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Tata Tea: High tea! - Views on News from Equitymaster
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Tata Tea: High tea!
Nov 22, 2006

Performance summary
The world’s second largest branded tea company, Tata Tea, announced good results for the second quarter ended September 2005. While on a consolidated basis the topline grew by 25% YoY, the bottomline registered a 91.8% YoY growth aided by higher other income, lower tax outgo and extraordinary income. As far as its Indian operations are concerned, the topline grew by 7.3% YoY, while margins remained stable.

Consolidated Financial Performance
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from Operations 7,788 9,740 25.1% 14,955 17,729 18.5%
Expenditure 6,173 7,938 28.6% 11,957 14,351 20.0%
Operating Profit (EBDITA) 1,616 1,801 11.5% 2,998 3,378 12.7%
Operating Profit Margin (%) 20.7% 18.5%   20.0% 19.1%  
Other Income 190 410 115.2% 216 484 123.8%
Interest (Net) 244 472 93.6% 504 746 48.0%
Depreciation 184 258 40.3% 361 460 27.3%
Profit before Tax 1,379 1,482 7.5% 2,349 2,657 13.1%
Extraordinary income/(expense) (20) 670 - 219 652 -
Tax 384 268 -30.2% 710 590 -16.8%
Profit after Tax/(Loss) 975 1,884 93.2% 1,858 2,718 46.3%
Share of profit/(loss) from assosiates 76 107 40.5% 76 97 28.1%
Minority interest 39 49 27.7% 58 74 26.9%
Net profit 1,012 1,941 91.8% 1,876 2,742 46.1%
Net profit margin (%) 12.5% 19.3%   12.4% 15.3%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Earnings per share (Rs)*         68.6  
P/E (x)*         10.3  
* 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 player 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 plantations 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 Tatas hold 18% stake in the new company and will continue to support its marketing and R&D needs.

What has driven performance in 2QFY07?

Indian operations: In 2QFY07, the sales of the Indian operations grew by 7.3% YoY. Higher brand sales, improved auction realizations and higher exports contributed to the topline performance. Domestic brand sales were higher by 9% YoY on value terms. However, the share of the Indian operations to the consolidated revenues decreased to 28% in 2QFY07 as compared to 32.8% in 2QFY06.

Indian operations
Rs m 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from Operations 2,553 2,740 7.3% 4,917 5,284 7.4%
Expenditure 1,873 2,027 8.2% 3,799 4,013 5.6%
Operating Profit (EBDITA) 679 714 5.0% 1,118 1,270 13.6%
Operating Profit Margin (%) 26.6% 26.0% 22.7% 24.0%
Other Income 243 488 100.7% 302 600 98.5%
Interest (Net) 24 39 59.8% 44 68 53.8%
Depreciation 55 48 -12.3% 99 93 -5.7%
Profit before Tax 844 1,115 32.1% 1,277 1,709 33.8%
Extraordinary income/(expense) (17) 680 73 658 806.3%
Tax 198 156 -21.3% 286 282 -1.4%
Profit after Tax/(Loss) 629 1,639 160.5% 1,063 2,085 96.1%
Net profit margin (%) 24.6% 59.8% 21.6% 39.5%

Consolidated view: The consolidated sales were up 25.1% YoY in this quarter driven by higher branded tea sales in both the domestic and the international markets. The international sales were up 38% YoY. The new acquisitions namely Good Earth, Jemca and Eight o’ clock coffee too performed well. Improved auction realizations and higher exports too aided the growth. During the quarter, The Tetley Group (the company’s 98.58% UK subsidiary) reported an 11% YoY growth in revenues.

Indian operations cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 17.9% 22.3% 22.1% 25.4%
Staff Cost 19.6% 18.4% 20.2% 18.0%
Advertisement 8.9% 9.5% 8.3% 8.1%
Other Expenditure 27.0% 23.7% 26.7% 24.6%

Margin pressure: Margins on a standalone and consolidated basis witnessed a decline of 0.6% and 2.2% respectively. Higher tea prices coupled with increased volumes and higher investments in brand building led to higher expenditure. The company has been running an employee separation scheme since last year, which is reflected in staff costs declining as a percentage of sales during the quarter.

Extraordinary effect: Tata Tea’s consolidated net profits were up 91.8% YoY during the quarter led by the extraordinary income to the tune of Rs 670 m (profits on sale of investments) received by the company. Excluding this, the bottomline was up 25.6% YoY. On a standalone basis, excluding the extraordinary income, the net profits were up 52.5% YoY. Standalone profits contributed 85% to the total profits. Higher other income due to better returns on investments further aided the bottomline growth.

What to expect?
At the current price of Rs 704, the stock is trading at a price to earnings multiple of 10.3 times its 12-month trailing consolidated earnings. The company’s acquisitions are performing well. Going forward, with a pick-up in branded tea sales, the topline performance is expected to remain strong. Also, its restructuring efforts are paying off and the company is now moving from a tea player to a complete beverage player.

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