 18-23%

It is really difficult to find it in B2B businesses

that's why we liked studying this business

When you see margins dropping in here it doesn’t mean drop of margins

But sales are higher , EBITDA per Kg is fixed

because prices of coffee go higher as we can see today

You can find 17% margins in the recent quarter

But those margins are also fixed

Only the price of coffee has gone high

That is why they have bought & stored Green Coffee

This is the unique thing about this business

They are a type of Contract Manufacturer

which does customization as well for the client

In India we have different types of CRAMS listed

1 is of Syngene type who is into Pharmaceuticals

Syngene’s asset turns are low, working capital intensity is also low

they receive payment in advance many a times

Margins are quite high in syngene’s case

because of which the ROCE is at 15-20% at full capacity utilization

There’s another type of CRAM like Varun Beverages

They do CRAMS for Pepsi, establishes plant of Pepsi in every state

They have done the backward integration as well

In Varun Beverages the asset turns are okayish

asset turn beyond 1.5x becomes difficult

Working capital days are low with low receivable days

The margin lies b/w 20-25% & they make a ROCE of 15-20%

There is business like Dixon

with single digit margins in 3-6% band with high asset turn

4-5x sale upon deployment of 1000 crs of asset

with good asset turns & low working capital intensity

You won’t earn in margins but in working capital employed & asset turns

There is a 4th type of CRAM like Hindustan Foods

which is almost like Dixon

But why superior business than Dixon?

In Hindustan Foods case the margin volatility is also taken care of

Like in Dixon’s case

if components from China becomes higher resulting in lower margins

In Hindustan foods there is a clause which completely pass on

Even though there is 5-6% margins with high asset turns

The ROCE will be higher than Dixon

Finally, we've business like CCL Products which is CRAM in Coffee

Basically, the margins in the business are b/w 20-22%

The EBITDA/Kilo is around 110 INR

In this business the working capital intensity is high

as you buy the inventory in advance as per prior order (6-9 months)

There is a need of buying inventory with high working capital intensity

Asset turns are not more than 1-2x

This is why business earns 15-20% ROCE as your asset turns is b/w 1-2x

Working capital intensity is high but you earn in the margins

Varun Beverages, Syngene & CCL are similar kind of businesses

Reason being its switching costs

which we’ll cover in its competitive advantages section

If you haven’t watched the Syngene & Varun Beverage’s video

you can watch it as well

But this the nature of this business

which connects the common thread of all CRAMS

From which we get to learn a lot

If you look at the India’s export in coffee;

This is the market leader, as per 2022 data till October

They have exported 33.536K T of coffee (source: coffee board’s website)

Sucdean Coffee India Private Ltd who is a packager & trader of Coffee

have exported 26.739K T of coffee

Third is also a trader

2nd largest in the industry is Tata Coffee

But Tata Coffee is exporting 21K T

In Tata Coffee’s case they have 10K T of processing capacity

whereas they sell 10-11K T of coffee beans

CCL Products is just the coffee processor

The difference b/w Tata Coffee & CCL products is

Tata Coffee process the coffee & own the plantations as well

CCL is not into plantation business wherein they won't pluck coffee beans

as it’s a volatile bulk commodity business

They’re just into high value-added business processing business

This is the difference b/w CCL & Tata Coffee

we receive many questions about this; thought of explaining once

If you look at the world market of coffee;

Instant coffee’s market is close to 100-150 billion $

Inclusive of Roast coffee in 2022 it's 433.70 $ billion

Indian coffee industry trend; 1045 $ million in 2022 inclusive of both instant & roast coffee

If converted in Rs the market of instant coffee in India is 2-2.5 K Crs

That is the size of the pond

If looked by capacity wise

In the world there is 750K T coffee processing capacity

Out of which 300k capacity belong to Nestle

Nestle processes & sells its own coffee

450K T capacity can be targeted by CCL products

This is the size of opportunity of CCL where it operates

The market grows at a rate of 2-2.5% PA

If you look at the production capacity of CCL at the moment

1 is in India, 1 is in Vietnam & other in Switzerland

Switzerland’s capacity is 4000 MTPA

Vietnam~ 10000 MTPA post expansion became 13,500 MTPA

Currently in India there is 5000 MTPA capacity of freeze dried

Rest 10000 MTPA in spray dried coffee

This is the capacity that CCL products is operating in today

If you also want to learn how to analyze different businesses?

also want to learn how to study a business?

