CCL Products (India) Limited (519600) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CCL Products Q1 FY '21 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Mishra from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you, Aisha. On behalf of Systematix, I would like to welcome all participants on the call. From the company, we have Mr. Challa Srishant, Managing Director; Mr. K. V. L. N. Sarma, Chief Operations Officer; Mr. Praveen Jaipuriar, CEO of Continental Coffee; Mr. V. Lakshmi Narayana, CFO; Mr. P.S. Rao, Consultant, Company Secretary; and Ms. Sridevi Dasari, Company Secretary on the call. Now I would like to hand over the call to Mr. Srishant for opening remarks, and then we'll open the floor for Q&A. Over to you, sir.

Yes. Thank you for the introduction. The group has achieved a turnover of INR 289.25 crores for the first quarter of 2020-'21 as compared to INR 273.72 crores for the corresponding quarter of the previous year. And the net profit is INR 38.48 crores as against INR 34.67 crores. The EBITDA is INR 62.92 crores and the profit before tax is INR 45.77 crores. I think we can just directly get to the questions.

[Operator Instructions] The first question is from the line of Nitesh Jain from Birla Mutual Fund.

So essentially 2 questions from my side. Number one is on your stand-alone India operations EBITDA margin. So basically, they were lower in this quarter. The question is, what is the main reason behind it? I can understand, one is the fixed cost may be higher because of the lower volume. But at the same time, even the gross margin, which is simply the revenue minus raw material is also lower. Is it because that the shipment proportion has changed, I mean, the more spray dried this quarter than FDC? Or what are the main reasons? This is the question number one.

Yes. The main reason is actually because in India, we've shut down the plants over here for quite some time. And FD especially was shut down. So that is where the maximum impact is coming from. Because our Vietnam and Swiss operations are operating normally, we are not able to see, on a consolidated basis, that much of an impact.

So would you say that the FD proportion for the India business was significantly lower in the overall volumes in this quarter compared to, say, Q4?

Yes, definitely.

50%.

Almost 50% reduction was there.

In the India itself, India volume, not the consolidated CCL?

Yes. In India, on a stand-alone basis.

Okay. And now how is the business for the high-margin India business? I mean, is it on track? Are you at pre-COVID levels for both spray dried as well as freeze dried?

We haven't reached the pre-COVID levels yet, but -- because especially countries like Russia, where majority of our customers are from, there -- they've been asking for some postponements and all that. So we're expecting things to ease up in another month or so. So we've also planned our maintenance, shutdown everything now itself in this -- in quarter 1. So that will be geared up for continuous production for the rest of the year. So as soon as our customers start confirming that we can start dispatching, we'll get back to the normal levels.

Okay. But both the plants are now up and running?

The SEZ plant is up and running. The EOU plant is still completing some maintenance. In another few days, it should be completed. After that, we'll start the plant.

Okay. EOU, you mean the Duggirala plant?

Duggirala plant, yes.

The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.

Hello?

Yes. You are audible. You can go ahead.

Am I audible?

Yes.

Yes. So sir, congratulations on really good numbers in extremely challenging times. Really congratulations for that. First question is on -- you mentioned about the EBITDA margins in the previous question. But I'm just looking at your gross profit for the quarter on a consolidated basis, which is about INR 130 crores and compared to quarter 1 of last year, that number is actually flat when volumes for the quarter would have actually declined. So given that there was a plant shutdown because of COVID. So have we seen significant expansion on per kg margins for the quarter at both gross margins as well as EBITDA margins level?

