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Tata Tea: On growth path - Views on News from Equitymaster

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Tata Tea: On growth path
Oct 30, 2007

Performance summary
  • Driven by volume and value sales, consolidated revenues grow 13% YoY in 2QFY08; company has achieved the volume leadership position ahead of Unilever in the quarter.

  • Consolidated EBITDA margins improve marginally due to lower costs.

  • Excluding the extra ordinaries, the net profit after NIPO falls by 9% YoY due to lower other income and higher interest costs to fund its acquisitions.

  • Indian operations grow 16% YoY for 2QFY08 led by stronger branded sales.

  • Glaceau sale and Mount Everest Mineral Water (15% stake) acquisition were completed in the quarter.

Consolidated Financial Performance
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Income from Operations 9,740 10,965 12.6% 17,729 21,166 19.4%
Expenditure 7,938 8,903 12.1% 14,351 17,425 21.4%
Operating Profit (EBDITA) 1,801 2,062 14.5% 3,378 3,741 10.7%
Operating Profit Margin (%) 18.5% 18.8%   19.1% 17.7%  
Other Income 410 204 -50.1% 484 291 -40.0%
Interest (Net) 472 660 39.9% 746 1,606 115.3%
Depreciation 258 240 -6.7% 460 498 8.3%
Profit before Tax 1,482 1,366 -7.8% 2,657 1,928 -27.4%
Extraordinary income/(expense) 670 (33) - 652 52 -92.0%
Tax 268 373 39.3% 590 514 -13.0%
Profit after Tax/(Loss) 1,884 960 -49.0% 2,718 1,467 -46.0%
Share of profit/(loss) from assosiates 107 250 134.6% 97 216 122.7%
Minority interest 49 118 139.1% 74 135 82.6%
Group consolidated net profit 1,941 1,092 -43.8% 2,742 1,549 -43.5%
less: PAT relating to NIPO 304 241 -20.9% 338 233 -31.1%
Net profit 1,637 851 -48.0% 2,404 1,316 -45.3%
Net profit margin (%) 16.8% 7.8%   13.6% 6.2%  
No. of Shares (m) 56.2 61.8   56.2 61.8  
Earnings per share (Rs)*         48.6  
P/E (x)*         16.8  
* 12months trailing

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 21% in India (FY06). 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 of UK (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 26% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand into Asia Pacific and the Middle East.

Tata Tea 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 company, which is owned by the plantation workers (each worker got a stake in the new company with a minimal investment of Rs 3,000). The Tata’s hold 18% stake in the new company and will continue to support its marketing and R&D needs

What has driven performance in 2QFY08?
Brewing growth: The consolidated sales were up 13% YoY in 2QFY08, driven by higher branded tea sales in both the domestic and international markets. The acquisitions also have performed well to further aid the growth in the topline. Though the performance was affected due to exchange rate fluctuations, the highlights of the results were the company achieving leadership in volumes higher that Unilever. The branded tea and coffee sales were higher by 13% YoY. In international markets the company gained market share. In 1HFY08, the topline grew by 19% YoY led by 27% YoY growth in Great Britain, 31% YoY growth in India, 32% YoY and 11% YoY growth in US and rest of the world respectively. Overall the volume portfolio grew by 17% YoY.

Indian operations: Income from operations increased by 16% YoY in 2QFY08. While the volume sales were higher by 15% YoY, value sales were higher by 18% YoY for 2QFY08. Domestic operations contributed nearly 29% of the consolidated revenues. During the quarter, the company completed the acquisition of 15% stake in Mount Everest Mineral Water (MEMW). An additional 9.15% stake, at Rs 140 per share, is agreed to be purchased from the current promoters of MEMW. This will be followed by an open offer for 20% of the shares at the rate of Rs 140 per share, as prescribed by SEBI. The key brands – Agni, Tata Tea Premium, Tata Tea Gold, Gemini did well in terms of volume sales. The company’s rural initiatives are paying off. Indian operations have achieved an all-time high volume share of 19.8%, taking them to market leadership status in India

