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Tata Tea: Not a brewing start! - Views on News from Equitymaster
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Tata Tea: Not a brewing start!
Jul 17, 2007

Performance summary
  • Consolidated revenue grows by 28% YoY, driven by higher branded tea sales across the business.

  • EBITDA margins contracts by 3.4% YoY due to higher raw material and promotion expenses.

  • Excluding the extra ordinaries, the net profit has fallen by 40% YoY due to lower operating income and higher interest costs to fund its acquisitions

  • The Indian operations contributed 29% of the consolidated sales for the quarter.

  • The company acquired a 15% stake in Mount Everest Mineral Water (MEMW) by subscribing to a preferential issue at a negotiated price of Rs 140 per share.

Consolidated financial performance
(Rs m) 1QFY07 1QFY08 Change
Income from Operations 7,989 10,188 27.5%
Expenditure 6,412 8,523 32.9%
Operating Profit (EBDITA) 1,577 1,666 5.6%
Operating Profit Margin (%) 19.7% 16.4%  
Other Income 75 224 200.5%
Interest (Net) 274 946 244.8%
Depreciation 202 258 27.4%
Profit before Tax 1,175 686 -41.6%
Extraordinary income/(expense) (18) (39) -
Tax 322 140 -56.5%
Profit after Tax/(Loss) 835 507 -39.2%
Share of profit/(loss) from assosiates (9) (34) 257.4%
Minority interest 24 17 -31.6%
Net profit 801 457 -42.9%
Net profit margin (%) 10.4% 5.0%  
No. of Shares (m) 56.2 61.8  
Earnings per share (Rs)*   66.0  
P/E (x)*   12.4  
* 12months trailing

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 21% in India (FY06). It has a total acreage of 24,500 hectares located in Kerala, Assam, Tamil Nadu and West Bengal and owns a majority stake in Tata Coffee, the largest coffee company in Asia. Tata Tea's profile changed the day it acquired Tetley of UK (FY01). From being a key player in a commodity industry (tea), it made an overnight transition to becoming the No. 2 globally in the branded tea market. Tetley has 26% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand into Asia Pacific and the Middle East.

Tata Tea hived off its plantation’s business in South India, which led to it emerging as a focused branded tea company. It transferred 16 estates in Munnar (Kerala) to a company, which is owned by the plantation workers (each worker got a stake in the new company with a minimal investment of Rs 3,000). The Tata’s hold 18% stake in the new company and will continue to support its marketing and R&D needs

What has driven performance in 1QFY08?
International operations: The consolidated sales were up 28% YoY in 1QFY08, driven by higher branded tea sales in both the domestic and international markets. Also, the inclusion of Eight O’ Clock Coffee revenues led to the strong topline performance. The Tetley Group’s (the company’s 78.8% UK subsidiary) turnover was also 6% YoY higher than the corresponding quarter of the previous year.

Indian operations
Rs m 1QFY07 1QFY08 Change
Income from Operations 2,544 2,900 14.0%
Expenditure 1,987 2,279 14.7%
Operating Profit (EBDITA) 557 621 11.6%
Operating Profit Margin (%) 21.9% 21.4%  
Other Income 112 138 23.2%
Interest (Net) 30 136 362.4%
Depreciation 45 48 5.1%
Profit before Tax 594 575 -3.2%
Extraordinary income/(expense) (22) 9  
Tax 127 154 21.6%
Profit after Tax/(Loss) 446 430 -3.5%
Net profit margin (%) 17.5% 14.8%  

Indian operations: Income from operations increased by 14% YoY in 1QFY08. The topline performance was mainly driven by increase in the branded tea volumes by 18% YoY. Domestic operations contributed nearly 29% of the consolidated revenues (32% in 1QFY07). During the quarter, the company acquired a 15% stake in Mount Everest Mineral Water (MEMW) by subscribing to a preferential issue at a negotiated price of Rs 140 per share. An additional 9.15% stake, at Rs 140 per share, is agreed to be purchased from the current promoters of MEMW. This will be followed by an open offer for 20% of the shares at the rate of Rs 140 per share, as prescribed by SEBI. Mount Everest is a leading player selling bottled natural mineral water in India. Its brand “Himalayan” has a strong franchise and is well entrenched in the hospitality industry. Bottled water in India is growing at about 30% with a market size of Rs 10 bn. Further the mountain water variant is just about 3% of the total market size. Tata Tea is planning to scale up the water sales by leveraging its distribution reach. The company is also looking at niche areas in the tea segment particularly the green tea and the speciality teas, which have huge scope going forward as the lifestyle of the consumer changes. We believe that the domestic operations will continue to do well in coming quarters.

Also, the company has planned to transfer the North India Plantation Business (NIPO) to a new company viz., Amalgamated Plantations Private Ltd (APPL). The scheme has been approved by the shareholders of the company as well as APPL on April 5, 2007. As per the scheme, North India Plantation Operations is to be transferred to APPL with effect from April 1, 2007 for a total consideration of Rs.3.6 bn in addition to transfer of agreed current assets and current liabilities and certain other related assets at mutually agreed values. The petition for sanction of the scheme is now pending before the High Court of Calcutta. Once approved, the transfer would happen. This move is expected to improve margins going forward.

Indian operations cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 28.7% 31.9%
Staff Cost 17.4% 16.6%
Other Expenditure 32.0% 30.1%
Steady margins: Margins on the domestic front have remained stable. The company’s employee separation scheme (which started last year) has helped the company and has been reflected in the declining staff cost as percentage of sales. The other expenses too witnessed a decline (as percentage of sales). However, the raw material cost (as percentage of sales) increased by 320 basis points denting the margins to that extent. On the consolidated basis, the margins have witnessed a decline of 3.4% due to higher advertising and promotional expenditure during the quarter and adverse exchange rates.

Extraordinary effect: The net profits on a standalone basis have fallen by 3.5% YoY. Excluding the extraordinary item, the profits have fallen by 10% YoY for the quarter. The interest cost was higher as the company had taken loans to finance the acquisition of 25% stake in Energy Brand in the previous year by the company’s subsidiary, the Tetley Group. The Tetley Group has entered into a conditional agreement for sale of this stake to Coca Cola Corporation during the year and expects the loans to be repaid during the year, thereby reducing the interest cost. Even the effective tax rate was higher thereby causing further decline in the net margins. For the entity as a whole, the bottomline has fallen by 43% YoY on the back of lower operating margins and higher interest costs (up 245% YoY). Even after excluding the extraordinary item and despite the higher other income, the performance of the company has not been good.

What to expect?
At the current price of Rs 820, the stock is trading at a price to earnings multiple of 12.4 times its 12-month trailing consolidated earnings. The company has witnessed a rise in both its domestic and international sales. Its business has improved, with a pickup in growth driven by improvement in the product mix and restructuring of its plantations. It is also increasing its presence in fast growing areas like green teas and speciality teas. Also, the profit from sale of Glaceau will help the company reduce its debt burden and increase its earnings forward. Besides this, acquisitions are on the anvil going forward. Though the company is likely to face difficulty initially increasing the sales of the branded water due to higher competition, we believe that the acquisitions and focus on new products would lead to a robust performance going forward.

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