A Boring Business that went 17x in 8 years! A Boring Multibagger Stock! CCL Products Coffee Industry
Summary
TLDRThis 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
📚 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.
☕️ 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.
🌐 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.
🏭 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.
📈 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.
🛑 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.
🌟 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.
Mindmap
Keywords
💡Boring Industries
💡Lindy Effect
💡Michael Porter
💡Value Chain
💡Coffee Processing Industry (CFI)
💡Arabica and Robusta
💡Spray Dried Coffee
💡Freeze Dried Coffee
💡Agglomerated Coffee
💡Continental Coffee Limited (CCL)
💡CRAMs
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
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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
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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
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