Today I can only find 4 problems of retail investors

Biggest of them all is confusion in valuation

confusion in forensic analysis

confusion in how to analyze an industry, cash flow, Balance sheet & Income statement

So, all this is a part of SOIC Business Analyst course

which is available in Hindi & English

What is the 2nd key aspect?

We've a SOIC Sectoral Analysis course

in which you get to learn how to analyze different sectors

Apart that on 13th-14th Nov, we are doing analysis of QSR sector

in which we’ll teach about different QSRs of world

Till now we have covered analysis of 12 sectors for SOIC students

We discussed what is a low float stock?

we've taught how to read an annual report

Life Insurance, General Insurance sector, Chemical, Banking & IT Sector

we've analyzed these sectors to know the language of a sector

Even Agrochemicals included

3rd element is to learn from experience of investors if you are into investing

Part of SOIC membership is that

we believe in learning from the experience of other investors

Recently we hosted "The Chartist" who's into Twitter as well

Also, with many investors like Rohit Chauhan Sir, Abhishek Basu, Mr Gautham Baid & many more

Where we learn their learnings

& We give opportunity to SOIC tribe members to ask them a question

There are 2 more aspects; How to find epic stocks & SOIC Financial Literacy classes

In how to find epic stocks

In 6 hrs you’ll only learn that how a retail investor can buy stocks

What is the way of filtering stocks?

That is the purpose of how to filter stocks class

This is also separate course in description, for a limited time

This will teach you the way of filtering & buying stocks in 6-7 hours

Final key aspect of SOIC membership; SOIC Financial Literacy Program

We teach personal financial planning as a 20,30,40-year-old

Financial planning of children who is 3,4,5-year-old

What are the asset classes available & what tools to invest in?

Whether to invest in gold, index funds, MFs

all those things are taught in SOIC Financial Literacy program

This wasn’t the part of membership but has been included

2 of its modules are live at the moment, 3rd module goes live next week

all these 5 courses are part of 1 SOIC membership

Link to registration is in the description below

Back to video; Let’s now study the competitive advantages of the business

Different sources of competitive advantages or moat

What is Moat?

What is the ROCE Of company

As in CCL makes 16-20% of ROCE & why me & you can’t do that business

1st reason for competitive advantage which is always present in B2B businesses

There is massive switching cost

difficult to get the blends right & cycle of approval

Let’s study the con call & understand what they said?

This is from the 2018-19 Con call wherein they said that

“One of the main reasons why certain customers who've been with us

for more than 15-20 years & they have been able to grow their volumes very substantially”

I think in domestic market Reliance is one of their customers

because they have better product acceptance

have lot of products to offer them

Similarly, from this con call, they keep mentioning again & again

Their 20-25 years old customers with whom they have the repeat businesses

Basically, their plant is also old

What else they've done

once you get the customer there originates a switching cost

What switching cost?

Suppose you like some private labelled coffee & its particular taste

You basically cannot switch the supplier that easily

This is the idea of switching cost that you cannot switch the supplier

This is the 1st key source of moat

2nd key source of moat

you are doing customized manufacturing for different clients

Let me show you one of their products which can be viewed on Trader Joe’s website

Trader Joe is a retailer in USA

on their request CCL had made a concentrate of cold brew

If you are a big buff of coffee like me

Cold brew is kind of brewed coffee in which the aroma of coffee is strong

They made a specific customised coffee for Trader Joe

which they discussed in the con call

they can also offer customized manufacturing

Basically, they are making customized products for clients

3rd key source of competitive advantage?

Basically, you are present all over the world

Frequent tie ups with Distributors, Stockist, Retailers, Supermarkets abroad

Doing private labelled manufacturing for them

winning customers is a tedious task

This is like a puzzle which has mini moats, there are small moats in businesses

4th key source of competitive advantage;

R&D & offering more than1000 varieties of unique coffee tastes

Over the years of R&D

Company has manufactured 1000 varieties of coffee blends in house

Basically, that is very difficult for anyone else to copy

It seems to be a coffee processing business but not an easy business to do

How does it look?

In 2018 -19 one of their customers stopped buying Agglomerated coffee from them

we discussed i.e., finer form of spray dried coffee is agglomerated coffee

One customer stopped buying from them

but same customer came back to them in 2020

To start buying the coffee again

This is the power of this business

There is a huge switching cost

If the blends get right again & again it's very difficult for others to enter

Final key source of competitive advantage?

