I have entered into CCL Products this week. I’m done with my portfolio adjustments by introducing new companies for that ALPHA. There will NOT be any new entrants into my portfolio. Only re-alignments of the weights going forward.
Weightage: The stocks which are introduced for that ALPHA will be capped at 20-25% of the total portfolio.
PORTFOLIO
Stocks introduced for ALPHA: MPS, CUPID, CCL Products. (cap at 25%).
Core stocks: Repco, Gruh, PI Industries, Page industries. (cap at 75%).
Rationale for CCL Products (I have already explained the rationale for MPS, Cupid:
- Improving RoE/RoCE until FY18 where we have certain visibility.
- Reduction of debt and probably settle around 0.1 D/E or Zero debt by FY18.
- Super visibility of free cash flows
- Increasing dividend as a %ge of net profit with increasing cashflows
- Vietnam plant at 75% utilisation by FY 17 and then increase the Vietnam capacity to 20000 MT by capex of about 20 million USD funded entirely by internal accruals. No tax on Vietnam revenues for next 3 years and later 50% tax – effective tax rate is going to be low for foreseeable future.
- Immediate revenue visibility of 25% for FY 16 and 30+ EPS growth. (mostly built into current price, still scope of surprise exists)
- No recent history of equity dilution, ethical management, promoter holding increased from 3-4 years back and stabilised around 44%.
- Upside due to new big European client and entry into Japanese markets (very sticky market where long term revenue visibility would be high and management sounded positive on this new business).
- This is NOT a commodity business and also NOT a real estate intensive (no plantations). I really liked that they do the RAW MATERIAL purchase as per JIT (Just In Time) policy so they are completely insulated from coffee prices though realisations could vary by 7-8% in case of fluctuations as per management.
- Own brand retail foray: Very difficult preposition. Nescafe and Bru has SUPER mindshare of customers and breaking this could be difficult. However, the coffee is priced less than 50% the price of Nescafe for same quality – now beat this. Management only has to make people realise this. Difficult though.
- I’m Hyderabad and CONTINENTAL COFFEE has a shelf place beside Nescafe and Bru in Vijetha Super market. I took both the bottles and compared the price, packaging, bought home both of them and tasted. ( I will put my observations in CCL thread).
- Better late than never even though the valuations are a bit high and IF all the above story plays out well, there WILL be a PE re-rating as we cannot have a company growing at 25% plus, with near zero debt levels, with RoE and RoCE levels above 30, increasing dividend, free cash flows at 24 PE. Retail foray success (IF) will provide even further PE expansion.
Request forum members to provide feedback on this post. Many thanks!!
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