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Tata Tea: Extraordinary effect - Views on News from Equitymaster

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Tata Tea: Extraordinary effect
Jul 28, 2006

Performance summary
The world’s second largest branded tea company, Tata Tea, announced results for the first quarter ending June 2006 on Wednesday. On a consolidated basis, revenues rose by 12% YoY for the quarter. The decline in net profits has to be viewed in light of the extraordinary income to the tune of Rs 238 m in 1QFY06. Excluding the same, the bottomline has actually risen by 31% YoY.

Consolidated Financial Performance
(Rs m) 1QFY06 1QFY07 Change
Income from Operations 7,167 7,989 11.5%
Expenditure 5,785 6,412 10.8%
Operating Profit (EBDITA) 1,382 1,577 14.1%
Operating Profit Margin (%) 19.3% 19.7%  
Other Income 26 75 186.5%
Interest (Net) 260 274 5.4%
Depreciation 177 202 14.4%
Profit before Tax 971 1,175 21.0%
Extraordinary income/(expense) 238 (18) -
Tax 326 322 -1.1%
Profit after Tax/(Loss) 883 835 -5.5%
Share of profit/(loss) from assosiates - (9) -
Minority interest 20 24 -
Net profit 864 801 -7.3%
Net profit margin (%) 12.3% 10.4%  
No. of Shares (m) 56.2 56.2  
Earnings per share (Rs)   52.1  

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 1QFY07?
Sales – The domestic side: Income from operations increased by 7.6% YoY in 1QFY07. Sales growth was fueled by a 6% growth in domestic branded sales. Higher auction and export sales also helped matters. Domestic operations contributed nearly 32% of the consolidated revenues (33% in 1QFY06) and 56% to the bottomline (including extraordinaries). We believe that the domestic operations will continue to do well in coming quarters.

Indian operations
Rs m 1QFY06 1QFY07 Change
Income from Operations 2,365 2,544 7.6%
Expenditure 1,926 1,987 3.1%
Operating Profit (EBDITA) 438 557 27.0%
Operating Profit Margin (%) 18.5% 21.9%  
Other Income 59 112 89.7%
Interest (Net) 20 30 46.8%
Depreciation 44 45 2.3%
Profit before Tax 433 594 37.2%
Extraordinary income/(expense) 89 (22)  
Tax 88 127 43.1%
Profit after Tax/(Loss) 434 446 2.6%
Net profit margin (%) 18.4% 17.5%  

Sales – The international perspective: The consolidated sales were up 11.5% YoY in this quarter, driven by higher branded tea sales in both the domestic and international markets. Operating margins also improved by 40 basis points. During the quarter, The Tetley Group (the company’s 98.58% UK subsidiary) reported an 8% YoY growth in the turnover. However, the net profit was lower by 17% YoY due to lower exceptional income in the 1QFY07.

Indian operations cost break-up
As a % of net sales 1QFY06 1QFY07
Total Cost of goods 26.6% 28.7%
Staff Cost 20.9% 17.4%
Other Expenditure 33.9% 32.0%

Margins: Margins on the consolidated basis and on the domestic front have increased, but the increase is more in case of domestic front. Better product mix, favourable impact of restructuring of plantations and higher investment income have enabled the company to expand margins. The company has been running an employee separation scheme since last year which is reflected in staff cost declining as a percentage of sales during the quarter. However, the raw material cost (as a percentage of sales) increased by 210 basis points denting the margins to that extent. Given the fact that tea prices have risen in the recent past, Tata Tea‘s raw material costs have risen.

Bottomline: The net profits for the entity as a whole has fallen by 7%, while up just 3% on the domestic front. But this was mainly due to extraordinary items. Excluding this, the bottomline was up 31% YoY and 36% YoY for the group and domestic operations respectively. Also higher other income has helped the strong growth in the profits.

What to expect?
At the current price of Rs 788, the stock is trading at a price to earnings multiple of 15.1 times its 12 month trailing consolidated earnings. The group witnessed rise in both domestic and international sales. Also the restructuring of plantations have improved the profitability. Going forward, we expect the domestic operations to perform well.

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