Yes. This is Sarma. While Indian operations are on a subdued scale because of the lockdown and subsequently small maintenance on freeze dried, the Vietnam plant was running to the full capacity. So there was a better contribution from Vietnam plant during this month. The gross margin levels, as you know, when spray-dried powder is spray dried in major quantity, the gross margin levels will slightly be lower, but they are in line. In fact, even on a stand-alone basis and on a consolidated basis, also, we were -- when the spray-dried capacities are there, it will range between around 45% to 48%, and they are in line with that. Secondly, because of these reschedulements, we are still maintaining substantial quantities of freeze-dried product because we have produced these quantities for enabling capacity utilization. If you have seen our financials, you must have seen against our some INR 35 crores, INR 36 crores of closing stock last year, only INR 11 crores was adjusted. So we are still carrying inventory, and these -- the dispatches and when filters, these are the carrying inventory will come in the subsequent quarters.

Okay. Second question is on -- generally on the broader market, you also alluded on the same in the quarter 4 conference call also. In terms of consumption of coffee globally, if you could give some comments on the growth in ground coffee as well as instant coffee volumes in line of this work-from-home culture, which probably may continue for a fairly long period of time. So what impact could it have on both the instant coffee business where we have significant presence as well as the ground coffee consumption also?

Okay. So for the ground coffee, we've been seeing that there has been a slight decline in roasted ground coffee consumption because of the coffee shops being shut across the world during the lockdown period. And the in-home segment of instant coffee seems to be increasing across the world. So we've seen…

Which segment in instant coffee? I -- sorry, I missed out on.

No. The instant coffee segment -- the in-home consumption instant coffee segment, that segment seems to be increasing across the world, to be frank. So we've seen an increase in offtake from our customers, the brands and all. At least initially when the panic buying was there, they were stocking up on more volumes because people who are used to drinking a cup of coffee on a regular basis, now they don't have the option of going to a coffee shop. So that's why they were sitting in the house and consuming more of instant coffee. So that's one of the reasons why we've also seen an increase in volumes for instant coffee.

Okay. And in terms of instant coffee, what would be the breakup between at home and out-of-home?

That is something which is very difficult to answer. Most of that…

But broadly would it be more in favor of at home, largely in favor of at home?

Mostly it's in at home only. But definitely, there are a lot of institutions, offices that buy instant coffee, larger packs, jars and everything, and they make fresh coffee for their employees. But I'd say maybe more than 90% of the consumption will be from in-home segment.

Okay. Okay. And just one last question. In terms -- and this is not to do with the quarter, but generally, about, let's say, strategy of our company, how much difference can small packs versus bulk packaging can make on our EBITDA per kg? Can it be substantial difference?

The quantities that currently what we are producing in smaller packs is substantially less. In fact, of our entire capacity, we have only about 10% to 15% of small packs. So the differential in EBITDA -- I mean, it will be on a value-added component. So broadly, if we say there is a value addition of about $2 for a small pack, there can be about 15% to 20% EBITDA additional margin on that. But the volumes that we have right now are approximately 10% to 15% of our total capacity.

[Operator Instructions] The next question is from the line of Richard D’souza from SBI Mutual Fund.

Congrats on a decent set of numbers. Just a couple of questions from my side. When you look at the exports from India, which got stalled because of the logistics issue, were there any loss of customers in EU or U.S. because we couldn't supply them material?

No. We didn't lose any customers. In all cases, like most of our customers, they place orders at least 1 year in advance. So if there is something which is unforeseen that happens, they can come -- they'll usually come and request us for a postponement or something like that. In our case, we've accepted that postponement in order to maintain that relationship with our customers.

Okay. And also, you recently mentioned that there were some closures of coffee chains in EU and the U.S., and a lot of restaurants have also closed down. But along with this, given the financial problems of a lot of small and medium roasters, they too would have closed down. So would you have any idea of how the consolidation has taken place within the space for roasters?

Very, frankly, no. Most of the -- as in what we have seen is that reduction in demand has had an impact on the coffee prices. And when we got into more details, we understood why that impact took place. But what is happening -- frankly, we're not in that segment at all of supplying roasted coffee to coffee shops and all that. We are not in that segment at all. So we don't really monitor that segment very closely.

Okay. Okay. The ancillary question to this is that it has seen that even in in-house consumption, there is an increase in dominance of those single-serve packs and all that stuff. So do we have any plans to get into it?

