15
Anand Rathi Research Time Horizon 12 Months June 8, 2016 Source: Company Reports, Anand Rathi Research, Ace Equity V A L U E P I C k Analyst: Ridhi Mehta [email protected] Relative stock performance (JUNE 2015=100) CMP: `240 Target: ` 340 Shareholding Pattern (as on Mar’16) CCL Products (India) Limited (CCL) RISK MEDIUM Bloomberg Code CCLP IN NSE Code CCL Sector AGRI Industry TEA/COFFEE Face Value (`) 2 BV per share (` ) 38.2 Dividend yield (%) 0.65% 52 Week H/L (`) 253.9/154 Market Cap (` mn. ) 30849.17 Key Data Mar-16 Dec-15 Sep-15 Jun-15 Promoters 45% 45% 45% 45% Non-Institutional 33% 32% 39% 39% Institutional 22% 24% 16% 17% Total 100% 100% 100% 100% 80 100 120 140 CCL NIFTY 50 (In ` mn) FY2015 FY2016 FY2017E FY2018E FY2019E Net Sales 8,806 9,321 10,719 12,542 14,423 EBITDA 1,712 2,047 2,508 3,060 3,663 EBITDA Margin (%) 19.4% 22.0% 23.4% 24.4% 25.4% EPS (`) 7.1 9.2 11.1 13.7 16.6 Ev/Sales (x) 3.7 3.5 2.9 2.4 2.1 Ev/EBITDA (x) 19.2 15.8 12.2 10.0 8.3 P/E (x) 34.0 26.1 21.7 17.6 14.4 Price Performance CY12 CY13 CY14 CY15 YTD Absolute 183% 28% 297% 31% 8% Relative 155% 21% 265% 36% 4% NIFTY 28% 7% 31% -4% 3%

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Anand Rathi Research

Time Horizon – 12 Months

June 8, 2016

Source: Company Reports, Anand Rathi Research, Ace Equity

V

A

L

U

E

P

I

C

k

Analyst: Ridhi Mehta [email protected]

Relative stock performance (JUNE 2015=100)

CMP: `240

Target: ` 340

Shareholding Pattern (as on Mar’16)

CCL Products (India) Limited (CCL)

RISK MEDIUM

Bloomberg Code CCLP IN

NSE Code CCL

Sector AGRI

Industry TEA/COFFEE

Face Value (`) 2

BV per share (` ) 38.2

Dividend yield (%) 0.65%

52 Week H/L (`) 253.9/154

Market Cap (` mn. ) 30849.17

Key Data

Mar-16 Dec-15 Sep-15 Jun-15

Promoters 45% 45% 45% 45%

Non-Institutional 33% 32% 39% 39%

Institutional 22% 24% 16% 17%

Total 100% 100% 100% 100%

80

100

120

140

CCL NIFTY 50

(In ` mn) FY2015 FY2016 FY2017E FY2018E FY2019E

Net Sales 8,806 9,321 10,719 12,542 14,423

EBITDA 1,712 2,047 2,508 3,060 3,663

EBITDA Margin (%) 19.4% 22.0% 23.4% 24.4% 25.4%

EPS (`) 7.1 9.2 11.1 13.7 16.6

Ev/Sales (x) 3.7 3.5 2.9 2.4 2.1

Ev/EBITDA (x) 19.2 15.8 12.2 10.0 8.3

P/E (x) 34.0 26.1 21.7 17.6 14.4

Price Performance CY12 CY13 CY14 CY15 YTD

Absolute 183% 28% 297% 31% 8%

Relative 155% 21% 265% 36% 4%

NIFTY 28% 7% 31% -4% 3%

2 Anand Rathi Research

CCL Products (India) Limited (CCL)

Producing instant coffee in India and Vietnam, CCL was established in the mid-nineties to manufacture world-class instant coffee. It is a profit making,

export oriented unit (EoU) with the ability to import green coffee into India from any part of the world and export the same to any part of the world,

free of all duties. The strong infrastructural backbone and a global client repertoire in over 90 countries have led them to evolve into largest instant

coffee exporter in private labeling in the world

CCL Products is engaged in the manufacture of Soluble Instant Spray Dried Coffee Powder, Spray Dried Agglomerated / Granulated Coffee, Freeze Dried

Coffee, Roasted Coffee, Roast & Ground Coffee, as well as Freeze Concentrated Liquid Coffee. The company is in a position to offer a range of in‐house

products to customers. Its state‐of-the‐art soluble instant coffee manufacturing plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh,

with current combined capacity of 15000MT/PA. The company has adapted Swiss and Brazilian technology, purchased from world renowned pioneers in

turnkey instant/soluble coffee technology at its plant. This adaptation of technology has enabled CCL to produce international quality soluble coffee.

