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Tata Coffee: Growth at Eight 'O' Clock - Views on News from Equitymaster
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Tata Coffee: Growth at Eight 'O' Clock
Dec 3, 2009

Performance summary
  • Tata Coffee’s top line in 2QFY10 grew by 14% YoY. This increase was aided by strong growth in coffee sales.
  • Operating margin increased by 2% to 19.5% on the back of lower raw material and lower other expenditure as a percentage of sales.
  • Net profit fell by 29% during the quarter. This fall was due to higher tax expense.
  • Net profit during 1HFY10 increased by 34% aided by higher operating income. The net profit could have been higher but for higher tax expense during the period.


Financial snapshot
(Rs m) 2QFY09 2QFY10 % change 1HFY09 1HFY10 % change
Net Sales 2,792 3,174 13.7% 5,247 6,473 23.4%
Expenditure 2,301 2,555 11.1% 4,387 5,141 17.2%
Operating profit (EBDITA) 491 618 25.9% 861 1,332 54.7%
EBDITA margin (%) 17.6% 19.5%   16.4% 20.6%  
Other income 13.073 5.111 -60.9% 20.349 5.387 -73.5%
Interest 164.827 158.272 -4.0% 322.028 316.079 -1.8%
Depreciation 79.969 88.36 10.5% 156.94 179.557 14.4%
Profit before tax 260 377 45.3% 402 842 109.2%
Exceptional Items 0 1   0 29  
Minority interest 49 115 136.5% 79 243 207.4%
Tax 85.509 171.454 100.5% 135 316 134.3%
Profit after tax/(loss) 125.3 89.16 -28.8% 188.12 252.73 34.3%
Net profit margin (%) 4.5% 2.8%   3.6% 3.90%  
No. of shares (m) 19 19   19 19  
Diluted earnings per share (Rs)*         14.8  
Price to earnings ratio (x)*         22.9  

What has driven growth in 2QFY10?
  • During 2QFY10, sales growth of the company was aided by robust sales of its subsidiary Eight ‘O’ Clock (EOC) coffee. However, sales of the standalone company fell by 14% during the quarter due to slowdown prevailing in some of Tata Coffee’s markets.

      2QFY09 2QFY10 1HFY09 1HFY10
    Raw material 33.8% 32.8% 33.1% 32.8%
    Staff costs 11.1% 11.1% 12.3% 11.1%
    Sales promotion and selling expense 17.5% 17.8% 18.2% 18.8%
    Other expenditure 20.0% 18.8% 20.0% 16.8%

  • Operating income grew by 26% YoY. This growth was aided by a fall in raw material and other expenditure as a percentage of sales. Raw material was lower by 1% as a percentage of sales to stand at 33% while other expenditure fell by 1% as a percentage of sales during the quarter to stand at 19%.

    Segment breakup
      2QFY09 2QFY10 % change 1HFY09 1HFY10 % change
    Coffee and Other Produce 2,593 2,957 14.0% 4,855 6,009 23.8%
    EBIT margin 15.2% 16.7%   13.8% 16.8%  
    Tea 148 154 4.2% 285 334 17.5%
    EBIT margin 21.4% 28.0%   21.0% 31.4%  
    Estate Supplies Division 66 77 15.7% 139 157 12.6%
    EBIT margin 2.4% 1.4%   2.8% 1.6%  
    Other 12 12 2.2% 24 25 5.9%
    EBIT margin 46.0% 43.5%   39.8% 45.7%  

  • During the quarter, consolidated sales of coffee increased by a robust 14% on the back of strong growth of EOC coffee. Operating margins for this segment after deducting depreciation expense improved by 1.5% to 16.7% due to higher contribution of sales coming from branded coffee and lower raw material costs. Tea which contributes 5% of overall sales grew by 4% while margins improved by 7% to 28% during the quarter. Sales of Estate supplies and others grew by 16% and 2.2% respectively during the quarter.

  • Net profit margins fell by 3% during the quarter in spite of strong growth in operating income. This was the result of higher tax expense. Tax expense increased by 101% during the quarter mainly due to tax provision charge of Rs. 19.1 m from previous years.

What to expect?
At a price of Rs.338, the stock is trading at 21 times its trailing twelve month earnings. We believe this is expensive for a company in the coffee business. Furthermore, we are not comfortable with the leverage the company has on its books. We believe that this company would be an interesting story as it draws more of its revenue from the sale of branded coffee.

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