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Tata Tea: Costs offset growth - Views on News from Equitymaster

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Tata Tea: Costs offset growth

Jul 29, 2008

Performance summary
  • Revenues for both the consolidated and the standalone entity grows by 12% YoY. Tea and coffee contribute 77% and 21% of the consolidated sales respectively.

  • The operating margins decline by more than 2% on consolidated and standalone basis.

  • The consolidated net profits (excluding extraordinary items) jumps by 110% YoY. Standalone profits decline by 1.2% YoY.



Consolidated Financial Performance
(Rs m) 1QFY08 1QFY09 Change
Income from Operations 10,107 11,347 12.3%
Expenditure 8,502 9,810 15.4%
Operating Profit (EBDITA) 1,606 1,537 -4.3%
Operating Profit Margin (%) 15.9% 13.5%  
Other Income 86 74 -14.6%
Interest (Net) 918 109 -88.1%
Depreciation 236 222 -5.8%
Profit before Tax 538 1,280 137.9%
Extraordinary income/(expense) 86 14 -
Tax 134 440 227.9%
Profit after Tax/(Loss) 489 853 74.4%
Share of profit/(loss) from associates (34) 10 -131.0%
Minority interest (17) (107) 543.1%
Group consolidated net profit 439 756 72.3%
Net profit margin (%) 4.3% 6.7%  
No. of Shares (m) 61.8 61.8  
Earnings per share (Rs)*   254.6  
P/E (x)*   3.1  
* 12months trailing


What has driven performance in 1QFY09?
  • Tata Tea’s consolidated sales increased by 12.3% YoY in 1QFY09 led by strong performance across all its brands. Its domestic business and foreign subsidiaries -Tetley and EOC (Eight’o clock Coffee) have all grown in the range of 12% to 13% YoY. The domestic sales contribute 28% to the total sales. While the tea segment contributed 76.9% to the consolidated sales, coffee formed 21% of the total sales. The impact on account of currency translation was negligible.

    Indian operations

    Rs m 1QFY08 1QFY09 Change
    Income from Operations 2,806 3,150 12.2%
    Expenditure 2,258 2,615 15.8%
    Operating Profit (EBDITA) 548 534 -2.5%
    Operating Profit Margin (%) 19.5% 17.0%  
    Other Income 138 122 -12.2%
    Interest (Net) 109 64 -41.1%
    Depreciation 26 24 -6.9%
    Profit before Tax 552 568 2.9%
    Extraordinary income/(expense) 9 (22)  
    Tax 148 168 13.9%
    Profit after Tax/(Loss) 412 377 -8.5%
    Net profit margin (%) 14.7% 12.0%  

  • The consolidated operating margins declined by 2.3%. This was mainly on account of higher raw material and other expenses. Higher cost of tea procurement in the domestic business and Tetley resulted in raw material prices moving up by 22% YoY. On the standalone basis, the margins were lower due to higher sales growth in the low margin products.

  • Consolidated bottomline was up 110% YoY in 1QFY09 excluding the extraordinary items. Exceptional income in the current period represents the write back of provision for restructuring costs that were offset by amortisation of amounts incurred on Employee Separation Schemes and profit on sale of land/assets investments in Energy Brands Inc (EBI) and profit on transfer of North India Plantation Division. Further lower interest costs and depreciation also aided the jump. In the last quarter, the company had loans pertaining to the acquisition of the Energy Brands, which the company has been paying off from the sale of stake. On the standalone basis, the profits have declined by 1.2% YoY, excluding the extraordinary items. The non–domestic ventures’ profits contributed 50% to the total profits in 1QFY09.

  • During the quarter, consequent to the conversion of the Loan Notes (debt owed to Tata Tea) held by the holding company in the Tetley Group into equity shares, the percentage holding in the Tetley Group has increased from 77.78% to 78.79%. Also, Tata Coffee (a 57.48% subsidiary of the holding company) has acquired 3,000 shares of US$ 1 each of M/s Kahutara Holdings Limited, Cyprus, which is now a wholly owned subsidiary of Tata Coffee.

    What to expect?
    At the current price of Rs 787, the stock is trading at a price to earnings multiple of 3.1 times its 12-month trailing consolidated earnings. The company has done well on the topline front in all its geographies and brands. On the domestic front, the management is bullish with regard to increasing sales and pricing power. It has also done well to restructure its financials and significantly reduce its debt. The management has indicated to continue its focus on building its portfolio in other segments. However, the risk of input prices and integration remains.

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