To cater to specific markets, the company has expanded capacity in Switzerland and Vietnam during FY11 and FY14, respectively. The newly

commissioned green field Vietnam facility with proximity to raw material and customers as well as tax benefits is expected to propel growth and lead to

significant cost savings.

The company’s recent entry in the domestic branded coffee segment via Continental is bound to aid margin expansion. The management expects

Continental Coffee to become a Rs. 2bn brand in the next three to four years.

CCL Products has been successively awarded for its outstanding contribution to the global coffee market by the Ministry of Commerce, Government of

India & the Coffee Board of India, the Government of Andhra Pradesh and other organizations. CCL also holds Kosher and HALAL Certifications.

Coffee processing is a challenging business wherein getting the perfect blend is crucial, which the company has successfully mastered. The company’s

cost‐efficient business model, rich experience and long‐standing relationships with customers give it an edge over competitors. We initiate our coverage

on the stock with a BUY recommendation and a target price of Rs. 340 per share.

Source: Company Reports, Anand Rathi Research

Proven Business Model

3 Anand Rathi Research

Upholding the reputation for being one of the most trusted brands in the industry, CCL Products is committed to delivering its promise of

manufacturing unparalleled quality products. Roasted, blended and processed to the precise requirements of the clients, the Arabica and

Robusta green coffee is hand-picked from different parts of the world. CCL coffee is manufactured at -60 degree Celsius to retain the original

flavor and aroma. They are among the only companies in the world to produce all 4 types of pure soluble coffee from a single location.

CCL manufactures both types of instant coffees i.e. spray-dried and freeze dried instant coffees (SDIC and FDIC). SDIC is the most common

form and, in a sense, a commoditized product, hence, less expensive. On the other hand, FDIC is technically more challenging to produce,

with the output superior to that of SDIC due to flavor and aroma retention. Therefore, it is rightly considered a premium product.

Potent Combination of scale & depth

CCL has the ability to supply flavored coffee, decaffeinated

coffee, organic coffee, Rainforest coffee, Fair Trade coffee,

Dual and Triple certified coffee as well as Chicory-coffee mix

as per the required specifications of the customer, and can

also offer the customers the option of highest quality

customized products.

The company has combined capacity of 35000 tons per

annum (TPA) from its facilities across India, Vietnam and

Switzerland.It is currently the largest single-location instant

coffee manufacturer in India and one of the largest

independent white label coffee producers globally.

Of the total capacity, 40% is freeze - dried while 60% is

spray – dried. Source: Company Reports, Anand Rathi Research

CCL Products (India) Limited (CCL)

4 Anand Rathi Research

Newly commissioned plant in Vietnam drives the growth

Source: Company Reports, Anand Rathi Research

CCL Products (India) Limited (CCL)

CCL commissioned its green-field 10,000tn project in April 2013 for manufacturing instant coffee in Vietnam at a total investment of

US$40mn (including working capital). The company took a long time to commence commercial production because of technical glitches and

environmental problems. Commercial production from the plant started in 2HFY14.

With the Vietnam plant coming on stream, CCL is strategically located in terms of:

a) Logistical advantage: The plant is located in a coffee production zone in Vietnam, which provides logistics benefit to CCL.

b) Raw material availability: The plant is located in Dak Lak province, which is the highest green coffee bean-producing area in Vietnam

(Vietnam is the second-largest green coffee bean grower after Brazil, accounting for 18.3% of the world’s coffee production). As a result, the

plant will have easy access to raw materials, thereby reducing the lead time to a great extent.

c) Market proximity: Owing to the Vietnam plant, CCL can easily cater to the coffee requirements of ASEAN countries and those in close

proximity like Japan, Korea, China, etc. In addition, Vietnam enjoys the ’most favored nation’ status with many countries, thereby enjoying

reduced or nil duty structure. The Vietnam plant will cater to domestic as well as overseas markets.

d) Tax benefit: Being an agri-producer in an under-developed part of the country, the Vietnamese government has granted it 100% tax

exemption on profits till CY20, and 50% exemption after that for nine years.

