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Tata Tea: Blend with the best… - Views on News from Equitymaster
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Tata Tea: Blend with the best…
Jun 10, 2005

Introduction to results
The world’s second largest branded tea company, Tata Tea’s, consolidated figures were quite unenthusing for FY05, with topline showing a growth of mere 5% and bottomline by 10% YoY. The Indian operations of the company closed its books for the year with a decent 15% YoY topline growth and a robust 41% YoY growth in net profits. For the quarter, the company’s Indian operations posted a robust 38.4% YoY bottomline growth, mainly aided by deferred tax write back of earlier quarters to the tune of Rs 45 m. If this is factored out, bottomline grew by 14% YoY.

Consolidated numbers
(Rs m) FY04 FY05 Change
Income from operations 29,211 30,591 4.7%
Expenditure 24,605 25,194 2.4%
Operating Profit (EBDIT) 4,606 5,397 17.2%
Operating Profit Margin (%) 15.8% 17.6%  
Other income 250 174 -30.5%
Interest (net) 1,222 1,228 0.5%
Depreciation 785 779 -0.8%
Profit before Tax 2,877 3,137 9.0%
Tax 859 939 9.2%
Minority interest (83) (160) 93.7%
Share of profit/(loss) from associated undertakings 29 116 296.6%
Profit after Tax/(Loss) 1,964 2,155 9.7%
Net profit margin (%) 6.7% 7.0%  
No. of Shares (m) 55.2 56.2  
Diluted Earnings per share (Rs) 35.6 38.3  
Current P/e ratio (x)   15.3  

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.

The company recently hived off a major chunk of its plantation business, which would lead to it emerging as a focused branded tea company. It will transfer 15 estates in Munnar (Kerala) to a new limited company which would be owned by the company workers and each worker could get a stake in the new company with a minimal investment of Rs 3,000.The Tata’s would have a stake of around 20% and would continue to support the new company for its marketing and R&D needs. The other estates would be sold outright through the tender route.

What has driven performance in FY05?
Sales:  Globally, Tata Tea (including Tetley) has hardly grown during the year in terms of revenues. Of the total, non-India operations accounts for nearly 71% of consolidated revenues. On the other hand, Indian operations were comparatively stronger mainly owing to improved realisations on garden tea and strong performance of its branded tea operations.

Indian operations
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Income from operations 1,973 2,204 11.7% 7,827 8,996 14.9%
Expenditure 1,968 2,158 9.7% 6,856 7,574 10.5%
Operating Profit (EBDIT) 6 47 747.3% 971 1,422 46.4%
Operating Profit Margin (%) 0.3% 2.1%   12.4% 15.8%  
Other income 318 290 -9.0% 551 504 -8.5%
Interest (net) 26 15 -42.4% 99 85 -14.8%
Depreciation 54 60 11.1% 220 220 -0.2%
Profit before Tax 244 261 7.0% 1,202 1,622 34.9%
Tax 57 3 -94.8% 287 332 15.8%
Profit after Tax/(Loss) 187 258 38.4% 915 1,289 40.8%
Net profit margin (%) 9.5% 11.7%   11.7% 14.3%  
No. of Shares (m) 55.2 56.2   55.2 56.2  
Diluted Earnings per share (Rs)* 13.5 18.4   16.6 22.9  
Current P/e ratio (x)         25.6  
*(annualised)            

Tetley Group (98.6% subsidiary) results
(Rs m) FY04 FY05 Change
Income from operations 19,389 19,403 0.1%
PBT 1,537 1,736 13.0%
The Tetley Group (98.6% subsidiary), did not grow in revenues during FY05 on a like to like basis. However, at the PBT level, growth was 13% YoY. One must remember that this subsidiary accounted for over 63% of the company’s consolidated revenues and any sluggishness on its part reflects on the whole company. Owing to the Indian operations out performance, the contribution of Tetley to revenues has gone down during the year. However, at the PBT level, there has been an improvement, which highlights the restructuring benefits.

Margins:  The margins for the quarter for its Indian operations were a mere 2.1% at the EBDITA level, mainly due to a clarification in the proposed accounting standard from current year, in relation to the defined benefit of gratuity benefits, resulting in Rs 46 m higher expenditure. However, for the full year margins expanded by 340 basis points, which is a positive. In case of consolidated business, operational restructuring benefits seem the key margin drivers.

Cost as % of sales (India operations)
(Rs m) 4QFY04 4QFY05 FY04 FY05
Material cost 38.3% 35.4% 18.7% 22.0%
Staff cost 30.4% 26.5% 29.5% 28.4%
Other expenditure 31.0% 36.0% 39.4% 33.8%
Total expenditure 99.7% 97.9% 87.6% 84.2%

Net Profit:  India contributed around 29% to the consolidated profits in FY05, up from 27% in FY04. 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)
  4QFY04 1QFY05 2QFY05 3QFY05 4QFY05
Sales growth (YoY) 2.2% 12.5% 15.3% 18.3% 11.7%
OPM (%) 0.3% 17.2% 25.9% 17.2% 2.1%
Net profit growth (YoY) 433.4% 0.5% 52.2% 76.2% 38.4%

What to expect?
At Rs 588, the Tata Tea stock trades at 15.3 times FY05 consolidated earnings and market cap. to sales ratio of 1.1x. 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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