Q1FY24 Review: CCL Products: Growth momentum continues; valuations rich

18 Jul 2023 , 11:18 AM

CCL delivered a robust quarter of growth as Ebitda/PAT grew 20%/15% YoY respectively (driven by a ~18-20% volume growth). Management guided to a similar volume growth over the next 2-3 years on the back of upcoming capacities in India and Vietnam (both projects on schedule). Order book and revenue visibility are healthy. Analysts of IIFL Capital Services cut their FY24-26 EPS estimates by 3-10% on the back of higher depreciation and interest costs. Their TP, rolled forward to Sep’24, comes down to ~Rs630. Analysts of IIFL Capital Services downgrade their recommendation to REDUCE.

UK acquisitions demonstrate focus on B2C verticals: 

The recent brand acquisitions in the UK indicate that management’s focus has shifted towards the B2C business for driving long term growth. Management guided towards increasing revenue of UK brands from ~Rs180-200mn currently, to ~Rs1bn over the next few years. It stated that the company will ensure that it does not compete with existing customers across international geographies. 

Debt levels expected to increase: 

Management increased its Mar’24 gross debt guidance from ~Rs12bn to ~17-18bn and believes that debt will peak in Mar’25 at ~Rs20bn (equally split between working capital and long term debt). The increase in debt guidance is largely driven by higher working capital requirements. Thus analysts of IIFL Capital Services increase their FY25-26 finance cost estimates by ~8-9%.

Valuations price in stellar growth: 

Analysts of IIFL Capital Services continue to believe that CCL is on track to register healthy Ebitda growth in FY24 but PAT growth will likely be subdued on account of the rise in depreciation and finance costs. Analysts of IIFL Capital Services expect PAT growth to pick up only in FY25 as capacity utilization of the recently commissioned plant at Vietnam improves. Growth visibility post FY26 remains low and is dependent on the success of the B2C business outside of South India. Key risks include – loss of customer, delay in commissioning of ongoing capex projects and inability to ramp-up volumes at new plants. Analysts of IIFL Capital Services believe current valuations to be rich given the lack of long term growth visibility.