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Tata Tea: Extraordinary effect! - Views on News from Equitymaster
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Tata Tea: Extraordinary effect!
Jan 30, 2008

Performance summary
  • The consolidated income from operations for the quarter increased by 7% YoY. Domestic business grew by 22% YoY contributing 30% to the total topline.

  • The margins on the consolidated basis, improved by a small 60 basis points.

  • The net profits on a consolidated basis have jumped nearly 9 fold, due mainly to gains from stake sale in Glaceau. The Glaceau stake was sold for US$ 1.02 bn with profits of US$ 421.5 m (The company has been advised that no tax is payable on the profit on sale of Energy Brands to Coca Cola Company).

Consolidated Financial Performance
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Income from Operations 11,126 11,849 6.5% 28,855 33,015 14.4%
Expenditure 9,120 9,644 5.7% 23,471 27,045 15.2%
Operating Profit (EBDITA) 2,005 2,205 10.0% 5,384 5,970 10.9%
Operating Profit Margin (%) 18.0% 18.6%   18.7% 18.1%  
Other Income 398 430 8.0% 882 941 6.7%
Interest (Net) 909 504 -44.5% 1,655 2,110 27.5%
Depreciation 262 227 -13.3% 722 749 3.7%
Profit before Tax 1,232 1,903 54.5% 3,889 4,053 4.2%
Extraordinary income/(expense) 424 15,341 3521.6% 1,075 15,173 1311.3%
Tax 393 503 28.1% 983 1,017 3.4%
Profit after Tax/(Loss) 1,263 16,741 1225.9% 3,981 18,209 357.4%
Share of profit/(loss) from assosiates (9) 34 -482.2% 88 251 184.4%
Minority interest 82 3,703 4432.6% 155 3,838 2369.5%
Group consolidated net profit 1,172 13,072 1015.5% 3,913 14,622 273.6%
less: PAT relating to NIPO 70 94 33.7% 408 327 -19.9%
Net profit 1,102 9,563 768.2% 3,505 14,295 307.8%
Net profit margin (%) 9.9% 80.7%   12.1% 43.3%  
No. of Shares (m) 59.0 61.8   59.0 61.8  
Earnings per share (Rs)*         239  
P/E (x)*         3.5  
* 12months trailing

What has driven performance in 3QFY08?
  • The consolidated income from operations for the quarter increased by 7% YoY. While tea segment contributed 79%, coffee formed 20% of the total sales in 3QFY08. Tetley Group (in which the Company together with its subsidiaries has a 77.78% shareholding) contributed 51% to the total consolidated sales. Domestic branded tea business witnessed strong 15% YoY volume growth. Domestic business grew by 22% YoY contributing 30% to the total topline. The Company has during the quarter acquired 2.6 m shares of Mount Everest Mineral Water for a consideration of Rs 361 m pursuant to an open offer and 3.1 m shares from the promoters for a consideration of Rs 435 m. Tata Tea is looking at increasing its presence in value added teas and acquisitions to expand its geographical reach.

    Indian operations
    Rs m 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Income from Operations 2,908 3,554 22.2% 8,191 9,644 17.7%
    Expenditure 2,351 2,943 25.2% 6,364 7,656 20.3%
    Operating Profit (EBDITA) 557 611 9.7% 1,827 1,989 8.8%
    Operating Profit Margin (%) 19.2% 17.2%   22.3% 20.6%  
    Other Income 80 460 478.6% 680 888 30.7%
    Interest (Net) 151 163 8.2% 219 431 96.8%
    Depreciation 46 44 -2.6% 139 145 4.5%
    Profit before Tax 440 864 96.2% 2,149 2,302 7.1%
    Extraordinary income/(expense) 614 (22)   1,272 (33) -102.6%
    Tax 112 253 126.3% 394 602 52.8%
    Profit after Tax/(Loss) 942 589 -37.5% 3,027 1,667 -44.9%
    less: related to NIPD 70 94 33.7% 408 327 -19.9%
    PAT 872 495 -43.2% 2,619 1,340 -48.8%
    Net profit margin (%) 30.0% 13.9%   32.0% 13.9%  

  • The margins on a consolidated basis, improved marginally by 60 basis points. However, raw material prices as a percentage of sales increased from 27% to 28% during the quarter. On the domestic front, the margins fell by 2.0% YoY mainly due to higher raw material costs.

  • The net profits on a consolidated basis have fallen by 448% YoY in 3QFY08 excluding the extraordinary item (sale of Glaceau). The Glaceau stake was sold for US$ 1.02 bn with profits of US$ 421.5 m (company has been advised that no tax is payable on the profit on sale of Energy Brands to Coca Cola Company). Lower interest costs and depreciation provided some relief. According to management, all the debts related to the Energy brands acquisition were repaid during the quarter, thereby reducing the financial gearing. Even the effective tax rate (26%) was lower. For the domestic operations, the bottomline has risen by 100% YoY (excluding extraordinary) on the back of higher other income (gain on foreign exchange) and lower depreciation. Its contribution fell from 79% to 3.8% to the total profits. For 9mFY08, the consolidated net profits fell 136% YoY.

What to expect?
At the current price of Rs 842, the stock is trading at a price to earnings multiple of 3.5 times its 12-month trailing consolidated earnings. Tata Tea will use its proceeds from sale of Glaceau to make further acquisitions in the global beverages space. Also, with repayment of debt, its financials would improve. It is looking at higher margin products and acquisitions. Acquisitions are likely to be important growth drivers as most of the existing businesses are steady or low-growth businesses.

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