Tata Tea held an analyst meeting yesterday (June 20, 2001). The following are the key points the Tata Tea management stated during the meet.
The management stated that the industry was going through a difficult phase, but maintained that tea prices are now better than last year and they look forward to a much better FY02 vis-à-vis FY01. They also said that globally, the CAGR of tea consumption is still ahead of production.
Commenting on the 24% decline in net profits, the Tata Tea management maintained that they have been able to withstand difficult market conditions vis-à-vis competitors.
The management stated that the quality upgradation of tea especially from South India plantations is needed for growth in exports and realisations.
Tata Tea bought out 15 million kgs of high quality tea from auctions in Assam. In effect, Tata Tea remains net buyer of high quality tea and net seller of low quality tea. The management is working towards solving this anomaly.
75% to 80% of the company’s tea production is ‘dedicated production’, meaning this production is utilised to Tata Tea and Tetley brands. The management is working towards upgrading the other 20% of productions so that it can utilise that too for in house consumption.
The Tetley senior management was also present at the meeting. During the meeting the following key points came to light about the Tetley business.
A large proportion of Tetley’s business comes from UK, where volumes remained good in the calendar year 2000. Margins however, were under pressure. This was because, on the one hand the African tea prices rose significantly, and on the other hand retail prices remained low. Retail prices in the UK are influenced by five of the large retailers (or super markets). They normally do not favour high retail prices.
Canada is the 2nd largest market for Tetley where it controls a dominating 40% share of the branded tea market. France had a good year. The company’s brand was the fastest growing in this country and now it has 10% share of the French market.
Tetley had two factories, one in London and the other in Northeast England. Last year, Tetley closed its factory in London and consolidated all manufacturing to one factory in Northeast England.
Tata Tea and Tetley are working together on the following issues.
Both are working towards Tetley sourcing more tea from Tata Tea estates in south India. For this they are coordinating to better the south Indian tea blends. They have a joint R&D program to find more and more tea of high quality and blend.
In FY01 Tetley sourced around 0.5 million kgs of tea from Tata Tea plantations. The management said that this consumption by Tetley is going to double by FY02.
Tata Tea has decided to hike investment in its 100% subsidiary (Tetley) by injecting 30 m pounds as convertible loans. Out of this Tata Tea will invest only 10 m pounds and the balance will come from Tata Sons. Effectively, Tata Tea’s investment in the company will go up to 80 m pounds from the earlier 70 m pounds.
The Tata Tea management has categorically ruled any more injections into the Tetley company post its 30 m pounds investment.
The management will consolidate the Tetley accounts with itself in its FY02 annual report.
At the current price of Rs 207, the Tata Tea stock trades at 16 times its FY01 earnings. 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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