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Brokerage recommendations

Monday, January 08, 2018

Angel Broking call a 'Buy' on CCL Products
CMP: 302        Target: 360

CCL Products Limited (CCL) is the largest Indian manufacturer and exporter of instant coffee. With a total capacity of 35,000 TPA (tonne per annum), the company has a global market share of ~6.5%. It also has a leading market share of 24% in Indian instant coffee exports CCL exports (contributing over 90% to revenue) to over 90 countries, which have helped in registering 14% CAGR in revenue and 30% CAGR in PAT over FY2012-17.

Hedged business model has created healthy moat: CCL works on cost plus margin method and places orders for green coffee only after receiving orders for instant coffee. This saves company from adverse volatility in coffee prices and has helped in maintaining operating margins at 20%+ level. Further, CCL’s Vietnam expansion is an excellent strategic move, as it is preferred by importing countries due to proximity to raw material and a favorable duty structure.

Strong balance sheet and healthy return ratios: Its robust business model keeps on generating free cash flow in excess of Rs. 80cr every year, which would largely fund its capex requirements. Despite its intensive capex ramp up, DE ratio has come down to 0.2x in FY2017 and return ratios have been at 20%+ level.

Outlook & Valuation: CCL is likely to maintain the 17%+ growth trajectory over FY18-20 backed by capacity expansion and new geographical foray. In H1FY18, the company faced some margin pressure while acquiring new clients, which we have factored in our model. However, according to us, the margin pressures would ease from FY19 onwards, once the relationship is established. The stock is currently trading at 21x FY19 EPS, which offers good opportunity to enter the stock. We initiate coverage on CCL with a Buy recommendation and Target Price of Rs. 360 (25x FY19E EPS), indicating an upside of ~20% from the current levels.

Angel Broking call a 'Buy' on Nilkamal
CMP: 2033        Target: 2178

Nilkamal Ltd is engaged in the manufacturing and retail sales of moulded plastic furniture and material handling products. The company has three divisions viz. Plastics, lifestyle furniture and furnishings & accessories. Nilkamal’s manufacturing plants are located at Barjora (West Bengal), Hosur (Tamil Nadu), Jammu, Dadra & Nagar Haveli, Noida (UP), Sinnor and Nashik (Maharashtra) and in Pudducherry.

Market leader in plastic furniture with strong brand name: Nilkamal has strong brand recall and is a market leader with ~39% market share in the plastic furniture segment (double of its closest peer). Nilkamal has planned an additional investment for 10 new products in the monoblock and value added segments like plastic storage. The market share of non-monoblock category in the current year would continue to witness an improvement. Further, Nilkamal is a market leader in material handling segment too.

The company is optimistic regarding the revival in demand for material handling products, supported by various initiatives like Swachh Bharat Abhiyan, etc. Mattress segment geared up for the big organised opportunity: Currently, mattress segment contributes Rs. 48cr to the company’s total revenue (up ~44% yoy in FY17). Nilkamal is targeting revenues up to Rs. 200cr over the next 2-3 years on the back of strong brand, wide distribution network and shift of consumer sentiment towards branded products.

Retail division expected to perform better: Nilkamal continues to remain a trusted brand among consumers with its 17 large format stores, one Go-to-Market (GTM) store and 8 shop-in-shop stores (Shoppers Stop), spread across 14 cities, covering a retail space of over 2.87 lakh sq. ft. Nilkamal registered flattish top-line growth last year due to trimming down of non-profitable stores. Going forward, we expect improvement in retail space on revenue and profitability fronts backed by foray into customized kitchens, wall units and wardrobes.

Outlook and Valuation: We forecast Nilkamal to report top-line CAGR of ~9% to Rs. 2,635cr over FY17-20E on the back of healthy demand growth in plastic division. On the bottom-line front, we estimate ~10% CAGR to Rs. 162cr owing to improvement in volumes. Further, better margins and lower interest cost would aid profitability. We initiate coverage on Nilkamal with a Buy recommendation and target price of Rs. 2,178 (20x FY2020E EPS), indicating an upside of ~16% from the current levels.

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