On the back of capacity utilization level from Vietnam facility crossing 70% in FY16, Vietnam and other subsidiary revenue increased by 22%

to Rs. 2549 mn. CCL expects to reach maximum capacity utilization level (~10000 tons) in Vietnam in the medium term owing to its

favorable location advantage and relaxed duty & tax structure. Company will be setting up a 10,000tn brown field plant in Vietnam once the

current capacity utilization of its plant touches the peak level. Therefore, the benefits of both expansions will be visible from FY19-FY20.

5 Anand Rathi Research

CCL Products (India) Limited (CCL)

With announcement of capex, growth prospect to continue…

CCL Products has announced the setting up of a green field plant with capacity of 5000 tn in Chittur, Andhra Pradesh at an estimated cost of

~$40 million for manufacturing of freeze-dried instant coffee. The time frame for setting up the unit will be 24 to 36 months. This new

planned capacity validates strong demand visibility even beyond FY18 for freeze dried coffee variant.

CCL has already bought land in Chittur district of Andhra Pradesh, which is economically a highly backward area, for ~Rs. 230mn. The area

has proximity to ports and airports, making it a viable location. Out of the total investment of ~$40 million, ~$15 million would be funded

from internal accruals with remaining ~$25 million in the form of debt.

Advantages of setting up of freeze dried coffee facility in India versus Vietnam

• Skill-sets and expertise of employees in India and Vietnam operations are not the same. Therefore, it has to send at least 30-40

people from India to Vietnam if it prefers Vietnam over India for expansion. The management cites lack of availability of equally

competent workforce and language problem as the reason why it is more inclined towards expansion in India rather than in Vietnam.

• It will be greenfield expansion whether in India or Vietnam in case CCL opts to set up a freeze dried coffee plant. The newly formed

state of Andhra Pradesh (after carving out Telangana state) is providing better benefits compared to Vietnam, as the new unit will be

in a SEZ zone.

Source: Company Reports, Anand Rathi Research, NASSCOM

6 Anand Rathi Research

The company’s recent entry in the domestic branded coffee segment via Continental is bound to aid margin expansion. Under continental company has

three categories namely;

Continental Speciale: Continental Spéciale is 100% pure, granulated soluble instant coffee processed from carefully selected plantation Arabica and

washed Robusta beans blended to perfection for complete satisfaction instantly.

Continental Premium: Continental Premium is a distinctive blend of carefully selected plantation Arabica coffee beans, processed to perfection to give

an aroma and taste for real satisfaction, instantly. The flavor of this unique blend will linger long after the coffee is consumed.

Continental Supreme: Continental Supreme is made from carefully chosen coffee beans blended with roasted chicory to provide a strong cup of rich

tasting coffee.

Sales in domestic retail segment were Rs350mn-Rs400mn in 9MFY16, of which Rs150mn- Rs180mn comprised Continental Coffee sales. Currently,

coffee market size in India is ~Rs30bn and the management expects Continental Coffee to become a Rs. 2bn brand in the next three to four years.

Margins for its own brand are very high (more than 30%).

CCL is witnessing very good off-take of its brand and is penetrating new states. It is currently present in seven states and plans to expand to three new

states every year. CCL is increasing the headcount in its team as well as at distributor end.

Source: Company Reports, Anand Rathi Research

CCL Products (India) Limited (CCL)

Foray into branded operations provides interesting option value….

7 Anand Rathi Research

CCL Products (India) Limited (CCL)

Financials Statistics

Source: Company Reports, Anand Rathi Research

CCL witnessed robust growth of ~30% y-o-y in earnings to

Rs.1221mn despite ~5% y-o-y growth in net sales to Rs.9321mn.

For Q4 FY16 revenues improved 22% mainly because of 4% and

93% increase in revenues of India unit and subsidiary operations

respectively. Also the key reason being order slippage of previous

two quarters being booked in 4QFY16. The management stated

that CCL achieved 15% volume growth in FY16 and it gave

guidance of ~12% growth for FY17. The management believes

that CCL can achieve 20% growth in bottom line in FY17 mainly

because of product improvement.