Well, single-serve definition is actually a little broad over here. We are already into single-serve segment where we have single-serve sachets, which we are selling in the market. Our sale of single-serve sachets within India has grown -- has gone up multifold to be frank. And the single serve, which maybe you are referring to, could be like in the Western world, the pods.

The capsules, pods, yes.

Yes, the capsule. In India, that capsule business itself is almost nonexistent. But across the world, yes, the pod business is growing, and it's expected to grow at a CAGR of almost about 4 -- about 5.7% or something like that. So that is also coming under in-home consumption segment.

Okay. Okay. But are we planning to get into that because…

Yes. We are exploring some options because some of our existing customers only have been asking us to supply some of these pods as well. Now that the patent has run out, now we can officially pitch for this business as well. So we are exploring that as well.

Okay. Okay. One last question from me. We believe that in the first quarter, you onboarded a customer from U.S. in your Vietnam facility. So any such customer additions will be there for this year or over the next few quarters?

We are constantly adding new customers all the time. There are some major customers whose business that we are pitching for and all. When exactly that will materialize is something which we cannot definitively say. Even this particular customer has taken us quite some time, in fact, almost a year of talking to them, building up that relationship, the rapport and then doing a lot of production trials in quarter 4 of last year and getting the approval. All that process took some time. And finally, that particular customer came on board and signed 1-year contract. And we are quite confident that they'll keep renewing it every year.

The next question is from the line of Chetan Gindodia from AlfAccurate Advisors.

My question is more on the guidance. So last call, you had said that for FY '21, though not on the revenue side, on the profit side, we can see a double-digit kind of a growth. So any word on that? And secondly, on the freeze-dried capacity you said that this quarter, the mix was slightly on the lower side. So what has led to that? Is the mix going to return back to normalcy from next quarter? It was just the shipment? Or was there any other reason for this?

Well, yes, the profit side, the double-digit growth that we are expecting is mainly because in Vietnam, we have a tax-free status over there. And as far as India is concerned, the SEZ is also operational, and we'll be utilizing the capacity a little more this year. There is a -- FD is one thing, where, to be very frank, we had expected maybe a 75% utilization during this year. We are still trying our best to target that same utilization. But there could be a slight variation here and there because there are a lot of things which are not in our control at this point in time. If customers ask for postponements and all that, we don't have much of a choice except to postpone that supplies. So if that happens, one thing, what we are seeing is there's an increase in spray-dried demand and people are not asking for any postponements in this particular segment because it's more of a value segment for most customers. And we're trying our best to, at least, make up for that volume with spray dried during this year.

Okay. And what had led to the sharp revenue growth in the Vietnam subsidiary in this quarter? So we saw the subsidiary numbers -- revenues go up by almost 65% to 70%. So what had led to that growth?

I think we've already mentioned that. We've added one new customer from the U.S. and that's one of the reasons why the volumes have also increased quite a bit, and that impact should be there for the rest of the year as well.

Okay. Okay. And just the last one from my side. Can you give us the capacity utilization for this quarter for India and Vietnam business?

Well, in India, we are almost at peak utilization for the Duggirala plant. The SEZ plant, we had projected around 75% utilization during this year. That can range between maybe 65% to 75% this year based on how things shape up. And as far as Vietnam is concerned, we are actually operating at almost 100% utilization based on the current capacity. And by the end of quarter 3, our new enhanced capacity should also come online. That project also unfortunately got delayed because the engineers were not allowed to travel from India because of the travel advisory and all that. So we are expecting that installation to be completed in quarter 3.

The next question is from the line of Abhijit Akella from IIFL Securities.

Congratulations on a good quarter. Just a few small clarifications. One was whether there has been any deferral of orders from 1Q into 2Q because of postponement from the customers end? And if you could just share how much that quantum might have been?

