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Tata Tea: Fluctuating fortunes - Views on News from Equitymaster
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  • Mar 27, 2001

    Tata Tea: Fluctuating fortunes

    Over the past few months’ investors are shifting their buying interest in favour of old economy stocks, worried by future prospects for the TMT sector. Tata Tea is being eyed with renewed buying interest with the firming up of global tea prices.

    The up trend in international tea prices has perked up the prospects for domestic tea industry. India being the largest producer and consumer of tea, accounting for nearly 31% of the global output is expected to gain comparatively more from this rise.

    Tea prices in India had been declining in the last sixteen months up to December ’00. The trend however, reversed in the past few months in both northern and southern regions. In the last three months, the tea auction prices have risen considerably leading to higher realizations for the tea producing companies. The trend is expected to continue as a result of current reductions in the Indian crop, both in the south and north.

    Tata Tea is the largest integrated firm in country with 54 tea estates spread across Assam, West Bengal, Kerala and Tamil Nadu. Tea and tea products account for about 94% of its revenues and the rest come from other businesses like coffee, mushrooms and spices. Being in a cyclical industry the company’s fortunes are greatly dictated by the commodity (tea) prices based on demand and supply.

    During the first nine months of the current year, Tata Tea’s revenues dropped by 8% and profits declined by 13%. Excluding extraordinary income of Rs 125 m from sale of ACC shares in the previous year profits declined by a marginal 1.2%. Raw material cost efficiencies suppressed the steep fall in profits. In the first nine months of FY01, raw material cost accounted for 22.5% of turnover compared to 24.4% in the corresponding previous period. However, due to a significant increase in staff cost and other expenditure the operating margins dropped by 300 basis points to 19.3%.

    Thus, the performance of the company in the coming quarters could improve only with the cost control measures apart from a rise in tea prices. Higher tea prices would boost the realizations for the company but it would not be able to sustain the operating margins in absence of cost control.

    Financial snapshot
    (Rs m) 3QFY00 3QFY01 Change 9m FY00 9m FY01 Change
    Sales 2,330 2,016 -13.5% 6,778 6,216 -8.3%
    Other Income 125 5 -96.0% 258 373 44.5%
    Expenditure 1,903 1,653 -13.1% 5,273 5,019 -4.8%
    Operating Profit (EBDIT) 427 363 -15.0% 1,505 1,197 -20.5%
    Operating Profit Margin (%) 18.3% 18.0%   22.2% 19.3%  
    Interest (Net) 67 75 11.9% 150 184 22.5%
    Depreciation 48 51 6.3% 144 150 4.7%
    Profit before Tax 437 242 -44.6% 1,470 1,236 -16.0%
    Tax 113 78 -31.0% 423 325 -23.3%
    Profit after Tax/(Loss) 324 164 -49.4% 1,047 911 -13.0%
    Profits excluding other income 218 164 -24.6% 922 911 -1.2%
    Net profit margin (%) 9.3% 8.1%   13.6% 14.7%  
    No. of Shares (eoy) (m) 48.6 56.2   48.6 56.2  
    Earnings per share * 15.5 11.7   21.8 21.6  
    P/E (at current price)   18.1     9.8  
    (* annualised)            

    In order to come out from the susceptibility of tea prices, the management has drawn out a plan of exporting value added tea to Tetley and enhancing instant tea production. By leveraging the brand equity of Tetley, Tata Tea is planning to launch packaged tea in the markets including Russia, Middle East and Poland. The company is also reducing its dependence on auction sales by consuming more tea in-house for being sold as branded tea. It is restructuring its distribution network for the North by going for direct distribution, which would deepen its penetration and lower the cost.

    The FM has announced several beneficial proposals for the tea industry in the current budget. An increase in investment allowance from 20% to 40%, as proposed in section 33AB of the IT Act, would lead to a reduction in the effective tax rate. Also, the customs duty on tea has been raised from 35% to 70%. Though the imports of tea are low, this proposal would improve tea industry sentiments to a large extent. This would also protect the tea industry after the removal of quantitative norms with effect from April 1, 2001 when cheap foreign brands would enter the Indian markets.

    At the current market price of Rs 211, the stock trades at a P/E of 10 times on 9 months annualised earnings with a market cap to sales ratio of 1.4 times. Tata Tea is expected to report a marginal growth in its bottomline for the year ended March 2001. Its financial performance is expected to improve in FY02 with the rising tea prices and benefits given in the budget. The company’s performance being highly linked to tea prices, valuation gap would remain compared to its peers in the FMCG sector.



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