Tata Tea, the largest integrated producer of Tea in the world has a market share of 23%. It cultivates tea on 24,500 hectares of land spread across Kerala, Assam, Tamil Nadu and West Bengal. It owns a majority stake in Consolidated Coffee Limited, the largest coffee company in Asia. It also has a controlling interest in Rallis India Ltd., one of the largest agro chemicals firms in India and Asian Coffee Ltd., a 100% export oriented unit, making instant coffee.
The company’s exports were Russia dependent as 45% of its total exports were to that part of the globe. But demand from Russia declined in the last couple of years, which has adversely affected the company’s export outlook (exports fell over 50 % in 1QFY01). On top of that countries like Indonesia, Sri Lanka, Kenya and Malawi are increasing exports by increasing the area under cultivation. All this means weak exports and hence, an oversupply situation in the domestic market. As a result the average prices of tea fell continuously from a high of Rs. 81.6 a kg in October 1999 to Rs 47.8 a kg in April 2000 (down 41%).
As a result, Tata Tea registered a 3% drop in its net profit to Rs 1.2 bn in FY00. The drop in profits was also due to a decline in production and higher employee costs (up 17% over FY99). Operating margins of the company declined to 16.6% (FY99 - 23.1%). However, the turnover improved by a minor 4%. In its 1QFY01 too, its net profit recorded a 48% increase over 1QFY00, but it was largely on account of a bulging Rs 305 m other income. In real terms (if we exclude other income), the company’s profit from operations was down by 69%.
The bourses took notice of this and Tata Tea’s stock tanked from over Rs 650 levels to Rs 228 currently. The stocks P/e multiple works out to be 8.9 times its FY2000 earnings. Given the fact that the company has recently acquired UK based Tetley, (the 2nd largest brand in the world after Lipton of Unilever) a P/e multiple of 8.9 times looks like a good time to re-evaluate the company’s prospects.
In this bleak export outlook for Indian tea companies, Tetley can act as a crucial export vehicle for Tata Tea. It is expected that the Tetley acquisition will double Tata Tea’s exports (FY2000 exports – Rs 700 m). Tetley by virtue of being a packaged tea major will give a thrust to Tata Tea's strategy of becoming a branded tea major both in India and the international markets. Tetley opens up a huge market for Tata Tea, providing access to North American, European and Australian markets.
Weak tea prices especially in South India will make FY2001 a tough year for Tata Tea. Added to that the Tetley acquisition will also put pressure on margins and profitability in the short run. But given the company’s prominent positioning in the business and the initiatives it has taken, the company seems a good play over the long-term horizon.
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