Yes. There was because the logistics were restored only during May, we were supplying our existing quantities, which were -- we were carrying towards the end of March, during May. So whatever we were producing during the months of May in our SEZ, we had to maintain that stocks. So if you have seen our financials, you must have seen that at the end of last year, we were carrying an inventory of about INR 40 crores or so, out of which only about INR 11 crores or so was adjusted in financials. So we are carrying almost 75% of the inventory that we were having at the year-end. That means that inventory which we're having was dispatched, and what was produced during the quarter 1, they got deferred to the second quarter. So these dispatches will take place during August and September. So that will be reflected in the -- this quarter's dispatches.

Okay. So around INR 30 crores, sir. Is that a fair number?

Yes.

Okay. And second thing, also, just to clarify. There was one comment made earlier on the call about a 50% drop in stand-alone volumes. I just wanted to clarify, this is only for the freeze dried at Chittoor, right, a 50% sequential drop in volume in this quarter?

No, it's in freeze dried.

Yes, not in overall standalone?

Almost 55 days, we had to shut down the plant due to lockdown. And then we were -- but subsequently, we were operating SEZ. But since there were -- even if you remember, Russia has gone into lockdown a little late, around the month of May or so. So because of these reschedulements, the drop in FD production was there. And then -- so it was mainly on FD. Abhijit?

Yes. Got it, sir. And one last quick thing. On the employee cost and other expenses, the run rate is a bit low this quarter. I guess it's because of the lower operations. But from 2Q, should we assume that it comes back to a normal run rate? And if so, what would a good normal quarterly run rate be for these 2 expense items?

Marketing expenses and mostly, it will be on the power and fuel that we come back to the normal levels. Power and fuel, because we were not operating for 50 days, the power and fuel costs were lesser. Other things, they should come back to normal levels as they were there.

The next question is from the line of Dhiral Shah from PhillipCapital.

Sir, my question is pertaining to the freeze-dried facility because it's being a higher value product. So are we seeing any demand destruction due to down trading?

No. As of now, we have not seen demand destruction. It is only reschedulements that were asked for. So since we were already having 50 days lockdown in India, so that much capacity is already lost. And when we have restarted the plant, we were liquidating the closing stocks that we were having during March. So those things are being liquidated during May and April. And we have utilized the plant during May and June as well in SEZ, which we are still carrying as an inventory to be dispatched in second quarter. So it's not a demand going out. It's about reschedulements. And from now onwards, we are expecting that the operation should be normal on SEZ as well.

So this year, your targeting, sir, around 65% to 75%. So do you expect optimum utilization by next year?

Since -- see, this year itself, we are not able to predict how things will be. So if a normal functioning was enabled, we would have reached optimum utilization this year itself. But because of these compulsive conditions, there may be a slight reduction in capacity utilization vis-à-vis product mix as well. So whenever the things are normal, we are geared up for a full optimum utilization. If it is from next month onwards, next month onwards, we are geared up.

And sir, how is the performance in Indian business, Continental brand? What was the revenue we did?

Praveen?

Yes. Praveen, this side. You're asking for the first quarter?

Yes, sir, Q1.

So we did reasonably well in the first quarter. We almost clocked around 40% growth in this quarter. So things have been good. Yes, there has been a lot of disruptions on the bulk side and on the institutional side. But the retail has done extremely well. And because of that, at an overall level, we clocked around 40% growth.

Figure, sir?

It's almost INR 21 crores plus, 20 -- close to INR 22 crores.

INR 22 crores. Okay. And sir, what would be the CapEx for FY '21?

For FY '21, we have -- whatever we've told earlier last year, it's the same CapEx, which we'll be incurring this year. So about INR 120 crores for the packing and agglomeration facility. And that $8 million in Vietnam for enhancement of value by an additional 3,500 tonnes.

Sir, how much we have spent for in FY '20?

In FY?

'20, sir, how much we have spent additional CapEx?

In FY '20, around INR 60 crores is the amount that was spent in, yes, to compete the SEZ works and other work. This -- the entire amount for -- the amounts that I just mentioned are going to be spent in this year.

