CCL Products (India) Ltd Management Discussions.

Soluble Instant coffee, more commonly referred to as instant coffee is commercially prepared from carefully selected green coffee, which is roasted, extracted, evaporated and converted into solid form by either freeze-drying or spray- drying, after which it can be rehydrated to make a good cup of coffee.

Instant coffees have now been in the market for many decades because of its convenience, economy and homogeneity. Soluble coffee consumption has been increasing, owing to changing life styles and convenience. With the invention of new technologies, the quality of instant coffee has significantly improved, thereby attracting even traditional roast and ground coffee customers. The instant coffee industry moved from cheap alternative instant beverage to new trend speciality, single origin, high quality niche coffees.

Business Review

Your Company has the distinction of being one of the elite manufacturers, that can provide all types and forms of coffee from one single location. With our constant dedication towards research and development, we have created & commercialised unique products in the market. After wide spread presence in international markets, and with vast experience on the variety of coffee products, CCL had ventured into domestic market in India and created a dedicated team exclusively for domestic market, drawing professionals from FMCG companies for brand creation.

CCL has spread its client profile directly to 90 countries inspite of global pandemic situation and staggered lock downs in most of the countries, restricting movement of both individuals and goods.

CCL domestic team has been consistently working hard and are able to garner a good awareness level for the brand "Continental". Continental brand is able to hold the fort of being the third largest domestic brand player for the year 2020-21.

Continental Brand THIS premixes coffee has now some loyal takers in the market with flavours like Cappuccino, Mocha, Caramel catching the fancy of consumers. Due to covid-19 pandemic, consumers purchase pattern changed and there is an increase of in-home coffee consumption. Consumers have switched gears and have started ordering grocery from Ecommerce portal. Driven by the trend, we observed a surge in online orders which has helped the brand to grow 2x times through various ecommerce portals where we sell.

Our filter coffee Continental Malgudi has seen fast acceptance by consumers. Traditional filtercoffee drinkers have liked both our blends which is evident by the sales growth the brand has witnessed.

Campaigns with reknowned celebrities like actress Nitya Menon and legendary singer Smt. P Suseela has helped the brand awareness and created a trust with consumers.

Young population is the driving force for experimenting with speciality coffees, which opened up new in-house consumption segment, where growth is anticipated. Thanks to the technology improvements in production that is making instant coffee tastes as good as roast and ground coffee. Image of coffee drinking as modern life style, which is trending in the social media is very much encouraging us to step into various coffee segment. During the year under review, your Company had launched 2-in-1 premixes in addition to already existing flavours like Hazelnut, Cappuccino, Mocha, Caramel etc., under the brand name THIS. Also, your Company launched premium Freeze-Dried coffee in different flavours like Coconut, Spice, Lemon and Hazelnut etc., to give a varied option for the customers in the premium segment. Continental Decaf was also launched under speciality coffees to cater to the niche market segment that prefers decaffeinated coffee.

In light of the current pandemic situation, people have become more health conscious and tending towards value added products in health segment. Your Companys R&D team is working on developing new products, focussing on the wellness category to catch up the upcoming trend.

The turnover of the Company on standalone basis is Rs 79,507 Lakhs and the net profit of the Company is 15,869 Lakhs (including 6217.95 Lakhs dividend received from Ngon Coffee Company Limited, wholly owned subsidiary of the Comoany. Earnings per share (EPS) (Face value of Rs 2/- per share) for the current year is Rs 11.93 for the year 2020-21.

The turnover of the Company on consolidated basis is Rs 124,248.04 Lakhs and net profit of the Company is Rs 18,226.16 Lakhs. Earnings per share (EPS) (Face value of Rs 2/- per share) for the current year is 13.70 for the year 2020-21.

Industry Structure and Developments

The current instant coffee market in India is growing at guestimate rate of 9% year on year. In-home coffee consumption has been catapulted due to COVID-19 pandemic. Consumer behavior changed towards coffee consumption at home due to trends like ‘Dalgona coffee across the globe. Coffee category has seen entry of players offering coffee in varied formats for consumers to try different kinds of coffee.

Your Company is able to enhance its presence in the in-house brands of supermarkets in Europe and impressed by the quality of products, greater levels of service etc., these supermarkets have been consistently increasing our share of volumes. Your company is also confident that it will achieve the orders of various other supermarkets as well in this year. Necessary capacity augmentation is being done during this year to meet this additional demand.

Outlook

The modern times have witnessed evolution of coffee drinking from an everyday habit to a healthy lifestyle choice. Coffee has gained the status of being the most preferred beverage worldwide.

