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Tata Tea: FY01 sours blend

Jun 19, 2001

One of the world's largest tea companies, Tata Tea, has declared a 20% decline YoY in its net profit for FY01 (Rs 1,002 m). The results were not suprising, considering the company's dismal performance in the past nine months of FY01. The decline could be attributed to oversupply in the market, which put pressure on Tata Tea's margins.

(Rs m) 4QFY00 4QFY01 Change FY00 FY01 Change
Gross Sales 2,442 2,197 -10.0% 9,221 8,413 -8.8%
Other Income 222 125 -43.5% 480 498 3.8%
Expenditure 2,415 2,162 -10.5% 7,689 7,181 -6.6%
Operating Profit (EBDIT) 27 35 28.1% 1,532 1,232 -19.6%
Operating Profit Margin (%) 1.1% 1.6%   16.6% 14.6%  
Interest 25 66 164.5% 176 250 42.2%
Depreciation 44 53 19.8% 187 204 8.9%
Profit before Tax 180 41 -77.3% 1,493 998 -33.2%
Tax -18 -51 183.3% 405 274 -32.3%
Extraordinary items 0 0   156 278  
Profit after Tax 198 92 -53.6% 1,244 1,002 -19.5%
Net profit margin (%) 8.1% 4.2%   13.5% 11.9%  
Effective tax rate (%) -10.0% -124.7%   27.1% 27.5%  
No. of Shares (eoy) (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share       22.1 17.8  
P/E ratio         12.3  

Tata Tea's gross turnover declined 9%, underlining the difficult conditions that the company is facing in the long term. If we take out the extraordinary income effect from both FY00 and FY01, Tata Tea's net profit actually fell by 34%.

Not only did the company record a decline in its topline, its costs also escalated. Tata Tea recorded a huge 51% jump in its employee costs to Rs 2.3 bn. Increase in staff costs reflect the full-year impact of three-year industry-wide salary and wage settlements at the plantations. The company's debt servicing costs also went up by 42% during the year. However, it must be said that Tata Tea did manage to bring down its other operational costs. If we exclude the company's staff cost figures, its expenditure has actually declined by a significant 21%.

Tata Tea had reported a 14% decline in turnover and a 24% decline in net profit (excl. extraordinary items) in the previous quarter (3QFY01). On a nine month basis (April-December 2000) the company recorded an 8% decline in turnover and a significant 29% decline in the net profit (excluding extraordinary income).

As a consequence of changes in the insurance regulations, the company discontinued its marine insurance business with effect from June 1, 2001. The financial impact of this discontinuation is negligible.

At the current price of Rs 219 the stock trades at a P/E multiple of 17 times its FY01 earnings (excluding extraordinary income). Given the difficult market conditions and the high debt servicing costs, Tata Tea does look like facing a tough time on the bourses. However, once the effects of its merger with Tetley come into play, the company is likely to enjoy the benefits of being one of the largest integrated players of tea in the world. But in the medium term the company does look under pressure.

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