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Tata Tea: What's in a name? - Views on News from Equitymaster

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Tata Tea: What's in a name?
Sep 4, 2009

Tata Tea, the second largest tea company in the world, is looking for a new brand identity, an alternate name. The management feels that the company's name currently does not reflect the true identity of Tata Tea. In the sense that the company is today much more than a tea company and has a portfolio comprising of coffee and mineral water as well. Tata Tea endeavors to position itself as a beverage company rather than restricting its identity to tea. Tata Tea is also planning to financially integrate its global operations. The company currently comprises of several subsidiaries spread across the globe, involved in marketing loose and branded coffee, speciality, flavored and green tea, ready-to-drink products and mineral water. With the vast beverage empire, which is rapidly growing inorganically, it was a matter of time before the management looked at the operating integration and its financial implications. Tata Tea has stated that it aims to grow to US$ 10 bn by 2015 from the present US$ 1 bn in the next 5 years which implies a CAGR of 59%. Naturally majority of this growth will be sought through inorganic routes. The company will be focusing on expanding its reach in the Middle East, South America, South Africa and Commonwealth of Independent States (CIS). This would be done through joint ventures or partnerships.

While Tata Tea had a windfall gain from its investment in Glaceau, the vitamin water company, we cannot expect such return on investments on a regular basis. Consolidated net debt of the company in FY09 was Rs.991 bn down from Rs.3,847 bn in FY07 while the debt-to-equity ratio fell from 1.6 times in FY07 to 0.5 times in FY09, signifying a stronger balance sheet. This is a reflection of the liquidation of the stake in Glaceau, which helped wipe off a large portion of debt on Tata Tea’s books.

However, inorganic growth also brings with it its own set of problems; least of all in terms of integration of the new company with the acquirer. We also have to note the valuation of the acquisition, the competitive position of the new company in the market where it operates and the financing of the deal. The acquisition of Mount Everest Mineral Water in 2007 is an example of an acquisition which may be very expensive. Tata Tea initially bought a 24% stake in the company for a price of Rs. 1.1 bn implying that the company was worth Rs 4.6 bn. This value was 19 times the FY07 (21 times FY09) sales and 364 times FY07 sales (FY09 earnings meaningless since company made a net loss due to investment in branding) earnings. While the bottled water industry is growing at 25% annually, the company's sales growth has been flat since it is positioned as a premium product. Tata Tea recently indicated that it plans to market water in the mass segment while it has been steadily increasing its stake in this company to 40% through share procurement in the open market. At this stage we would like to wait and watch how Tata Tea builds up this business.

Although we trust the business acumen of the Tata Group, we would be cautious on the stock given that the company plans to grow 10 times its current size in 5 years through acquisitions. We are also concerned about the rising tea prices due to low rainfall and the fact that the company has to find a new buyer for its tea plantation after IL&FS having backed out.

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