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Tata Tea: Action packed year! - Views on News from Equitymaster
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Tata Tea: Action packed year!
Jun 4, 2007

Performance summary
The world’s second largest branded tea company, Tata Tea, announced results for the fourth quarter and twelve months ended March 2007. On a consolidated basis, the company posted a topline growth of 29.5% YoY led by higher branded tea sales coupled with inclusion of income pertaining to the acquisitions of Jemca and Eight O’ Clock Coffee. The company managed to maintain its operating margins for the full year. Excluding the extraordinary item, the bottomline has grown by 14.2% YoY.

Consolidated Financial Performance
(Rs m) FY06 FY07 Change
Income from Operations 31,239 40,446 29.5%
Expenditure 25,615 33,129 29.3%
Operating Profit (EBDITA) 5,625 7,317 30.1%
Operating Profit Margin (%) 18.0% 18.1%  
Other Income 269 934 246.7%
Interest (Net) 1,024 2,729 166.5%
Depreciation 758 967 27.5%
Profit before Tax 4,111 4,555 10.8%
Extraordinary income/(expense) 73 1,102 1417.4%
Tax 1,179 1,076 -8.7%
Profit after Tax/(Loss) 3,005 4,580 52.4%
Share of profit/(loss) from assosiates 117 180 53.4%
Minority interest 131 326 149.1%
Net profit 2,992 4,434 48.2%
Net profit margin (%) 9.6% 11.3%  
No. of Shares (m) 56.2 59.0  
Earnings per share (Rs)*   75.1  
P/E (x)*   12.2  
* 12months trailing

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 21% in India (FY06). 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 of UK (FY01). From being a key player in a commodity industry (tea), it made an overnight transition to becoming the No. 2 player globally in the branded tea market. Tetley has 26% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand into Asia Pacific and the Middle East.

Tata Tea hived off its plantations business in South India, which led to it emerging as a focused branded tea company. It transferred 16 estates in Munnar (Kerala) to a company, which is owned by the plantation workers (each worker got a stake in the new company with a minimal investment of Rs 3,000). The Tatas hold 18% stake in the new company and will continue to support its marketing and R&D needs.

What has driven performance in FY07?
Consolidated view: Tata Tea’s consolidated topline growth was largely aided by higher contribution from branded tea sales with the sales in its core markets having done well. Its acquisitions have also helped the company post a better performance. While Jemca performed in line with expectations, Jockels provided the company a great base for its South African venture. During FY07, the Tetley group (Tata Tea’s 77.78% subsidiary) clocked a near 13% YoY growth in the topline. The company witnessed an increase in market share in the UK and Canada. It expects robust growth going forward in its speciality tea category. However, the Tetley’s bottomline fell by 13.7% YoY due to higher interest cost to fund the acquisitions. Tata Coffee also performed well mainly due to the solid performance of Eight O’ Clock Coffee (EOC). The turnover increased from Rs 1.9 bn to 7.5 bn during the year. EOC continued to be the 3rd largest brand and has a market share of 4.5%.

The management expects the overall performance of Tata Tea to be good going forward on the back of better volumes. Also, the integration of the acquisitions is expected to drive the topline going forward.

Indian operations
Rs m 4QFY06 4QFY07 Change FY06 FY07 Change
Income from Operations 2,191 2,512 14.7% 9,821 10,703 9.0%
Expenditure 2,079 2,363 13.6% 8,063 8,727 8.2%
Operating Profit (EBDITA) 112 150 34.1% 1,758 1,977 12.4%
Operating Profit Margin (%) 5.1% 6.0%   17.9% 18.5%  
Other Income 245 78 -68.1% 580 758 30.7%
Interest (Net) 17 164 855.2% 90 383 327.1%
Depreciation 52 47 -10.2% 194 186 -4.3%
Profit before Tax 287 17 -94.2% 2,054 2,166 5.4%
Extraordinary income/(expense) 23) 60 252 1,332 429.1%
Tax 71 38 -46.2% 436 432 -0.9%
Profit after Tax/(Loss) 193 39 -79.9% 1,870 3,065 63.9%
Net profit margin (%) 8.8% 1.5%   19.0% 28.6%  

