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Tata Tea: Strong consolidated performance - Views on News from Equitymaster

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Tata Tea: Strong consolidated performance
Nov 24, 2009

Performance summary
  • Consolidated sales grew by a robust 18.2% YoY in 2QFY10.
  • During the quarter, operating (EBITDA) margins fell marginally by 0.2% to 14.2%. This was due to higher raw material prices offset by lower other expenditure.
  • Net profit increased by 32% YoY aided by lower interest costs and tax expense.
  • Bottom line for 1HFY10 fell by 8.7% while the net margins fell by 2.8% to 9.9%. This fall was due to a large one time income recorded in 1HFY10. While adjusting for one time income, net profit jumped by 172% YoY and net margins improved by 5% to 8.7%.


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Income from Operations 11,871 14,028 18.2% 23,045 26,984 17.1%
Expenditure 10,374 12,289 18.5% 20,089 23,491 16.9%
Operating Profit (EBDITA) 1,497 1,739 16.2% 2,956 3,493 18.2%
Operating Profit Margin (%) 12.6% 12.4%   12.8% 12.9%  
Other Income 219 227 3.7% 293 273 -6.8%
Interest (Net) 154 98 -36.3% 263 150 -42.8%
Depreciation 221 252 13.8% 443 496 12.0%
Profit before Tax 1,341 1,617 20.6% 2,544 3,120 22.7%
Extraordinary income/(expense) 1,984 2,201 11.0% 2,076 343 -83.5%
Share of profit/(loss)from associates 322 244 -24.4% 333 193 -42.0%
Minority interest 439 226 -48.5% 547 43 -92.1%
Tax 1,031 961 -6.7% 1,471 934 -36.5%
Net Profit 2,178 2,874 32.0% 2,935 2,679 -8.7%
Net profit margin (%) 18.3% 20.5%   12.7% 9.9%  
No. of Shares (m) 61.8 61.8   61.8 61.8  
Earnings per share (Rs)*         72.0  
P/E (x)*         9.4  
* trailing twelve month earnings

What has driven performance in 2QFY10?
  • Tata Tea reported strong consolidated sales growth during the quarter. This growth was led by robust performance of brands and price increases taken to offset input cost escalations. In addition, the company witnessed strong volume growth and a favorable currency during the quarter. International business saw a 13% YoY growth. On the other hand, domestic sales improved by 33% YoY. This was driven by strong performance of the branded tea operations.

  • The tea segment contributing 77% to the total consolidated sales increased by 16% YoY. The coffee segment saw a growth of 27% YoY led by higher prices. It now contributes 22% to the total sales. The company maintained its volume leadership in the Indian market with a growth of 22% YoY, while being second in value terms. Among its overseas businesses, its business in US outperformed its other markets in the UK, Canada and Australia.

    Segment breakup (%) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Tea 9,170 10,633 15.9% 17,959 20,371 13.4%
    % of sales 77.2% 75.8%   77.9% 75.5%  
    PBIT margins 10.9% 9.5%   11.3% 10.0%  
    Coffee 2,587 3,286 27.0% 4,850 6,393 31.8%
    % of sales 21.8% 23.4%   21.0% 23.7%  
    PBIT margins 15.4% 15.6%   13.8% 16.0%  
    Others 113 101 -10.3% 234 212 -9.7%
    % of sales 0.9% 0.7%   1.0% 0.8%  
    PBIT margins -87.7% -28.1%   -64.4% -41.2%  
    Unallocated 9 8 -10.0% 2 9 394.7%
    Total 11,879 14,028   23,045 26,984  

  • The consolidated operating income grew by 16% YoY. This was due to lower advertisement spending, employee costs and other expenditure as a percentage of sales. However, hardening commodity prices resulted in pressure on margins. The quarter witnessed an increase of 26% YoY in raw material costs. On a standalone basis, the margins increased by 0.3% to 7.8%. This was aided by judicial price increases.

  • Consolidated net profits increased 247% YoY during the quarter after adjusting for extraordinary items. Profit before tax improved by 21% YoY led by higher sales and lower interest costs. The standalone profits increased by 69% YoY on excluding the extraordinary items.

What to expect?
At the current price of Rs 860, the stock is trading at a price to earnings multiple of 9 times its 12 month trailing consolidated earnings. Tata Tea has invested heavily over the last year to transform itself from a tea and coffee company to a multi beverage company. The company is looking at expansion into new regions. It is targeting water and Ready-to-Drink segments for faster growth.

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