Okay. And lastly, how is the current coffee prices right now on a year-on-year basis?

As of now, the prices in the last 1 week, 1.5 weeks have increased a little bit. There's almost a 10% to 15% increase in green coffee prices. But that -- we feel that's more of a temporary phenomenon because there are a lot of people who have not covered the green coffee what they've booked on a differential basis. So they're going into the market and buying the coffee quite aggressively. But from a demand perspective, there is a slight reduction in demand because of the coffee shops and all that what I'd mentioned earlier. And this also is likely to get corrected going forward.

The next question is from the line of Rohan Gupta from Edelweiss.

Sir, my first question is on the Vietnam. You mentioned that it has already achieved almost 100% utilization and…

Sorry to interrupt, sir. Rohan, you're not audible. Can you speak a little clearer and louder, please?

Yes. I hope it's better now.

Yes. You can go ahead.

Sir, I was asking that you have -- Vietnam plant is already 100% utilization. And there will be some delays, as you mentioned, in increasing the capacity that may now be achieved by end of Q4 because of the restrictions on the movement from India. So in that case, you see that the new customers, which we have added from U.S. and also the new market, which we have gained will be impacted?

No, there won't be any impact because we are expecting that capacity to come in by Q3 -- towards the end of Q3. By the end of this calendar year, we should hopefully come in with that additional capacity. But we are planning our production also accordingly so that we ensure that we deliver to this customer without any delays.

Okay. And sir, this is 3,000 tonnes which you are going to add, right?

For this year, yes, approximately.

Right. And currently, we are already operating, you mentioned that, close to 10,000 tonnes we are only utilizing? Or there is some -- still room for growth in those Vietnam market -- Vietnam plant?

No, we're looking at around 10,000 tonnes for this year, and depending on how things shape up going forward. As of now, we feel that we should be able to reach that 10,000 approximately.

Is there any scope for better product mix in Vietnam because if you look at the current run rate, I mean not just revenues but at quarterly -- for the current quarter EBITDA level. So I'm just looking at that, is there any scope for better product mix that this EBITDA run rate of INR 28 crores, INR 29 crores can improve from here? Or is the best utilization in terms of product mix as well?

We are incorporating some additional manufacturing flexibilities in the expanded capacity. So expanded capacity can bring in a few more better products, quality products, which will enable improvement in the margins.

Okay. Sir, coming on India operations. So definitely, our FD capacities have been impacted. And you mentioned that the plant has been resumed from this month onward or there is still some hiccup in operations we are seeing?

The FD plant has resumed from May itself, towards the end of May. And the FD plant in Duggirala, we haven't resumed yet because we're still completing some maintenance works, which got delayed because of nonmovement of people. And the SEZ plant has been resumed more than a month ago.

Okay. So as of now, in month of July or maybe in August, we are going to see 100% production from India, if there is enough demand?

Yes. From August onwards, we should be seeing 100% production, yes.

Okay. And you mentioned that demand is showing some weakness, mainly coming from markets whereas the lockdown like Russia and also. So though on the production side, challenges are now done and we have overcome that, now it's all about the demand, which is still showing some weakness in some of the markets, right?

Yes. So we still have to wait and see if this vaccine comes out earlier, then a lot of things will definitely improve. If it gets delayed a little bit more and depending on the ground level situation in -- at our customers' end, things could change over time. As of now, as I mentioned earlier, most of our customers have placed orders with us in advance. So as far as the order book is concerned, we are very comfortable. It's a question about execution of those orders, which is why we cannot definitively say that, yes, we will 100% achieve whatever we have committed to. Based on our order books, we'll definitely achieve. But based on practical situation, something could change at any point in time. So if that changes, that's when we'll keep the market also informed.

Okay. And just last on my side. Sir, globally, there has been a lot of impact on few of the retailers because of the COVID scenario. Have any of our large customers have seen such problems or bankruptcy or getting out of the business? Have you seen any of such things happening with the customer?

