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Tata Tea: Strengthening operations - Views on News from Equitymaster
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  • Oct 30, 2001

    Tata Tea: Strengthening operations

    Tata Tea, one of the largest integrated producers of tea in the world, has declared an 18% decline in 2QFY02 topline and a 3% decline in net profits (excluding extraordinary income). However, if we include an extraordinary income of Rs 190 m received by way of dividends from subsidiaries, then 2QFY02 profits zoom 45% YoY.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Net Sales 2,275 1,860 -18.2% 4,200 3,784 -9.9%
    Other Income 47 13 -73.3% 48 30 -36.5%
    Expenditure 1,682 1,324 -21.3% 3,366 2,958 -12.1%
    Operating Profit (EBDIT) 593 537 -9.5% 834 825 -1.0%
    Operating Profit Margin (%) 26.1% 28.8%   19.9% 21.8%  
    Interest 50 50 -0.2% 109 102 -6.3%
    Depreciation 49 55 13.5% 100 106 6.0%
    Profit before Tax 541 444 -18.0% 674 648 -3.8%
    Extraordinary items 16 190 - 320 180 -43.6%
    Tax 197 109 -44.3% 247 152 -38.2%
    Profit after Tax 361 524 45.3% 747 676 -9.5%
    Net profit margin (%) 15.9% 28.2%   17.8% 17.9%  
    Effective tax rate (%) 36.3% 24.7%   36.6% 23.5%  
    No. of Shares (eoy) (m) 56.2 56.2   56.2 56.2  
    Diluted earnings per share* 25.7 37.3   26.6 24.1  
    P/E ratio   3.8     5.8  
    (* annualised)            

    Though the company's sales volumes are under pressure, the company's increasing grip on its operating expenditure has resulted in a significant 270 basis points improvement in operating margins to 28.8%. Tata Tea's control on its raw material costs and other expenses has somewhat eased the pressure on the company. Consumption of Raw Materials during the quarter was lower on account of higher consumption of own garden teas in blends and resultant lower auction purchases.

    Improving cost advantage
    (Rs m) 2QFY01 2QFY02 Change
    Raw material expenses 249 -96 -138.7%
    Staff cost 556 599 7.7%
    Others 877 822 -6.4%
    Total expenditure 1,682 1,324 -21.3%

    On a consolidated half yearly basis, Tata Tea's bottomline has shown a 16% improvement YoY (excluding extraordinary items effect). But the company's topline has declined 10% during the period. Here too, the improvement in operating margins is evident.

    The company is restructuring itself by exiting joint ventures. The company currently holds 50% of the equity in Tata NYK (a joint venture with NYK of Japan). Of the 50% equity held, Tata Tea has decided to divest 40% in favour of NYK, Japan. The resultant capital gains of Rs 76.9 m from this divestment is expected to be reflected in the third quarter of the current financial year. The company has also decided to wind up Tat-Hitachi Sales (Japan) Ltd., a join venture company with Hitachi. However, the management does not expects negligible gain from this divesture.

    At the current price of Rs 140 the stock trades at a P/E of 8x annualised 1HFY02 earnings (excluding extraordinary items). Though the company's topline is under pressure, the company's improving focus on operations, its 'Tetley' and 'Barista' acquisitions make Tata Tea the company to watch out for in future.



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