It will take quite awhile for FMCG pretender king
Tata Global Beverages (TGB) to flaunt its brand strength in the manner of an MNC brand like Nestle or a Glaxo Smith Kline. But going by the directors' report it is trying 'ramba' hard to get there. Consolidated group turnover (excluding other income and investment income) for the latest period toted up to Rs 57.8 bn from Rs 48.5 bn recorded in the preceding year. The company does proudly claim that it is the second largest tea company in the world (more correctly it should read as tea marketing company, as it sources the vast bulk of the tea that it adds value to), operating in over 40 countries.
The Tata holding
The very interesting aspect of TGB is that the Tata Group controls only 35.4% of the total outstanding equity of the company. The other nugget is that more than 92% of the total number of outstanding shares is held by small investors who hold between 1-500 shares. TGB in turn holds a very profitable equity portfolio in a number of listed TATA group companies. Against a book value of Rs 4.9 bn, the market value of this holding as on March 31, 2010 was a cool Rs 12.2 bn. But these investments are 'tied' investments, in a manner of speaking, and have no practical value from the company's longer term point of view. Besides, these strategic investments have been tied round its neck long before TGB decided to embark on its new found FMCG mantra. The time may have come for the company to make a more judicious use of its resources. The total book value of all investments - including in its overseas subsidiaries was a very hefty Rs 23 bn.
What the company is about?
It presently markets some 10 brands of both tea and coffee, including ready to drink beverages. The ten brands being Tata Tea, Tetley, Himalayan, Good Earth, Chakra Gold, Eight O'Clock Coffee, Jemca, Kannan Devan, Vitax and, Grand. The principal markets out of India are the UK, USA, Canada, Europe, and the Middle East. Consequent to the frantic expansion, it presently makes do with a large extended family of 28 foreign subsidiaries, 9 Indian subsidiaries, 3 associate companies, and 6 joint ventures of subsidiaries - a grand total of 46 sidekicks.
TGB has come a long way from the days when it was initially incorporated in 1964 as Tata Finlay, to market value added tea made by Kannan Devan Hill Produce (KDHP), the tea plantations in the Anamallais & Munnar (all in the South) and, the tea plantations of Assam and West Bengal (in the North). These holdings together made up the giant tea assets owned by James Finlay of the UK. Tata Finlay metamorphosed into Tata Tea in 1983 after it acquired the businesses, including the North Indian and South Indian tea plantations, of James Finlay, after Finlay's exited India. In the early 1990's, the company also acquired a controlling stake in Consolidated Coffee, now called
The making of TGB
In its latest avatar it has subsumed its present name. The metamorphosis came within a few years of Tata Tea spinning off its North Indian and the bulk of the South India tea plantations into separate standalone companies, (Amalgamated Plantations Ltd and Kannan Devan Hills Plantations Company Pvt Ltd, KDHP). In a first for the industry, the workers have become the principal shareholders of these two companies today, with TGB being a minority shareholder. The parent deciding that making tea is its past strength, but marketing beverages is going to be its future strength. But the fact of the matter is also that, TGB inspite of affecting a name change, is still only in the business of tea, it grows tea, buys tea, and sells tea. It is the subsidiaries that do the talking. The divestment of its plantations has however led to a drastic reduction in its employee base from 58,888 in FY01 to 2419 in FY10!
The operational aspects
Understanding the operational aspects of tea companies is befuddling to say the least, and TGB complicates the picture even more. Going by one of the schedules in the accounts, 18% or 15.1 m kgs (26%, or 21.4 kgs in the preceding year) of the total volume of tea that it made ready for sale in FY10, came through in-house means, with the balance production being met through contract packers. (TGB still holds on to around two thousand acres of high yielding tea plantations in Munnar). But according to another schedule the total in-house production of tea was only 2.2 m kgs -- from its two Munnar based plantations. Yet another schedule however says that it consumed green leaf produced by its own estates to the extent of 8.5 m kgs, while the purchased tea that it consumed was to the extent of 10.1 m kgs! There are even more such riddles, so to speak. It also looks like that it consumed 102 m kgs of tea to produce 84.9 m kgs of made tea.
Interestingly enough while it sources tea from Amalgamated Plantations, it does not appear to have the same level of confidence in the quality of the tea produced by KDHP! In FY10, the total quantum of tea that it produced for sale was 84.9 m kgs, which was marginally more than the 84 m kgs that it produced in the preceding year. Thanks to the substantially higher prices that it was able to realize for every kg sold, TGB achieved a turnover of Rs 17 bn, an increase of 25% over that of the preceding year. The average cost of tea consumed per kg was Rs 114, (Rs 92 previously) with the average sale price rounding off to Rs 198 per kg (Rs 161 previously).
Hot air of sorts
The public are duly informed through the annual report, by the erudite vice chairman that 'over 65% of the consolidated revenues now come from markets outside India, mainly from developed retail markets. Over 90% of the turnover is from branded products with the balance coming from plantation and extraction activities. Tea constitutes 71% of the consolidated revenue with the balance coming from coffee and other products.' What the vice chairman does not say is that TGB's turnover accounted for close to 32% of consolidated group turnover against 26% in the preceding year. More importantly TGB also accounted for 41% of profit before tax and exceptionals, though lower than the 45% recorded in the preceding year. In other words inspite of the flowery words that the directors have chosen to describe the group performance, it is more hype than substance.
One will also do well to remember that a whopping 67% of the gross block of the consolidated group, amounting to Rs 29.5 bn, is made up of an intellectual property asset going by the brand name of 'Goodwill'. It represents the cost of brands acquired in Europe and the USA. This asset has meaning only if the brands outperform in the market place. Other intangible assets account for another Rs 2.2 bn, together making for a total of Rs 31.7 bn. That is a lot of good money already spent, banking on the brands to give superior returns.
eading between the lines
With companies on a globalization spree, deciphering the innards of companies gets more taxing both due to the broader spectrum of operations, and the increased number of legal entities through which the income is generated. But suffice to say that the increased sales and profits have come primarily from the higher prices realized on the sale of tea. The gross margins on the sale of tea in the latest year were substantially higher, which along with the market's ability to absorb the higher prices, helped TGB to generate appreciably higher cash flow from operating activities. But again, the real action was featured in its
'Operations from its investment activities' with close to Rs 10 bn of cold cash swooshing in and out of its bank accounts. This was partly aided by the sale of the company's holding in group company
Rallis India. The company seems to have a greater focus on side activities, it appears.
Though TGB has a plethora of subsidiaries and such like, compounded by the many inter-se transactions to boot, it has grouped their activities under 5 entities. The largest by turnover is Tata Tea (GB) which accounts for 66% of the total turnover of the subsidiaries. But the profit margins before tax are a wafer thin 4.8%. Next in the pecking order is Tata Coffee accounting for 30% of all sales, and a pre-tax margin of 12%, followed by Tata Tea Inc, tossing in a middling 2.5%. The latter was however able to clock profit margins of 26%. The mystery player here is Tata Tea Capital which recorded a pretax margin of 88% on a turnover of Rs 449 m. This company is apparently some sort of an investment arm of the immediate group. The sour punch in this grouping is the smallest subsidiary, Mount Everest Mineral Water, which recorded a loss of Rs 141 m on a turnover of Rs 205 m. That would qualify this division in the negative net worth territory. The subsidiaries (book value of investments Rs 19.9 bn) barring Tata Coffee pay no dividend. But, then, remember that subsidiaries barring the odd one never pay any dividends.
More about hope
This then is what the group is all about. It is more about promise than actual happening.
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.