5,000.00

7,000.00

9,000.00

11,000.00

13,000.00

15,000.00

FY14 FY15 FY16 FY17E FY18E FY19E

Revenue Stream

14311712

2047

2508 3060

3663

10.0%

15.0%

20.0%

25.0%

30.0%

500

1500

2500

3500

FY14 FY15 FY16 FY17E FY18E FY19E

Operational Efficiency

EBITDA EBITDAM

100

120

140

160

180

200

500

1000

1500

2000

2500

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Trend of Coffee Prices

ARABICA ROBUSTA

8 Anand Rathi Research

Inventory days declined from 115 in FY15 to 98 mainly

because of improvement in inventory days at Indian

operations from 113 to 85 in FY16. This was mainly because

of large volume orders; uniformity in production, better

product management. Also, the management believes that

inventory days are sustainable at current levels.

18.3%

22.3%

24.0%24.7%

25.7% 26.1%

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

29.0%

FY14 FY15 FY16 FY17E FY18E FY19E

ROE Trend

4.8

7.1

9.2

11.1

13.7

16.6

0.0

5.0

10.0

15.0

20.0

FY14 FY15 FY16 FY17E FY18E FY19E

Earnings Per Share

9.0

7.6

6.3

5.4

4.53.8

0.0

2.0

4.0

6.0

8.0

10.0

FY14 FY15 FY16 FY17E FY18E FY19E

Price/Book Value

CCL Products (India) Limited (CCL)

Source: Company Reports, Anand Rathi Research

Financials Statistics

9 Anand Rathi Research

CCL Products (CCL) is India’s largest manufacturer and exporter of instant

coffee. Coffee processing is a challenging business wherein getting the perfect

blend is crucial, which the company has successfully mastered.

The newly commissioned green field Vietnam facility with proximity to raw

material and customers as well as tax benefits is expected to propel growth

and lead to significant cost savings. Moreover, the company’s recent entry in

the domestic branded coffee segment via Continental is bound to aid margin

expansion. Resilient business model, capacity augmentation in Vietnam and

sharpening brand focus in India place CCL in a sweet spot to post sales and PAT

CAGR of 16% and 22% over FY16‐19E, respectively. We estimate ROE to

improve from 24% in FY15 to 26% in FY19E. We initiate our coverage on the

stock with a BUY recommendation and a target price of Rs.340per share.

Relative stock performance (JUNE 15=100)

Valuation and Recommendation:

Source: Anand Rathi Research, Ace Equity

CCL Products (India) Limited (CCL)

Source: Company Reports, Anand Rathi Research, Ace Equity

80

100

120

140

CCL NIFTY 50

(In ` mn) FY2015 FY2016 FY2017E FY2018E FY2019E

EPS (`) 7.1 9.2 11.1 13.7 16.6

P/E (x) 34.0 26.1 21.7 17.6 14.4

P/B (x) 7.6 6.3 5.4 4.5 3.8

ROE 22% 24% 25% 26% 26%

ROCE 27% 32% 44% 46% 46%

Ev/EBITDA (x) 19.2 15.8 12.2 10.0 8.3

10 Anand Rathi Research

Consolidated Financials:

CCL Products (India) Limited (CCL)