The covid-19 pandemic is likely to have a profound impact on the global coffee sector, including production, consumption and international trade. International Coffee Organisation (ICO) has conducted an analysis based on a sample of the top 20 coffee consuming countries, which represents 71% of global demand, covering the period 1990-2018. The results show that a one percentage point drop in GDP growth is associated with a reduction in the growth of global demand for coffee of 0.95 percentage points or 1.6 million 60-kg bags. Coffee consumption at Coffee Shops (out of the home) consumption will drastically come down because of covid-19 but at home consumption will increase and this will have a positive impact on the consumption of instant coffee. The shift towards more upmarket coffee products seen in 2020 as a result of covid-19 continued the trend seen in previous years. Premiumization towards the end of the review period was driven by increased consumer interest in artisanal and gourmet coffees.

Revenue in the Instant Coffee segment amounts to US$116,761.7m in 2021. The market is expected to grow annually by 9.13% (CAGR 2021-2025). In relation to total population figures,per person revenues of US$15.54 are generated in 2021. In the Instant Coffee segment, volume is expected to amount to 1,719.5 mkg by 2025. The market for Instant Coffee segment is expected to show a volume growth of 3.7% in 2022. The average volume per person in the Instant Coffee segment is expected to amount to 0.2kg in 2021.

Consumers in India have started exploring different coffee taste, thanks to various flavour, formats which are offered nowadays across different channels. 21% of Indian coffee drinkers perceive gourmet coffee to taste more superior than regular coffee reflects the growing demand for fresher coffee formats and premium offerings. As consumers demand information about the food they consume, it will be key to be more transparent about coffees origin and processing method. Such details can serve as proxies to enhance the quality image of the product.

Asia Pacific leading the market share and is expected to remain on top over the next few years. The easy preparation of instant coffee, as well as its ability to be tailored to local taste preferences, has made it the coffee of choice in most markets in Asia Pacific, where coffee consumption is still low. The expanded spotlight on interesting, valid flavours and different useful properties of coffee has supported the premium version launches of the global instant coffee market.

The instant coffee segments outlook is bright as consumers increasingly value instant coffees simplicity of preparation.

Opportunities

The covid-19 pandemic unveiled the opportunity in premix and functional coffee segments due to increase in in-house consumption of speciality coffees. Diversification into value added finished products with premium quality is more in demand as focus is shifting to consumption of high quality coffee manufactured under hygienic conditions.

As the consumer has been evaluating a lot of coffee options, providing an opportunity to launch different format and higher order coffee for not only affluent class of people but consumers who are open to trying such coffee products like Premixes and cold brew. Growing demand for the "coffee shop experience" at home is fuelling the rise of instant coffees with more unique flavours. 41% of urban Indian consumers agree that coffee is energising. This suggests that there is scope to expand on the natural energy credentials of instant coffee by making the link more obvious on pack. Premiumisation trend results in growth of artisanal products and flavoured coffee launches. Continued working from home to underpin growth of fresh and flavoured coffees. Demand for convenience and quality to influence coffee performance in post-India. E-commerce and subscription services set to grow in line with convenience and premiumisation trends.

Rising employment levels have driven up caffeination demand across the board. At the same time, increasing discretionary spending power has fuelled the appetite for indulgence among consumers as well as a desire for novel experiences, which in turn has driven premiumization and sophistication. The out-of-home market has especially benefitted from this trend as increasingly time-strapped consumers opt for the convenience of a quick boost on the go. Among younger demographics still living in shared or temporary accommodations, coffee shops have become something of a living room and officespace away from home, the rent for which is paid one Americano at a time.

There are several countries in which operations are hindered due to covid-19. Your Company is identifying these opportunities in the international markets and attempting to provide continuous supplies there, which can add few more customers into its portfolio. Desire for comfort and indulgence during covid-19 lockdown is increasing the upmarket trend.

Risks, concerns and threats

Owing to intermittent lockdowns in various countries, stoppage of international and local movements etc., had a severe impact on the logistics and thereby your Company has experienced occasional delays in both inbound and outbound shipments. These are likely to be continuing since the pandemic is still continuing – with more vigour and experiencing second and third waves globally. Company is taking effective steps to have enough stocks for enabling unhindered production activity. Any war between countries, Government / regulatory decisions effecting the change of the duty structure on green coffee/instant coffee shall have an impact on the prices of our imports/exports. Also high input costs and increasing logistics cost due to inflation poise risk for our operations at India as well as Vietnam, thereby affecting the working capital levels of the Company.

The major threat being faced by the instant coffee industry is the creation of huge additional capacities in several countries which is resulting in unhealthy competition and stress on prices. Your Company is making efforts to mitigate these threats by increased volumes of high quality niche and new products.

