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Tata Tea: Identifying its blend

Jul 13, 2004

Tea major, Tata Tea, is in the thick of news in recent times. The company reported strong FY04 results and there are reports that it is considering exiting the tea plantations altogether. Here we analyse the company's recent performance and its prospects. If you look at the table below, which depicts the performance of its Indian operations, the company has reported a marginal 3.6% topline growth. However, improved operating margins, lower interest burden and depreciation provisioning has resulted in the company reporting nearly 30% bottomline growth during FY04. With such decent numbers, why is the company looking to exit its plantations in the first place?

(Rs m)4QFY034QFY04ChangeFY03FY04Change
Income from operations1,9321,9732.2%7,5567,8273.6%
Other income2933188.5%5125517.6%
Expenditure2,0211,968-2.7%6,6976,8562.4%
Operating Profit (EBDIT)-906-106.1%85997113.0%
Operating Profit Margin (%)-4.6%0.3%  11.4%12.4% 
Interest (net)3126-16.4%14499-30.9%
Depreciation6354-13.9%227220-2.7%
Profit before Tax 110244121.5%1,0011,20220.1%
Tax7557-23.7%295287-2.7%
Profit after Tax/(Loss)35187433.4%70691529.6%
Net profit margin (%)1.8%9.5%  9.3%11.7%  
No. of Shares (m)56.256.2  56.256.2 
Diluted Earnings per share (Rs)*2.513.3  12.616.3 
Current P/e ratio (x)        23.2 
*(annualised)           

The answer to this is very simple. Over the years, Tata Tea has transformed itself rather successfully into a branded player in the tea segment. The acquisition of UK based Tetley a few years back consolidated its presence as a branded tea major globally. The plantations, which at one time were considered a necessary part of the backward integration strengths of tea companies, have now sort of become a losing proposition. This exposes Tata Tea to commodity cycles in the tea business (tea prices continue to be at historically low levels), it adversely affects the margin profile of the company and costs are a drain on the overall FMCG folio.

Cost as % of sales (India operations)
(Rs m)4QFY034QFY04FY03FY04
Material cost39.5%38.3%17.3%18.7%
Staff cost32.9%30.4%30.9%29.5%
Other expenditure32.3%31.0%40.4%39.4%
Total expenditure104.6%99.7%88.6%87.6%

Moreover, when the Tata's bought over Tetley, the idea was that Tetley will now source their tea from Tata Tea's gardens in India. Though it did happen, but overall, the company realised that by divesting this side of its business, all these negatives go away from its books and it merely sources tea from these very plantations (or may be other plantations globally) at competitive rates and changes its whole business profile. In the fourth quarter, though the company finished with a four fold increase in profits, in reality, if you look at the operational level, the company was hardly profitable (0.3% operating profit margin). The divestment of plantations (if it happens) is likely to change all that and make the Indian operations even more profitable.

A look at the consolidated global performance of the company (including Tetley) reveals that overall Tata Tea has grown by nearly 5% globally during FY04. Of the total, non-India account for nearly 75% of consolidated revenues. On the consolidated front too, higher operating margins, lower interest burden and depreciation provisioning as well as higher other income resulted in profits growing by a significant 148% YoY during FY04. The non India operations were key profit driver for the company. Just to put things in perspective, non India operations contribution to consolidated profits increased from 14.5% in FY03 to over 55% in FY04.

Consolidated numbers
(Rs m)FY03FY04Change
Income from operations29,51830,8574.5%
Other income16025056.6%
Expenditure25,34525,9492.4%
Operating Profit (EBDIT)4,1734,90817.6%
Operating Profit Margin (%)14.1%15.9% 
Interest (net)1,6561,320-20.2%
Depreciation888827-6.9%
Profit before Tax 1,7893,01168.3%
Tax62690644.7%
Minority interest-107-84-21.5%
Share of profit/(loss) from associated undertakings-23129-112.7%
Profit after Tax/(Loss)8252,050148.4%
Net profit margin (%)2.8%6.6% 
No. of Shares (m)56.256.2 
Diluted Earnings per share (Rs)14.736.5 
Current P/e ratio (x)  10.4 

Its Tetley subsidiary, which accounts for over 65% of consolidated operations, reported a 1.8% growth in FY04 revenues. The performance is however much better than this, as last year's numbers include Australian operations, which it hived off in FY04. Also, the preceding year's sales included business in the USA that has since been discontinued. At the profit before tax level, the company has reported an 86% growth YoY. Net profit growth stood at over 70% at Pound 16.1 m in FY04.

Tetley Group (98.6% subsidiary) results
(Pounds m)4QFY034QFY04ChangeFY03FY04Change
Income from operations55.485.053.4%251.5256.01.8%
PBT-3.65.9-12.823.885.9%
PATN. A.N.A. -9.416.171.3%

At the current price of Rs 378, Tata Tea trades at 10.4x FY04 consolidated earnings. The company is seeing the benefits of the global restructuring it undertook. Lower interest rates helped it restructure its debt and improved its consolidated cash flows. On the India side, plantations continue to be the only blip in its FMCG focus. With the management intent on addressing that too, the company's path for growth is clear. If it succeeds in hiving off its plantations, the whole profile of the company will get a big boost and of course, valuations will follow.

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