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Tata Tea: Integration on

Jun 2, 2008

Performance summary
  • Revenues for FY08 grows by 8.6% YoY. Domestic business grows by 7.8% YoY.
  • The operating margins on a consolidated basis, declines by 1.2% on account of higher raw material costs.
  • On a consolidated basis, the net profits, excluding the extraordinary items (profit on transfer of NIPD and sale of investments in Energy Brands), decline by 108% YoY led by lower margins and a higher tax outgo.

  • In terms of the Scheme of Arrangement approved by the Honourable High Court at Calcutta, the North India Plantation Division (NIPD) of the company stood transferred to Amalgamated Plantations Private Limited (APPL) with effect from the appointed date of April 1, 2007 for an aggregate consideration of Rs 3.7 bn. Hence the results are not fully comparable.

Consolidated Financial Performance
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Income from Operations 11,591 11,768 1.5% 40,446 43,923 8.6%
Expenditure 9,933 10,153 2.2% 33,403 36,822 10.2%
Operating Profit (EBDITA) 1,659 1,615 -2.6% 7,042 7,101 0.8%
Operating Profit Margin (%) 14.3% 13.7%   17.4% 16.2%  
Other Income 52 18 -65.6% 934 959 2.7%
Interest (Net) 1,074 118 -89.1% 2,729 2,214 -18.9%
Depreciation 245 235 -4.2% 967 916 -5.3%
Profit before Tax 391 1,280 227.3% 4,280 4,930 15.2%
Extraordinary income/(expense) 301 489 62.4% 1,377 15,662 1037.8%
Tax 93 594 538.0% 1,076 1,534 42.6%
Profit after Tax/(Loss) 599 1,176 96.1% 4,580 19,058 316.1%
Share of profit/(loss) from assosiates 91 38 -58.3% 180 289 60.8%
Minority interest 171 84 -50.8% 326 3,922 1102.7%
Group consolidated net profit 520 1,130 117.2% 4,434 15,425 247.9%
Net profit margin (%) 4.5% 9.6%   11.0% 35.1%  
No. of Shares (m) 59.0 61.8   59.0 61.8  
Earnings per share (Rs)*         249  
P/E (x)*         3.5  
* 12months trailing

What has driven performance in FY08?
  • Tata Tea’s sales for the year increased by 8.6% YoY led by higher branded sales and acquisitions. At constant exchange rates the sales growth is 15% YoY. Tetley Group (in which the company together with its subsidiaries has a 77.78% shareholding) contributed 52% to the total consolidated sales. Its turnover increased by 6% YoY over the previous year at constant exchange rates. Tata Tea’s domestic business did well during the quarter with 15% YoY growth in volumes and 17% YoY growth in sales from the branded tea business. For the year, it grew by 7.8% YoY contributing 26% to total sales.

    Indian operations
    Rs m 4QFY07 4QFY08 Change FY07 FY08 Change
    Income from Operations 2,512 2,750 9.5% 10,704 11,534 7.8%
    Expenditure 2,363 2,491 5.4% 8,727 9,771 12.0%
    Operating Profit (EBDITA) 150 259 73.2% 1,977 1,763 -10.8%
    Operating Profit Margin (%) 6.0% 9.4%   18.5% 15.3%  
    Other Income 78 210 169.5% 758 1,099 45.0%
    Interest (Net) 164 47 -71.3% 383 464 21.0%
    Depreciation 47 24 -49.1% 185 102 -45.1%
    Profit before Tax 17 398 2285.6% 2,166 2,297 6.0%
    Extraordinary income/(expense) 60 1,595   1,332 1,562 17.3%
    Tax 38 205 437.5% 432 730 69.0%
    Profit after Tax/(Loss) 39 1,789 4497.9% 3,066 3,129 2.1%
    Net profit margin (%) 1.5% 65.0%   28.6% 27.1%  

  • The tea segment reported a 3% YoY growth in revenues during the year, while coffee witnessed a 34% YoY growth. The latter’s contribution increased from 17% in FY07 to 21% in FY08. Zhejiang Tata Tea Extraction Company Ltd, the company’s joint venture in China in which it holds a majority stake has been consolidated as a subsidiary with effect from November 22, 2007. Mount Everest water was relaunched in Mumbai. The company is expected to test market the same in India before taking it international.

  • The operating margins on a consolidated basis decline by 1.2%. While labour and other expenses were on the lower side, higher raw material prices and promotional activities led to the decline. Tetley and Eight O’ Clock (EOC) have taken price increases to offset input cost pressures. On the domestic front, the margins were down 3.2% for the full year, but for the quarter they were higher, partly due to hive off of the loss-making North Indian plantations. The company expects the margins to witness a mixed trend going forward with the domestic entity witnessing higher margins and international operations facing pressure on account of higher promotional spends.

  • On a consolidated basis, the net profits, excluding the extraordinary items (profit on transfer of NIPD and sale of investments in Energy Brands) declined by 108% YoY led by lower margins and higher tax outgo. Lower interest costs and depreciation, however, provided some relief. According to the management, all the debts related to the Energy Brands acquisition were repaid, thereby reducing the financial gearing. On a standalone basis, the profits were down 10% YoY in FY08. It contributed around 10% to the consolidated profits.

What to expect?
At the current price of Rs 876, the stock is trading at a price to earnings multiple of 3.5 times its 12-month trailing consolidated earnings. The company has now started integrating the subsidiaries. EOC has launched premium Good Earth Coffee and is expanding its distribution reach in the west coast with the help of Good Earth Tea Company. This would help Tata Tea get a wider distribution reach and large product base. Further, with sufficient funds being available on account of the sale of Energy Brands, it would continue to target acquisitions. The company is keen to expand its presence in the added teas and beverages market as these have higher margins. While the management is bullish on the domestic front, some pressure from the international operations would be witnessed. It has declared a special dividend of Rs 20 per share taking the total dividend to Rs 35 for the year (dividend yield of 4%).

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