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Tata Tea: Consolidation on its agenda - Views on News from Equitymaster
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Tata Tea: Consolidation on its agenda
Jun 12, 2009

Performance summary
  • Driven by strong growth in the tea segment, the domestic entity reports a topline growth of 20% YoY. The consolidated revenues increase by 12% YoY driven by higher branded sales.
  • Faster growth in the operating costs as compared to sales leads to the 14% YoY decline in standalone operating profits. On a consolidated basis, the margins decline from 16% during FY08 to 13% during the fiscal.
  • On a standalone basis, the net profits, excluding the extraordinary items (amortization of amounts incurred on employee separation scheme, profit on sale of North India Plantations Division and new business initiatives), improve by 8% YoY. However, the consolidated net profits decline by 55% YoY.
  • The Board recommends a dividend of Rs 17.5 per equity share (dividend yield of 2.1%).


Financial Performance
Standalone Consolidated
(Rs m) FY08 FY09 Change FY08 FY09 Change
Income from Operations 11,534 13,793 19.6% 43,363 48,741 12.4%
Expenditure 9,771 12,268 25.6% 36,276 42,237 16.4%
Operating Profit (EBDITA) 1,763 1,524 -13.5% 7,087 6,504 -8.2%
Operating Profit Margin (%) 15.3% 11.1% 16.3% 13.3%
Other Income 1,099 1,454 32.3% 397 332 -16.4%
Interest (Net) 464 486 4.9% 2,198 542 -75.3%
Depreciation 102 107 4.7% 916 987 7.7%
Profit before Tax 2,296 2,386 3.9% 4,369 5,308 21.5%
Extraordinary income/(expense) 1,562 (96) - 15,662 (884) -105.6%
Exchange gain - - 562 8,139 1348.8%
Tax 730 700 -4.1% 1,534 4,244 176.7%
Profit after Tax/(Loss) 3,128 1,590 -49.2% 19,059 8,318 -56.4%
Share of profit/(loss) from assosiates - - 289 249 -13.6%
Minority interest - - (3,922) (1,563) -60.2%
Group consolidated net profit 15,426 7,005 -54.6%
Net profit margin (%) 27.1% 11.5%   35.6% 14.4%  
No. of Shares (m) 61.8 61.8   61.8 61.8  
Earnings per share (Rs)* 25.7   113
P/E (x)* 31.7 7.2
* 12months trailing earnings

What has driven performance in FY09?
  • Driven by strong growth in the tea segment, the domestic entity saw a topline growth of 20% YoY during the year. The company managed to pass on 75% of the increase in input costs for tea to the consumers. Average domestic tea prices rose 27.5% in FY09. The domestic region now contributes 28% to the total revenues (26% in FY08). The consolidated revenues increased by 12% YoY driven by higher branded sales. The tea segment witnessed a 10% YoY growth, while coffee segment revenues were up 20% YoY. Volume growth was tepid due to price hikes and the economic slowdown. Favourable currency movement also aided growth. Performance of its coffee business improved largely because of the depreciation of rupee against the dollar during the last quarter. Tetley saw a revenue growth of 5% YoY during the year.

  • The company purchased an additional 4.3% stake in Mount Everest Mineral Water from the market, increasing its stake to 36%. Also, an additional 16.7% stake was acquired in Consolidated Coffee by Tata Tea (GB) Capital, a UK subsidiary. As a result, the entire shareholding will be held by the group. Further, on account of the conversion of loan notes held by the holding company into equity shares in the Tetley Group during the year, the shareholding in the group has gone up to 78.8% from 77.8%. Tetley entered into an agreement to acquire 51% stake in an existing Russian beverage company to cover the Russia and its neighbouring regions.

    Cost break-up
    Standalone Consolidated
    As a % of net sales FY08 FY09 FY08 FY09
    Total Cost of goods 51.5% 56.0% 32.7% 36.0%
    Staff Cost 6.2% 6.7% 11.3% 11.4%
    Advertisement 0.0% 0.0% 19.0% 18.1%
    Other Expenditure 27.0% 26.3% 20.7% 21.3%

  • Faster growth in the operating costs as compared to sales led to the 14% YoY decline in the standalone operating profits. Higher input costs, currency fluctuations and higher actuarial charge on revaluation of employee benefits affected the performance. On a consolidated basis, a sharp rise in input costs affected its margins. The margins declined from 16% during FY08 to 13% during the fiscal. It faced margin pressure in the tea businesses. The margins of the tea segment declined to 12% as compared to 14% last year. Losses in its water business doubled due to the re-launch of the brand and the business.

  • On a standalone basis, the net profits excluding the extraordinary items (amortization of amounts incurred on employee separation scheme, profit on sale of North India Plantations Division and new business initiatives), improved by 8% YoY. The consolidated net profits declined by 55% YoY. However, the net profits are not comparable to that of the previous year due to impact of the onetime profit last year on sale of investments in Energy Brands Inc. and North India Plantations amounting to Rs 16 bn. Also, the currency volatility affected the performance of the bottomline.

What to expect?
At the current price of Rs 815, the stock is trading at a price to earnings multiple of 7.2 times its 12-month trailing consolidated earnings. Tata Tea is constantly working on transforming itself into a global beverages company by focusing primarily on growing its health and wellness segments. It is also giving focusing more on new product launches. It has initiated the process of consolidating its holding in varied global beverages businesses in a move to operate as a single-beverages entity and simplify operational issues.

This would help it in carrying out the marketing, distribution and branding activities efficiently. While this would take some time, it would help the company in the long run. The Tata Tea group is looking at becoming a global leader in the fast growing US$ 160 bn ‘good for you’ beverage market going forward.

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