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Tata Tea: India shine on numbers

Jan 25, 2005

Introduction to results
Tata Tea Limited's consolidated revenues were staid during the December quarter. However, improved operating margins propelled bottomline growth by 37%. The company's India operations continued to show a good turnaround reporting over 18% topline growth. Improved operating margins and lower effective tax outgo saw profits surge by 76% for the domestic business.

Consolidated numbers
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 8,073 8,061 -0.1% 21,877 22,681 3.7%
Expenditure 6,790 6,461 -4.9% 18,096 18,313 1.2%
Operating Profit (EBDITA) 1,282 1,601 24.8% 3,780 4,368 15.5%
EBDITA margin (%) 15.9% 19.9%   17.3% 19.3%  
Other income 143 10 -93.2% 287 142 -50.8%
Interest (net) 342 300 -12.4% 975 945 -3.0%
Depreciation 205 199 -3.2% 604 583 -3.4%
Profit before Tax 878 1,112 26.6% 2,489 2,981 19.8%
Extraordinary income / (expense) (3) 84 - (10) 88 -
Tax 252 303 20.2% 754 882 17.0%
Minority interest (27) (73) - (59) (100) -
Share of profit/(loss) from associated undertakings 4 4 -2.3% (58) 47 -
Profit after Tax/(Loss) 600 824 37.2% 1,608 2,134 32.7%
Net profit margin (%) 7.4% 10.2%   7.4% 9.4%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted Earnings per share (Rs) 42.7 58.6   38.1 50.6  
Price to earnings ratio (x)         9.4  

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 23% in India. It has a total acreage of 24,500 hectares located in Kerala, Assam, Tamil Nadu and West Bengal and owns a majority stake in Tata Coffee, the largest coffee company in Asia. Tata Tea's profile changed the day it acquired Tetley (FY01). From being a key player in a commodity industry (tea), it made an overnight transition to becoming the No. 2 globally in the branded tea market. Tetley has 29% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand to regions in Asia Pacific and the Middle East.

What has driven performance in 2QFY05?
Sales:  Globally, Tata Tea (including Tetley) has hardly grown during the quarter in terms of revenues. Of the total, non-India operations accounts for nearly 70% of consolidated revenues. Its Tetley subsidiary, which accounted for nearly 65% of consolidated operations, reported over 4% decline in 3QFY05 revenues (as compared to a 3% growth in 2QFY05). On the other hand, Indian operations were strong mainly owing to improved realisations on garden tea and strong performance of its branded tea operations. Infact, all of Tata Tea's brands (across all price points) reported strong growth during the December quarter. The branded folio was up 16% YoY in volume terms. Higher exports too added to this revenue momentum.

India operations
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 2,025 2,396 18.3% 5,854 6,803 16.2%
Expenditure 1,754 1,983 13.1% 4,888 5,428 11.0%
Operating Profit (EBDITA) 271 413 52.7% 966 1,375 42.4%
EBDITA margin (%) 13.4% 17.2%   16.5% 20.2%  
Other Income 29 24 -19.5% 233 215 -7.7%
Interest (net) 28 25 -10.4% 74 70 -5.3%
Depreciation 54 53 -3.1% 166 160 -3.9%
Profit before Tax 218 359 65.0% 958 1,360 42.0%
Tax 62 85 36.7% 230 329 43.4%
Profit after Tax 156 274 76.2% 729 1,031 41.5%
Net profit margin (%) 7.7% 11.5%   12.4% 15.2%  
Effective tax rate (%) 28.5% 23.6%   24.0% 24.2%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share* (x) 11.1 19.5   17.3 24.4  
Price to earnings ratio (x)         19.4  
(* annualised)            

Operating margins:  Both India as well as consolidated performance reflected strength in operating margins. Lower staff costs and other expenditure head was the key driver of operating margins of India centric operations. Consumption of raw material increased during the quarter due to increased utilisation of auction bought teas in brands pursuant to lower production in the company's own plantations (because of adverse weather conditions). In case of global operations, operational restructuring benefits seem the key operating margin drivers.

Cost break-up (India operations)
Cost as % of sales 3QFY04 3QFY05 9mFY04 9mFY05
Material cost 22.0% 23.3% 12.1% 17.6%
Staff cost 28.5% 25.8% 33.6% 28.9%
Other expenditure 36.1% 33.7% 37.8% 33.3%
Total expenditure 86.6% 82.8% 83.5% 79.8%

Net profit:  India contributed 33% to the consolidated profits in December quarter (up from 26% in 3QFY04). Tetley's contribution went down from 67% a year earlier to 60% in 3QFY05. What is clear from the Tata Tea performance is that while FY05 has proved to be a good year for the domestic operations both in terms of revenues and profits, revenue growth has been hard to come by for global operations. The profits of the global operations are improving largely owing to internal cost cutting (through restructuring).

Over the last five quarters (India operations)
  3QFY04 4QFY04 1QFY05 2QFY05 3QFY05
Sales growth (YoY) 6.6% 2.2% 12.5% 15.3% 18.3%
OPM (%) 13.3% 0.3% 17.2% 25.9% 17.2%
Net profit growth (YoY) -8.2% 433.4% 0.5% 52.2% 76.2%

What to expect?
At Rs 475, the Tata Tea stock trades at 9.4 times 9mFY05 annualised consolidated earnings and market cap. to sales ratio of 0.9x. We believe that Tata Tea has restructured itself well. The company's move towards hiving off some of its plantation businesses is also a positive move over the long term, as the potential to expand margins increases (plantation is a high fixed-cost business). India has clearly seen the benefits of marketing focus in the buoyant performance of the branded folio. However, the global business needs to find growth drivers to be able to sustain valuations.

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