Economies of scale; At the moment if their capacity grows to 71,000 MTPA

Worlds market size is close 4.50 L TPA

This will be the largest producer

You buy green coffee beans at large scale, you get an advantage

In Vietnam as well where they have plant

a green coffee bean growing region (Robusta coffee is grown a lot)

That as well gives them an advantage

because you can procure raw material very easily

This is also a source of competitive advantage

These are qualitative insights which are difficult to come by

In India when compared the volumes of Robusta & Arabica

Robusta is on higher side

this is also source of competitive advantage & an economies of scale

In India as well they easily get the raw material & same with Vietnam

you’ll be the world’s largest coffee processor

If you look at their competitors; you’ll get to know their names

Some of their competitors over here are Cacique(an Ecuador Co)

Cocam a Brazilian Co, Olam a South America Co

Jiahe King Flower a China Co & Tata Coffee

The capacity of these competitors is only 25,000 MTPA

whereas this company’s capacity is 71K MTPA

These are some of the sources of competitive advantages

your size is 3x bigger than your nearest competitor

Growth triggers of the business

1st: whenever we look at manufacturing Co’s

we should look at their manufacturing capacities & facilities

It's important to check the TPA capacity of facility

In manufacturing businesses biggest trigger is you have customer approvals in place

2nd trigger: you have a capex which is going live

I’ve been studying a business by name Gokaldas Exports

If you study their business

you’ll get to know that a huge capex is going live over there

Similarly in manufacturing we studied about Navin Fluorine

where we saw huge capex going live

similarly, in CCL products we’ll see the production capacity

as in how many units are you making

If you look at their coffee data, at one time in 2003

they used to make 3,600 Tonnes of coffee

In 2006 it expanded to 9K TPA, 14K TPA in 2009, 18K TPA in 2012

28K TPA in 2015, 35K TPA in 2019-20, 38.5K TPA in 2022

In 2023 one of their plants in Vietnam is going live with capacity of 16.5K TPA

that will make their capacity to 55K TPA

In India they've announced a green field capex of 320 crs & 230 crs in Vietnam

The capacity announced in India is also close to 16.5 K TPA

In total till 2024 their capacity will grow to 71K TPA which today is 38K TPA

Almost 85% of capacity expansion is happening in next 1-2 years

How is the capacity going live? 1 is going live in FY23 & 1 in FY24

First time this business is doing such huge expansion within very short period of time

If you want to understand their last 1 such valuation.

When their plant got opened in Vietnam

they received the approvals in FY13-14 , in FY-9 they basically started setting up the plant

At that point this stock performed really well (FY11-FY16)

as the earnings growth was very strong

Similarly in next 3-4 years

There is an expected volume growth of 15-20%

Just on the basis of capacity getting built

This is the 1st key growth trigger: 240 crs of capex in Vietnam

There is a 320 crs of capex in India

This business is doing capex of 560-570 crs

2nd key source of growth driver in business

They’re establishing small packaging units

As shown in video, during production the coffee is put into small boxes

This means you doing packaging for customer

As they make it in bulk, they have to sell it to reseller

Reseller pack it in their packaging facility to sell it to brands

For the 1st time in India, they’ve established a 12K TPA packaging capacity unit

Out of which they’re utilizing 4K TPA for themselves

rest will be used for private labels & supermarkets

This is a much higher margins business

The key metric to track in CCL Products is EBITDA/KG

That is what really matters at EOD

3rd key source of growth trigger

At this time all of their coffee capacity is spray dried

They had established a 5K TPA capacity of Freeze Dried

After 2-3 years they might establish another plant

To do Brownfield capex as they already have land for Freeze Dried

Final growth trigger: in 2016-17 they started establishing its B2C business

Until now CCL products is a B2B business

But earlier in 2000s they tried establishing B2C business in India

What’s B2C? You might see BRU, Nescafe

Selling to a customer directly via Kirana store

Similarly, CCL Products is trying to establish this business

In 2017-18 they hired Mr. Jaipuriar Praveen who used to work at Dabur

In Dabur if you speak about Hajmola, he’s handled marketing of such products

In here it’s very interesting to note, when I used to track this business

At that time this business was just setting up in B2C

Today there’s 200 crs sales in just B2C business

In India instant coffee’s market is only 2500 crs

Their 200 crs of sales is just coming from 3 states in south

This is the real optionality, out of this 200 cr business 25 % is institution business

In Hotels you can find Continental Coffee

You can find Continental coffee in Railways

Similarly in caterer you can find Continental Coffee

Rest of the 150 crs of business is directly sales being made to retailer

from whom at the end is reaching to customers, retailers

Let’s see the kind of products being launched in this business & innovation efforts