None of our customers have gone through this. In fact, for especially spray dried and all, we've had customers come back to us saying that, can you please give us an assurance that you will not delay in supplies and things like that. Because of the panic buying, they've seen an increase in demand. It's not the other way around.

Okay. And sir, is the other way around like any of the manufacturer or processor have -- you have seen that your competitor is getting out of business? We have heard that in Brazil in last 2 to 3 years many small shops were opened. They started processing on a very small scale for global players. Have you seen that any of such unorganized or new entrant who have come just in the last 2 to 3 are getting out of the business helping you to grow further?

Every year, normally, we keep seeing this, but that's out of regular operations, not because of COVID or anything. We do see that a lot of people come, the new capacities that keep coming online. There are old capacities, people who have not been able to sustain. They're going out of business. We've been seeing this happen over the years. And people keep building new capacities also every year. In fact, in India, there are some new capacities that have come in. In Vietnam, there are some new capacities that are going to come in from next year onwards. So these capacities will always keep getting built. In fact, if you've been tracking the company for a while, you will realize that there's more than 50% excess production capacity, which is there in the world. That is the extent of competition that is there in this segment.

The next question is from the line of [ Amit Zade ] from [ Antique Stock Broking ].

So guys, I just wanted to understand revenue and EBITDA performance for the first quarter in Vietnam. Is that possible?

Yes. Sarma will answer that.

Revenue, we did about INR 107 crores turnover with an EBITDA of about INR 30 crores.

Okay. Okay. And actually, we have seen some FY '19 declining EBITDA margins in Vietnam, that was due to some -- what was the reason for that? Because I see FY '20, we did around EBITDA margin of 29% versus around 33% in FY '19. So should that be normalized in FY '21?

No. It's a normal business cycle that we will go through. And a detailed explanation will be detrimental to the -- we have to go into too much of technicalities and explain. We wish to assure you that the business cycle was normal at that point of time. And any specific clarification I can give on a one to one.

The next question is from the line of Akhil Parekh from Elara Capital.

My first question is on the Continental Coffee business. Do we continue to maintain that we can become PAT positive by end of FY '21 for this business, the domestic business?

This year, it's a little tough to predict right now because we are going through a lot of ups and downs considering the situation that is going around. So very difficult to provide it. As of now, we are trying to be -- I'm not very sure PAT positive or not. But our first objective is to drive the top line, and that is where we are concentrating. So maybe closer to the year-end and when the things are getting a little more normal, we'll probably be able to predict a little better on this.

Okay. And my second question is on…

Just to add to what Praveen said, see, the mandate that has been given to Praveen also was that for the first 5 years, forget about PAT, just focus on the top line growth. We have to create a self-sustaining branded business is the objective that we have given him. Anyway, the -- as far as the parent company is concerned, we are able to sell more coffee, and we are able to have -- show that growth also, which is why we wanted to remove that pressure from Praveen. I just wanted to clarify that.

Okay. Okay. Fair enough. And my second question is on the Switzerland subsidiary. We saw sharp spike in sales at the end of FY '20. The sales as per the annual report has moved from INR 40-odd crore to INR 135-odd crore in Switzerland. Do we see similar kind of run rate even for FY '21?

Can you just repeat that? We were not able to hear you.

Sure. I'll repeat. My question is on the Switzerland subsidiary. We have seen a sharp improvement in the Switzerland subsidiary at the end of FY '20. And do we expect that kind of a run rate going forward even in FY '21?

Yes, we do.

This year, it might even out from the second quarter itself because last year, we started supplying from around September or so into the retail supermarkets. We have renewed contracts with them for this year also. This year it might be evening out more from the later part of second quarter and third quarter onwards. Somewhere from September onwards, it will be uniform.

Okay. Okay. Last question, the maintenance shutdown. So how many days we have lost at SEZ because of the plant shutdown?