Source: Company Reports, Anand Rathi Research, Ace Equity

(In ` mn) FY2015 FY2016 FY2017E FY2018E FY2019E

LIABILITIES

Shareholders’ Funds 4,216 5,098 5,960 7,067 8,479

Equity Share Capital 266 266 266 266 266

Reserves and Surplus 3,950 4,832 5,694 6,801 8,213

Non Current Liabilities 1,158 734 777 817 951

Long-term borrowings 904 443 486 527 661

Deferred Tax Liabilities 243 285 285 285 285

Other Long Term Liabilities 11 6 6 6 6

Current Liabilities 2,244 2,181 2,368 2,232 2,003

Total Liabilities 7,617 8,013 9,105 10,116 11,433

ASSETS

Non Current Assets 4,017 4,589 5,279 6,296 7,183

Fixed Assets 3,400 4,172 4,836 5,779 6,592

Long Term Loans and Advances 68 401 429 502 577

Other Non-Current Assets 549 16 15 15 15

Current Assets 3,600 3,423 3,826 3,820 4,250

TOTAL-ASSETS 7,617 8,013 9,105 10,116 11,433

Margins FY2015 FY2016 FY2017E FY2018E FY2019E

Sales Growth % 22.8% 5.9% 15.0% 17.0% 15.0%

Operating Margin % 19.4% 22.0% 23.4% 24.4% 25.4%

Net Margin % 10.7% 13.1% 13.7% 14.5% 15.3%

(In ` mn) FY2015 FY2016 FY2017E FY2018E FY2019E

Net Sales 8,806 9,321 10,719 12,542 14,423

Total Expenditure 7,093 7,274 8,211 9,482 10,760

EBITDA (Excl OI) 1,712 2,047 2,508 3,060 3,663

Other Income 12 15 18 21 25

EBITDA 1,725 2,062 2,526 3,081 3,689

Depreciation 268 284 370 439 505

EBIT 1,456 1,778 2,156 2,642 3,184

Interest 136 108 108 114 105

PBT 1,320 1,670 2,048 2,529 3,079

Tax 398 446 573 707 861

PAT 922 1,224 1,475 1,822 2,218

11 Anand Rathi Research

Volatility in green coffee prices will impact realization.

Slowdown in demand for instant coffee from Europe and other countries.

Retraction of order from clients.

Delay in planned expansion

Key Risks:

CCL Products (India) Limited (CCL)

Source: Company Reports, Anand Rathi Research

12 Anand Rathi Research

Rating and Target Price history:

CCL PRODUCTS rating details CCL PRODUCTS rating history & price chart

Source: Ace Equity, Anand Rathi Research Source: Ace Equity, Anand Rathi Research

CCL Products (India) Limited (CCL)

NOTE: Prices are as on 08th June, 2016 close.

Date Rating Target Price Share Price

08-June-2016 BUY 340 240

80

100

120

140

CCL NIFTY 50

13 Anand Rathi Research

CCL Products (India) Limited (CCL)

Disclaimer:

Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of the Anand Rathi Financial Services Ltd. ARSSBL is a corporate

trading and clearing member of Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd. (NSEIL), Multi Stock Exchange of India Ltd (MCX-SX), United stock

exchange and also depository participant with National Securities Depository Ltd (NSDL) and Central Depository Services Ltd. ARSSBL is engaged into the business of

Stock Broking, Depository Participant, Mutual Fund distributor.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon

various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues.

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recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of

purchase or sale of any security, derivatives or any other security through ARSSBL nor any solicitation or offering of any investment /trading opportunity on behalf of

the issuer(s) of the respective security (ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the

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aspects of any potential investment.

Continued…

14 Anand Rathi Research

CCL Products (India) Limited (CCL)

Disclaimer:

Contd. Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views expressed in this Report. Research Report may differ between ARSSBL’s RAs and/ or ARSSBL’s associate companies on account of differences in research methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold ARSSBL, its employees and associates responsible for any losses, damages of any type whatsoever. ARSSBL and its associates or employees may; (a) from time to time, have long or short positions in, and buy or sell the investments in/ security of company (ies) mentioned herein or (b) be engaged in any other transaction involving such investments/ securities of company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) these and other activities of ARSSBL and its associates or employees may not be construed as potential conflict of interest with respect to any recommendation and related information and opinions. Without limiting any of the foregoing, in no event shall ARSSBL and its associates or employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind. Details of Associates of ARSSBL and Brief History of Disciplinary action by regulatory authorities & its associates are available on our website i. e. www.rathionline.com Disclaimers in respect of jurisdiction: This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject ARSSBL to any registration or licensing requirement within such jurisdiction(s). No action has been or will be taken by ARSSBL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. ARSSBL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to ARSSBL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India.

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Contd.

15 Anand Rathi Research

Disclaimer:

Contd. Statements on ownership and material conflicts of interest, compensation - ARSSBL and Associates

Sr. No.

Statement

Answers to the Best of the knowledge and belief of the ARSSBL/ its Associates/ Research Analyst who is preparing this report

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2

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance?. NO

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NO

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7

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months. NO

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CCL Products (India) Limited (CCL)