If you check out the Amazon India’s website

You can see that 200 gms of Continental speciale pure instant coffee granules

is for 349 Rs which is from a discounted price of 550

Freeze-Dried coffee of Continental (100 gms) for 349 Rs/ dicosunted price of 440

They’ve made premixed coffee’s i,e., Cappuccino 3 in 1 which is instant coffee

basically, mixture of 3 different flavors

Similarly, there’s Continental Pure Roast, Ground Filter Coffee

alongside there’s different flavors of coffee

There’s Continental Freeze Dried coffee in Hazel nut

This is something similar to Beanies - Hazel nut coffee from UK for 500-550 Rs

But CCL's range is of 250 Rs

That is the difference in being manufacturer

because you can price your product at a cheaper level

If looked at more there’s Cappuccino premix instant 3 in 1

many more on Amazon available in varied offers

This is last such optionality because In India their consumption is of 4K TPA

Which is expected to grow to 8K TPA in next 2 years

as per their expectations i.e., 400 crs of B2C business

If their B2C business turns profitable

B2C businesses are actually much more difficult to build

This is very big optionality in company

If tomorrow their business grows to 800-1K crs

I don’t really know about what will happen in valuations

because valuations of B2C FMCG companies are a bit different

This is one big optionality that you have to track in the business

This was about growth triggers

Let’s now cover the risk pointers

1st risk: many players established Freeze Dried set up along with them

There's risk as in the capacity of Freeze Dried production

is yet to enter the market in next 6 months

There’s risk of hit in the realisations

Realisations as in the coffee or processed coffee prices can go down

2nd risk factor: This business is a steady compounding business

This is not a business for each & every type of stock picker

It’s possible that business will experience 15-20% volume growth

But in this business operating deleverage might happen

but not the game of operating leverage

As we discussed in beginning of video

You have already coffee contracts bagged

The volume growth is basically EBITDA growth

There’s no game of operating deleverage & leverage

15-20% volume growth is what is business offers

Sometimes there might be slow growth of 4-5%

That’s also a key risk factor to consider

It’s possible if you are expectations are different

then this might not be the business that you are looking for

This is not Antithesis pointer as business per se

But as per individual stock picker

Last key Antithesis pointer

If you fail to be profitable after building B2C business

I.e., as good as on sales multiple

Because even if you make 400 crs sale but without profits

There exists an investment phase for the next 4-5 years

Thats again a business which might not get valued

Building B2C businesses requires a long-term thinking mindset

You need to get long-term thinking mindset in this business

These were some of the key Antithesis pointers

which could be more on perspective of individual stock picker

as compared to business

In business it’s a compounding business

wherein they are gaining market share

They’ll become world’s largest capacity

Last Antithesis pointer: Instant coffee market is growing at 2-2.5% in world

This business is guiding for the 10-15% volume growth

Basically, it’s grabbing market share & how much will it grab

It remains to be seen

But 3-4 years of visibility is clear just because of the expanded capacities

But you as a stock picker have to think about it

Do let me know in the comments section

Do you think if Thesis outweighs Antithesis or vice versa

This is the business analysis of CCL Products

If you want to look at their valuations; I’ll give the complete hint

You can answer me in the comments section

Because this is what will make it fun if viewers participate

If the capacity of company doubles & does 570 crs of capex

You try making a Bull, Bare & Base scenario

Try checking the PE ratio of this company in 2011-16 from Tijori Finance

You can track in screener as well about EV/EBITDA, PE ratio on earnings growth

Value the business in terms of PE ratio

If in 4 years, there’s a growth of 18-20%

on that basis if this gets certain PE ratio

So, today what can be your CAGR, IRR

2nd thing to do, when you do the valuation

Do not forget the depreciation & finance cost

Because capex is dead funded capex

the amount of depreciation & finance cost will increase

As some of the plants like 1st 10K TPA capacity is fully depreciated

The fixed asset turns of this business won’t be more than 1-1.5x

Try checking by removing depreciation & you can consider 15 years live for asset

Depreciate 570 crs of asset life for 15-20 years

you find on 15-20 years period how much they depreciate the plant

Think how the P&L of this business might look in next 3-4 years

This was my homework for all of you

Thank you so much for joining us

See you in the next video

I’ll be discussing how I made a financial plan for my 3-year-old nephew

How I made his educational plan

as in to understand the expense of education cost if you want your child to study abroad

I have calculated the expenditure & made a financial plan

Which I will share with all of you

Thank you so much for joining SOIC

Hope to see you in the next business analysis video

Jai Hind