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Tata Tea: Perfect blend? - Views on News from Equitymaster
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Tata Tea: Perfect blend?
Jul 25, 2005

Introduction to results
World’s second largest branded tea company, Tata Tea’s results were quite unenthusing on a consolidated basis, wherein topline grew by a mere 1.4%, while the bottomline witnessed a robust 57% growth. Excluding the extraordinary income, which the company had received for its South Indian plantations and curtailment of a pension scheme for Tetley, profits have increased by 14% YoY.

Consolidated numbers
(Rs m) 1QFY05 1QFY06 Change
Income from operations 7,070 7,167 1.4%
Expenditure 5,746 5,785 0.7%
Operating Profit (EBDIT) 1,324 1,382 4.4%
Operating Profit Margin (%) 18.7% 19.3%  
Other income 6 26 340.7%
Interest (net) 312 260 -16.5%
Depreciation 189 178 -6.0%
Profit before Tax 829 970 17.0%
Extraordinary income/(expense) (3) 239  
Tax 266 326 22.6%
Minority interest (11) (20) -
Profit after Tax/(Loss) 549 864 57.3%
Net profit margin (%) 7.8% 12.1%  
No. of Shares (m) 56.2 56.2  
Diluted Earnings per share (Rs) 39.1 61.5  
P/E ratio (x)   10.8  

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 23% in India. 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 (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 29% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand to regions in Asia Pacific and the Middle East.

The company recently hived off a major chunk of its plantation business, which led to it emerging as a focused branded tea company. It transferred 16 estates in Munnar (Kerala) to a new limited company which is owned by the company workers and each worker got a stake in the new company with a minimal investment of Rs 3,000.The Tata’s have a stake of around 18% and will continue to support the new company for its marketing and R&D needs. The other estates would be sold outright through the tender route.

What has driven performance in 1QFY06?
Staid revenue performance:  Globally, Tata Tea (including Tetley) has shown a marginal growth during the first quarter in terms of revenues. Of the total, non-India operations accounts for nearly 70% of consolidated revenues, which showed a marginal growth, mainly due to de-growth in UK consumption pattern. This is the largest market for Tetley and accounts for around 50% of Tetley’s revenues. On the other hand, its Indian operations performed better with growth coming from all major brands like Tata Agni (38%), Chakra Gold (7%) and Gemini (4%). The company also improved capacity utilization through bought leaf operations. All in all, Indian operations were comparatively stronger mainly owing to improved realisations on garden tea and strong performance of its branded tea operations.

The Tetley Group (98.6% subsidiary) did not grow in revenues during the quarter on year on year basis. However, at the PBT level, growth was 17% YoY. One must remember that this subsidiary accounts for over 69% of the company’s consolidated revenues and any sluggishness on its part reflects on the whole company. Owing to the Indian operation’s outperformance, the contribution of Tetley to revenues has gone down during the quarter. However, at the PBT level, there has been an improvement, which highlights the restructuring benefits (basically lower interest costs).

Indian Operations
(Rs m) 1QFY05 1QFY06 Change
Net Sales 2,058 2,232 8.5%
Expenditure 1,703 1,808 6.2%
Operating Profit (EBDIT) 355 424 19.6%
Operating Profit Margin (%) 17.2% 19.0%  
Other Income 22 59 164.3%
Interest (net) 22 17 -23.6%
Depreciation 52 40 -23.1%
Profit before Tax 303 427 40.9%
Extraordinary item - 89  
Tax 78 88 12.1%
Profit after Tax 225 428 90.7%
Net profit margin (%) 10.9% 19.2%  
Effective tax rate (%) 25.9% 20.6%  
No. of Shares (m) 56.2 56.2  
Diluted earnings per share* (x) 16.0 30.5  
P/E ratio (x)   22.0  
(* annualised)      

Margins:  The Indian operation’s margins expanded by 180 basis points, mainly due to reduced staff expenditure and lower other expenditure. The reason for staff expenditure lowering is mainly due to the sell off of plantations business (the workers of the 16 South Indian plantations are no longer are on the company’s pay roll).

Indian operations
Cost as % of sales 1QFY05 1QFY06
Material cost 20.0% 26.1%
Staff cost 25.7% 21.8%
Other expenditure 37.1% 33.1%
Total expenditure 82.8% 81.0%

Extraordinary Gains:  The reason for bottomline ballooning out of proportion as compared to topline growth on a consolidated basis is due to two reasons. Firstly, the company received an income for to the transfer of certain estates in South India amounting to Rs 107 m. Secondly, on account of curtailment of a pension scheme for Tetley, it gained Rs 153 m. If we remove both these non-recurring items, the bottomline growth is more realistic at 14% YoY.

Over the last 5 quarters

Indian operations
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06
Sales growth (YoY) 12.5% 15.3% 18.3% 11.7% 8.5%
OPM (%) 17.2% 25.9% 17.2% 2.1% 19.0%
Net profit growth (YoY) 0.5% 52.2% 76.2% 38.4% 90.7%

At Rs 666, the Tata Tea stock trades at 10.8 times annualised 1QFY06 consolidated earnings and market capitalisation to sales ratio of 1.3x. We believe that Tata Tea has restructured itself well. The company's move towards hiving off some of its plantation businesses is a positive over the long term, as the potential to expand margins increases (plantation is a high fixed-cost business). India has clearly seen the benefits of marketing focus in the buoyant performance of the branded folio. However, the global business needs to find growth drivers to be able to sustain valuations.

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