Indian operations
Rs m 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Income from Operations 2,740 3,191 16.4% 5,284 6,091 15.3%
Expenditure 2,027 2,434 20.1% 4,013 4,713 17.4%
Operating Profit (EBDITA) 714 757 6.1% 1,270 1,378 8.5%
Operating Profit Margin (%) 26.0% 23.7%   24.0% 22.6%  
Other Income 488 290 -40.5% 600 428 -28.6%
Interest (Net) 39 131 240.0% 68 267 293.1%
Depreciation 48 53 10.9% 93 101 8.0%
Profit before Tax 1,115 863 -22.6% 1,709 1,438 -15.9%
Extraordinary income/(expense) 680 (20)   658 (11) -101.7%
Tax 156 195 25.3% 282 349 23.6%
Profit after Tax/(Loss) 1,639 648 -60.5% 2,085 1,078 -48.3%
less: PAT relating to NIPO 304 241 -20.9% 337.8 232.8 -31.1%
Net profit 1,335 408 -69.5% 1,747 845 -51.6%
Net profit margin (%) 48.7% 12.8%   33.1% 13.9%  

Also, the company has planned to transfer the North India Plantation Business (NIPO) to a new company viz., Amalgamated Plantations Private Ltd (APPL). The scheme has been approved by the shareholders of the company as well as APPL on April 5, 2007. As per the scheme, North India Plantation Operations is to be transferred to APPL with effect from April 1, 2007 for a total consideration of Rs 3.6 bn in addition to transfer of agreed current assets and current liabilities and certain other related assets at mutually agreed values. The petition for sanction of the scheme is now pending before the High Court of Calcutta and would happen once approved. This move is expected to improve margins going forward.

Tetley: Tetley reported 2% YoY increase in revenue in rupee terms, however, adjusting for currency movements, revenue growth for Tetley was around 7% YoY for the quarter. Strong growth in UK, Canada and France to the topline growth. Further the Vitax and Joekels have started contributing. Operating profit for Tetley is higher by around 37% YoY, primarily on account of favorable phasing of advertising expenses and lower operational costs.

Tata Coffee: The consolidated sales grew by 28% YoY mainly due to the acquisition of Eight O’clock Coffee. The market share improved from 4.6 % to 4.7% in the quarter.

Consolidated operations cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 23.3% 26.9% 22.9% 26.7%
Staff Cost 13.6% 13.4% 13.6% 13.3%
Advertisement 21.6% 19.1% 20.3% 20.0%
Other Expenditure 23.0% 21.9% 24.1% 22.3%

Steady margins: The margins on the consolidated basis, improved by 30 basis points, due to efficient reduction of operating costs. However raw material prices as a percentage of sales increased from 23% to 27% in this quarter. On the domestic front, the margins fell by 2.3% YoY mainly due to higher raw material costs.

Its all about extraordinary: The net profits on a consolidated basis have fallen by 48% YoY. Excluding the extraordinary item, the profits have fallen by 9% YoY for the quarter after considering the NIPO profits. The interest cost was higher as the company had taken loans to finance the acquisitions done by the company. Further the other income was also lower due to lower dividend income. Even the effective tax rate was higher thereby causing further decline in the net margins. For the domestic operations, the bottomline has fallen by 35% YoY on the back of lower operating margins, other income and higher interest costs (up 240% YoY), excluding the extraordinary item. Its contribution fell from 82% to 48% to the total profits.

What to expect?
At the current price of Rs 815, the stock is trading at a price to earnings multiple of 16.8 times its 12-month trailing consolidated earnings. Acquisitions of EOC, Joekels, and Vitax have contributed to the growth. Volume and value sales are also witnessing a firm trend. The company has planned its strategies in expanding its products and geographies. Tata Tea is well poised on its path for moving from being a tea company to complete beverage company.

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