Reduced rainfall in some areas is dramatically changing the ecosystem and growing conditions which result the quality of the beans used as raw material to produce the instant Coffee. It is noticed that changes in weather patterns (drought, unpredictable and varied rains, temperature changes) are causing alterations in the appearance and severity of newer pests while existing diseases are migrating to ecological zones where they previously did not exist. This may affect the quality of the beans grown in the traditional regions from where the Company is procuring. Although credible data on the levels and spread of these diseases and pests is not available, the potential risk should be noted. Changes in climate and a shortage of labourers due to lockdown resulted in increased coffee prices. Furthermore, foodservice outlets were reeling under the pressure of lockdown restrictions and consumers reluctance to venture out.

Your Company has already established its longstanding presence in the international markets in the instant coffee, however, the sales of the products may fluctuate depending on economic and political conditions, including acts of terrorism in the producing and consuming countries. Decline in population can lead to decrease in sales in that particular territory.

Further, the Company has gained rich experience with the presence of marketing consultants and in-house experienced marketing personnel to face any kind of competition and market related risks.

With intermittent lockdown across various states in India along with many team members contacted covid 19 created a disruption in the system. Considering this is going to be the next normal, treading the path of forecast would be challenging. On the demand side, we are visualizing a reduction in institutional requirements (particularly from HORECA) in view of the lockdown. With the two biggies in coffee category, there is always a constant threat, which can be in shape of disrupting schemes, consumer driven offers etc.

Source: Mintel & Statista

Internal Control Systems and their Adequacy

Your Company has appropriate internal control systems for business processes, efficiencyin its operations, and compliance with all the applicable laws and regulations. Regular internal checks and audits ensure that the responsibilities are being effectively executed. In-depth review of internal controls, accounting procedures and policies of Company is conducted. Your Company has adopted adequate internal control and audit system commensurate with its size and nature of business.

Internal audit is carried on a quarterly basis. Internal auditors work with all levels of management and the report is placed before the audit committee. The audit committee after reviewing the findings and suggestions directs the respective departments to implement the same.

Industrial Relations and Human Resources Management

Employees are the valuable assets and the strength of an organisation in its growth, prosperity and development. Your Company has a team of qualified and dedicated personnel who have contributed to the growth and progress of the Company. Necessary training is being imparted to the employees and various seminars and workshops are being conducted to continuously hone their skills.

Your Company is continuously striving to create appropriate environment, opportunities and systems to facilitate identification, development, and utilization of their full potential and inculcating a sense of belongingness. There are 613 employees in the Company as on 31st March, 2021.

Your Companys industrial relations continued to be harmonious during the year under review.

Financial performance with respect to operational performance

During the year, the Company has achieved a turnover of Rs 79,507 Lakhs recording a net profit of Rs 15,869 Lakhs. Profit includes 6217.95 Lakhs dividend received from Ngon Coffee Company Limited, wholly owned subsidiary of the Company.

Details of significant changes (i.e. change of 25% or more as year) in key financial ratios, along with detailed explanation

During the year on a consolidated basis the significant change in the financial ratios of the Company, which is more than 25% as compared to the previous year is summarised below:

Financial Ratios Consolidated Change(%) Reason for change
2020-21 2019-20
Current Ratio 1.78 2.46 (27.64) Decreased due to scheduled term loan repayments
Debt Service Coverage Ratio 3.11 4.99 (37.68) Decreased due to scheduled term loan repayments

During the year on a standalone basis, the significant changes in are more than 25% as compared to the previous year are summarised below:

Financial Ratios Standalone Change(%) Reason for change
2020-21 2019-20
Current Ratio 2.65 5.63 (52.93) Decreased due to scheduled term loan repayments

Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation there of: There is no significant change during the current financial year 2020-21, compared to previous financial year 2019-20.

Certifications

Your Company has the following certifications:

1. BRC- Version 8 with A Grade (British Retail Consortium) - Global Standard for Food

2. IFS - Food Version 6.1 with Higher Level (International Featured Standards) - International Food Standard.

3. Organic Coffee Certificate (Processing & Trading)

4. Fair Trade Certificate

5. Halal Certificate

6. Kosher Certificate

7. FSSAI License - Food Safety Standards Authority of India

8. BIS License - Bureau of Indian Standards (ISI) License

9. UTZ Certificate ( Chain Of Custody Standard - Coffee)

10. US.FDA Certificate of Registration

11. RFA Endorsement certificate

Social Accountability compliance

1. SGP (Supplier Guiding Principles and Human Rights Policy Assessment)

2. ICS (Initiative for Compliance and Sustainability)

3. SA 8000 (Social Accountability audit)

Cautionary Statement

Statements in this management discussion analysis describing the Companys objectives, projections, estimates, expectations may be forward looking within the meaning of applicable securities-laws and regulations. Actual results may differ materially from those expressed in the statement. Important factors that could make difference to Companys operations include economic conditions affecting the domestic market and the overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and other incidental factors.

For and on behalf of the Board
CCL Products (India) Limited
Sd/-
Place: Hyderabad Challa Rajendra Prasad
Date: 29th July, 2021 Executive Chairman
DIN : 00702292