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Tata Tea: 4QFY02 hits annual numbers

Jun 27, 2002

Tata Tea's restructuring blues continue. The company has finished FY02 with a 7% drop in topline and a significant 28% decline in net profit. Tata Tea has finished the March quarter (4QFY02) with a similar 7% drop in sales and has posted Rs 163 m as net loss during the quarter.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales2,1972,036-7.3%8,4137,794-7.4%
Other Income12632-74.7%17876-57.4%
Expenditure2,1632,2142.4%7,1816,857-4.5%
Operating Profit (EBDIT)34-179-1,232937-23.9%
Operating Profit Margin (%)1.6%-8.8%14.6%12.0%
Interest (net)6746-31.6%250214-14.6%
Depreciation53578.9%2042176.3%
Profit before Tax41-250-956583-39.1%
Extraordinary items00-320276-13.7%
Tax-50-87-274139-49.5%
Profit after Tax91-163-1,002720-28.1%
Net profit margin (%)4.1%-8.0%11.9%9.2%
Effective tax rate (%)-123.3%34.6%28.7%23.8%
No. of Shares (eoy) (m)56.256.256.256.2
Diluted earnings per share*6.4-11.617.817.1
P/E ratio12.2
(* annualised)

During the year, Tata Tea voluntarily cut production of low margin teas in a bid to improve the quality of earnings. It also exited from Tata NYK (a joint venture with NYK of Japan). Of the 50% equity held, Tata Tea divested 40% in favour of NYK, Japan. The resultant capital gains of Rs 70 m from this divestment are part of the extraordinary items. The company also decided to wind up Tat-Hitachi Sales (Japan) Ltd., a joint venture company with Hitachi. However, the management expects negligible gain from this divesture.

Till the first nine months of the year, Tata Tea had managed to sustain operating margins at over 19% owing to strict cost controls. However, the management had indicated that going forward, because of 3 new brand launches in December 2001, its ad expenses are likely to shoot up. As a consequence of higher marketing inputs, the expenses of 4QFY02 were 2% above the expenses for the corresponding quarter of the preceding year. Other expenses have in fact been curtailed significantly through various cost reduction measures. This is evident from the fact that full year expenses were 5% lower than in the previous year.

Improving cost advantage
(Rs m)FY01FY02Change
Raw material expenses1,6671,284-23.0%
Staff cost2,3202,4365.0%
Others3,1953,138-1.8%
Total expenditure7,1816,857-4.5%

The company's restructuring of debt has led to lower interest outgo. Also, its tax outgo has been on a decline. All this helped the company in curbing its profit slide. Also, the company's has managed to control raw material costs, which declined by 23% YoY. Infact, raw material costs as a percentage to sales declined from nearly 20% in FY01 to 16.5% in FY02. This indicates the company's improving operational efficiencies.

Tata Tea's press release mentions that on account of seasonality in the tea industry, there is generally a loss from operations in the North east in the last quarter of the year when production ceases in the winter months but fixed costs continue to be incurred. These two exceptional items in the fourth quarter have further accentuated the loss to Rs 185 m, as against Rs 25 m in the last quarter of the preceding year.

The press release also blames the undercutting by smaller players for the decline in topline. The release states that the pressure on established brands of larger players in the domestic tea market continued throughout the year, with heavy discounting by a plethora of small regional players operating at the lower end of the market. Operating income as a consequence declined by around 7% both in the quarter and for the full year.

The decline in profits was further accentuated by a steep decline in other income. Dividend income from the company's investment subsidiary, Bambino Investments and Trading Company, was Rs 100 m lower than in the last quarter of the preceding year.

The Tata Tea stock has run up by nearly 20% in the last three months to Rs 209 currently. Though the company's long term prospects are very good, the company's lacklustre performance is likely to pressure the stock price in the near term. At the current price of Rs 209 the stock trades at 12x FY02 earnings. Though Tata Tea's topline is under pressure, the company's improving operating efficiencies and its 'Tetley' and 'Barista' acquisitions make the company to watch out for in future.

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