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Tata Tea: Domestic woes continue…

Oct 29, 2002

Tata Tea's tryst with difficult market conditions continues. The beverage major reported a marginal 2.5% YoY rise in net sales during September quarter, that too aided by higher exports. Domestic sales was lower on account of the continued slowdown in the organized retail market for branded teas and lower CTC tea prices in auctions (which have fallen by around 20% since January this year).

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 1,860 1,906 2.5% 3,784 3,758 -0.7%
Other Income 13 17 36.8% 30 29 -4.3%
Expenditure 1,324 1,479 11.7% 2,958 3,064 3.6%
Operating Profit (EBDIT) 537 427 -20.5% 825 694 -15.9%
Operating Profit Margin (%) 28.8% 22.4%   21.8% 18.5%  
Interest (net) 50 34 -32.7% 102 88 -13.6%
Depreciation 55 56 1.6% 106 109 2.6%
Profit before Tax 444 354 -20.2% 648 527 -18.7%
Extraordinary items 190 62 -67.1% 180 140 -22.2%
Tax 109 109 -0.8% 152 166 8.9%
Profit after Tax 524 308 -41.2% 676 501 -25.9%
Net profit margin (%) 28.2% 16.2%   17.9% 13.3%  
Effective tax rate (%) 24.7% 30.6%   23.5% 31.5%  
No. of Shares (eoy) (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share* 37.3 21.9   24.1 17.8  
P/E ratio   7.1     8.7  
(* annualised)            

But still the topline performance was better in the quarter as compared to the March and June quarter, where Tata Tea witnessed a 7% and 4% fall in topline YoY respectively. However, a nearly 12% rise in operating costs took a toll on the company's operating margins, which fell a significant 640 basis points to 22.4% in 2QFY03. Higher expenses were a result of increased brand promotion expenses and also, higher raw material costs due to exports.

Cost break-up
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Material cost -96 33 - 139 329 136.8%
Staff cost 599 586 -2.1% 1,191 1,151 -3.4%
Other expenditure 822 860 4.7% 1,628 1,584 -2.7%
Total expenditure 1,324 1,479 11.7% 2,958 3,064 3.6%

The extraordinary income represents the dividend income of Tata Tea from its subsidiaries. This income saw a significant fall YoY during the quarter, as some part of the dividend income had already been received in the June quarter of FY03. The company's profits plunged by 41% YoY due to this. Excluding this dividend income component, Tata Tea's net profits fell by over 20% YoY in 2QFY03.

The strong performance of The Tetley Group Ltd. (the company's 98.6% subsidiary), is not reflected in the above results. The subsidiary has reported a 8% YoY sales growth during the first half of the current year (1HFY03) and EBIT growth of 6% during the same period.

At the current price of Rs 155 the stock trades at 8.7x annualised 1HFY03 earnings (including dividend income) and market cap to sales of 1.2x. The continued downtrend in the tea prices and undercutting by competitors is making life difficult for Tata Tea. And this is likely to continue in the medium term. But in the long run, the Tetley acquisition and 'Barista' are likely to reflect in the company's valuations.

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