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Tata Tea: Ad budget upsets applecart

Jan 21, 2002

Tata Tea's hiccups with restructuring continues. The company has declared a 2% drop in topline and a 17% drop in bottomline during the December quarter. The company's topline performance is however better than the 16% drop it witnessed during the preceding quarter (2QFY02).

(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Net Sales 2,016 1,975 -2.0% 6,216 5,759 -7.4%
Other Income 5 14 211.1% 52 44 -15.3%
Expenditure 1,653 1,685 1.9% 5,019 4,643 -7.5%
Operating Profit (EBDIT) 364 290 -20.2% 1,198 1,116 -6.9%
Operating Profit Margin (%) 18.0% 14.7%   19.3% 19.4%  
Interest (net) 75 66 -11.3% 183 168 -8.4%
Depreciation 51 54 4.3% 151 159 5.4%
Profit before Tax 242 184 -23.8% 916 833 -9.1%
Extraordinary items 0 70 - 320 250 -21.7%
Tax 78 48 -38.3% 324 200 -38.2%
Profit after Tax 165 207 25.7% 911 883 -3.1%
Net profit margin (%) 8.2% 10.5%   14.7% 15.3%  
Effective tax rate (%) 32.0% 25.9%   35.4% 24.0%  
No. of Shares (eoy) (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share* 11.7 14.7   21.6 20.9  
P/E ratio   12.0     8.4  
(* annualised)            

Tata Tea has voluntarily cut production of low margin teas in a bid to improve the quality of earnings. It has also exited from Tata NYK (a joint venture with NYK of Japan). Of the 50% equity held, Tata Tea divested 40% in favour of NYK, Japan. The resultant capital gains of Rs 70 m from this divestment are part of the extraordinary items. If we include the extraordinary gains then profits are up 26% actually. The company has also decided to wind up Tat-Hitachi Sales (Japan) Ltd., a join venture company with Hitachi. However, the management expects negligible gain from this divesture.

On a nine month consolidated basis, the company's operating margins have improved a shade to 19.4%. However, in 3QFY02 the company has actually seen a significant drop of 330 basis points to 14.7%. The company's inability to continuously keep a control on expenses in 3QFY02 took the edge away from its restructuring efforts. The company's operating expenses shot up during the December quarter, as advertising and promotion expenses were up owing to launch of 3 new brands in December 2001. The company has indicated that higher marketing expenses will continue into the next quarter.

The company's restructuring of debt has led to lower interest outgo. Also, its tax outgo has been on a decline. All this helped the company in curbing its profit slide. On a nine month basis, Tata Tea finished with a 7% decline in sales but a marginal 3% drop in profits. However, if we exclude extraordinary items in both years, the company's profits actually went up by 7%.

Though the company's sales volumes are under pressure, its increasing grip on operating expenditure is a positive. Tata Tea's control on its raw material costs and other expenses had eased the pressure on the company's margins during the first half of FY02. However, with the company increasing its ad budgets in a bid to perk its topline, its margins may again be in a disarray going forward.

Tata Tea's lacklustre performance is likely to pressure the stock price in the near term. The stock had climbed from Rs 140 levels in October 2001 to Rs 170 levels currently. At the current price of Rs 170 the stock trades at 8.4 x annualised 9m FY02 earnings. Though Tata Tea's topline is under pressure, the company's improving operating efficiencies and its 'Tetley' and 'Barista' acquisitions make it the company to watch out for in future.

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