India operations: Tata Tea’s domestic operations witnessed a growth of 9% YoY led by higher volume sales and improved auction realisations. Branded value sales improved by 12% YoY. The topline performance is commendable given the fact that the company has sold off its plantations. The healthy growth of all its domestic brands - Tata Tea Gold, Gemini, Chakra Gold, Agni and Tata Premium saw them gaining significant market share in their respective regions. However, the share of the domestic sales to consolidated revenues fell to 27% from 31% in FY06.

Indian operations cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 41.8% 41.0% 29.9% 31.7%
Staff Cost 19.5% 19.2% 18.0% 16.7%
Advertisement 11.1% 9.7% 9.2% 8.7%
Other Expenditure 22.5% 24.1% 25.1% 24.4%

Margin improves: Despite higher raw material costs, the Indian operations’ margins expanded by 60 basis points during the year owing to lower staff and advertising expenditure. With the sale of the plantations, the number of employees has fallen from 64,000 to 2,000. This has led to the reduction of the staff costs. The operating profits of the international operations rose by 30% YoY with margin improvement of 10 basis points during the year.

‘Extraordinary’ effect: On a standalone basis, the bottomline growth considerably outpaced revenue growth mainly aided by higher other income, lower depreciation charges and an extraordinary income. The extraordinary income was derived from the profit on sale of investments. However, if we exclude the extraordinary income effect, bottomline has grown by 7% YoY for the year. The company had made an investment of Rs 7.6 bn in its subsidiary, Tata Tea GB Ltd, UK to partially finance the acquisition of a 25% stake in Energy Brands Inc, USA (EBI). This investment in the subsidiary has been financed by bridge loans on which the interest amounts to Rs 267 m. As a result, the interest cost, which increased by 327% YoY during FY07, was the main culprit for the staid growth in net profits (excluding the extraordinary item). On a consolidated basis, Tata Tea’s net profits were up 48% YoY during the year led by extraordinary income to the tune of Rs 1,102 m (profits on sale of investments and forex gain) received by the company. Excluding this, the net profits increased by 14% YoY. Despite an increase in other income, it was the higher interest and tax expenses that led to the lower growth in the net profits.

New ventures: Last year was an action packed one for Tata Tea. The company spread its reach across geographies by inorganic growth. The company acquired Jemca, Jockels, Good Earth that have started contributing to the financials of the company. It also acquired Vitax for Rs 390 m and marking its entry into the fruits business. It has also signed a JV with Zhijang Tea in China (maker of polyphenols and instant tea extracts). It bought 70% stake in the JV. The facility would be operational in 12 months and will give the company access to products, which cater to the beverage and nutraceutical industries. The company had also acquired 25% stake in Energy Brands USA for US$ 677 m. It recently sold of the stake to Coco Cola for US$ 1.2 bn. The company in order to fund this acquisition had taken a huge debt. However, with the profit made on the sale, it will repay the debt and also use this money to fund further growth plans going forward. Last week it acquired a stake in Mount Everest Mineral Water Company, owners of the Himalayan brand of bottled water. It acquired 10.74% stake from the promoters and subscribed to a preferential offer of shares of 15% of the capital. This is expected to give the company an entry into the bottled water segment and contribute to the growth of the company going forward.

What to expect?
At the current price of Rs 919, Tata Tea is trading at 12.2 times its consolidated 12 months trailing earnings. Going forward, along with organic growth, Tata Tea is also looking at growing inorganically. Its restructuring efforts are paying off. The company plans to be more aggressive on high value speciality teas and newer products. It is venturing into new geographies and planning for further acquisitions. Also, with the Glaceau sale, the company has funds to repay its debt and fund new acquisitions. We believe that the acquisitions and focus on new products would lead to robust performance going forward.

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