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Tata Tea: Topline woes continue… - Views on News from Equitymaster
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Tata Tea: Topline woes continue…
Oct 28, 2005

Introduction to results
World’s second largest branded tea company, Tata Tea, announced mixed results for the second quarter ended September 2005. While topline growth was staid, the same cannot be said for the bottomline growth, which has outpaced the topline by miles, mainly aided by higher other income and lower financial and depreciation charges, clubbed with an expansion in margins. As far as its Indian operations are concerned, topline growth was even murkier, on the revenues front, mainly due to the sale of South Indian estates. However, bottomline growth was decent. Had the company not sold its South Indian plantations, then turnover would have been higher by Rs 150 m during the quarter.

Consolidated numbers…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Income from operations 7,561 7,788 3.0% 14,631 14,955 2.2%
Expenditure 6,107 6,173 1.1% 11,853 11,957 0.9%
Operating Profit (EBDIT) 1,454 1,616 11.1% 2,778 2,998 7.9%
Operating Profit Margin (%) 19.2% 20.7%   19.0% 20.0%  
Other income 126 190 51.4% 132 216 64.3%
Interest (net) 334 244 -27.0% 646 504 -21.9%
Depreciation 196 184 -6.0% 384 361 -6.0%
Profit before Tax 1,050 1,379 31.2% 1,880 2,349 25.0%
Extraordinary income/(expense) (3) (20)   (7) 219  
Tax 313 384 22.6% 579 710 22.6%
Minority interest 28 37 34.8% 17 18 7.3%
Profit after Tax/(Loss) 761 1,012 32.9% 1,311 1,876 43.1%
Net profit margin (%) 10.1% 13.0%   9.0% 12.5%  
Effective tar rate (%) 29.8% 27.9%   30.8% 30.2%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted Earnings per share (Rs)* 54.2 72.0   93.2 66.7  
P/E ratio (x)         11.1  
(* annualised)

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 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 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.

What has driven performance in 2QFY06?
Topline growth unenthusing: Globally, Tata Tea (including Tetley) has shown only a marginal growth during the quarter in terms of revenues. Of the total, non-India operations (Tetley) account for nearly 69% of consolidated revenues, which managed only a marginal growth, mainly due to de-growth in US. However, growth in UK picked up during the quarter due to promotional activities and grew by 4% YoY. It must be noted that this is the largest market for Tetley and accounts for around 50% of Tetley’s revenues.

On the other hand, its Indian operations performance was better with growth coming from all major brands like Tata Tea Gold (up 36% YoY) and the company now commands a 2% market share in this segment. Further, Chakra Gold (6%) and Agni (24%) also showed strong growth, mainly due to restaging the brand. However, growth of Gemini (3% YoY) was lower than expectations due to intense competition. 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) also showed a marginal YoY growth of 3% during the quarter. However, at the PAT level, growth was 33% 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 Tata Tea’s overall financials.

Indian operations
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 2,349 2,392 1.8% 4,407 4,624 4.9%
Expenditure 1,742 1,729 -0.7% 3,445 3,537 2.7%
Operating Profit (EBDIT) 607 663 9.1% 962 1,087 13.0%
Operating Profit Margin (%) 25.9% 27.7%   21.8% 23.5%  
Other Income 169 243 44.0% 191 302 58.1%
Interest (net) 23 21 -10.0% 45 38 -16.6%
Depreciation 55 50 -9.3% 107 90 -16.0%
Profit before Tax 698 835 19.6% 1,001 1,262 26.1%
Extraordinary item - (17)   - 73  
Tax 166 195 17.1% 244 282 15.5%
Profit after Tax 532 624 17.3% 757 1,052 39.1%
Net profit margin (%) 22.6% 26.1%   17.2% 22.7%  
Effective tax rate (%) 23.8% 23.3%   24.4% 22.4%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share* 37.9 44.4   26.9 37.4  
P/E ratio (x)         19.8  
(* annualised)            

Margins: The Indian operations’ margins expanded by 180 basis points, mainly due to reduced staff expenditure. The reason for staff expenditure being lower was the result of selling off of plantations business (the workers of the 16 South Indian plantations are no longer are on the company’s pay roll).

Cost break-up (Indian operations)
as a % of net sales 2QFY05 2QFY06 1HFY05 1HFY06
Material cost 9.7% 16.9% 14.5% 21.3%
Staff cost 31.7% 20.6% 30.6% 21.2%
Other expenditure 32.8% 34.8% 33.0% 33.9%
Total expenditure 74.1% 72.3% 78.2% 76.5%

Bottomline gets a boost: During the quarter under review, the company sold some mutual fund units and also received high dividend income arising from its various investments, all of which resulted in higher other income of Rs 65 m thus leading to a 51% YoY growth in the other income component. Also, the company incurred lower interest costs (down 27% YoY) due to re-financing of its debt and we expect this to go further down in the coming quarters.

Over the past few quarters (Consolidated numbers)…
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY) 7.9% -0.1% 4.7% 1.4% 3.0%
OPM (%) 19.2% 19.9% 20.7% 19.3% 20.7%
Net profit growth (YoY) 55.3% 37.2% 32.9% 57.3% 32.9%

What to expect?
At Rs 740, the Tata Tea stock trades at 11.1 times annualised 1HFY06 consolidated earnings and market capitalisation to sales ratio of 1.4x. We believe that Tata Tea has restructured itself well. The company's move towards hiving off some of its plantation businesses is a positive from the long-term point of view, 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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