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Weekly Insights #22- CCL Products: Narrative Check

CCL is an interesting company; it is one of the companies that I have tracked for the longest periods of time (nearly 7 years now).

That time in 2017 when I first looked at it, the stock had come off a very strong performance over last many years on the back of capacity expansion & increased utilization. Further, it had a very good perception in the market as it was one of the largest holdings of Professor Sanjay Bakshi.

Post 2017, the stock went off the radar because of no growth for many years only to remerge last year with renewed market interest as the growth came back on the back of new step-up increase in capacities; CCL increased its capacity by ~40% last year and is on track to double its capacities over FY22 base in coming few years.

One of our members asked about CCL in our Feb’23 members concall; and this is what I shared that time-

However, in last few months the narrative around the company has seen a sharp uptick so much so that the company is being positioned as a consumer company by many. And that has led the stock price into a sharp upmove, which came to an abrupt halt post the most recent quarter results.

Some of our members have reached out to us asking for further thoughts on the company in light of these recent developments; so in this post I’ll share some additional thoughts on the company; primarily on this whole B2C/consumer narrative. (what I shared in Feb’23 concall is something I continue to stand by)

A company needs to satisfy two important qualities to be considered a B2C/consumer company-

1. It should have strong terminal growth & value

2. It should generate very high returns on capital

Thoughts on CCL’s Terminal Value-

  • Anyone who has tracked CCL before 2022 would know that between 2017-2022, the company hardly grew. Its capacity over this period did not even increase by 20%.

  • Reason for this is because, CCL operates in an industry which grows at low single digit, has substantial over capacities. And within such an industry structure, CCL was already the 3rd largest player. So, the growth opportunities didn’t exist.

  • The whole reason why the company entered branded B2C business (discussed in detail in later section), was because it knew it cannot grow from such scale in the B2B business.

CCL’s management Q1FY19 Concall-

  • With its current expansion, CCL will become the 2nd largest B2B manufacturer of coffee in the world; post which it is very likely that the company moves back to no growth phase.

So low growth industry, over capacities, B2B nature and high market share are clear indicators of low terminal growth & value.

On Return on Capital-

  • CCL even in its best years have never delivered a ROCE of >25%.

  • This is because of the nature of business which is quite capital intensive. In-fact one of the major strengths of the company’s business model wherein it does not take the risk of raw material price fluctuations as it enters into back-to-back agreements requires it to hold large inventory and thus it has large working capital cycle.

  • The current concern of the market around company’s debt is exactly because of this. But if one looks at the past capacity expansion cycle of CCL, it is very clear that it has to lever itself during the capacity expansion phase. And thus I don't see why it would not be any different this time.

One important aspect of this whole B2C/consumer narrative around the stock is also because of its pivot into the branded business with its Continental Coffee brand.

This pivot is a great thing; but the challenge here is that if one sees it in the overall scheme of things; B2C business will remain relatively small compared to the size of B2B business for a very long period of time; especially now when the B2B side of the business will see a step-up increase in its scale.

Currently only ~10% of existing capacity is being used for B2C branded business and going forward even assuming a very high growth rate, B2C business will still be sub 20% of topline by next 4-5 years.

Also, typically a B2B to B2C transition is good from the perspective of profitability because B2B businesses are general low margin businesses while B2C are high margin businesses and thus as the company pivots from B2B to B2C, its overall profitability improves.

But this is not true in CCL’s case; CCL’s B2B business is extremely profitable with >20% EBITDA margins and mid-teens kind of net margins. So, the B2C business will not add any kicker in terms of better profitability.

Instead, I personally feel that even when the B2C business matures & hits a critical scale, it will operate at lower margins then its B2B segment, because in B2C business CCL will have to invest big time behind marketing; most FMCG companies makes low teens net margins only.

So, when considered from both revenues & profits perspective, CCL will be a B2B dominated business for the foreseeable future; and thus, should not be painted as a B2C/consumer company in my view.

In summary, I’ll say that CCL is one of the most resilient B2B businesses I have ever come across and it should deliver some good returns in coming few years on the back of its step-up increase in capacities. But will it be a multibagger stock as the whole B2C narrative paints it? I find it hard to see.

That’s it for this week, new insight coming up next week. So stayed tuned!


Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

Stock specific investment disclosure:

CCL Products- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service


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