• MARCH 21, 2005

Tata Tea: Checking out its blend!

A name associated with the Indian Tea industry for over 50 years, Tata Tea is today the world's 2nd largest branded tea company with presence in over 35 countries across the globe and the country's largest in value terms. The company has been in the limelight for sometime now because of its transition from a commodity led business to a dominantly branded one. We decided to take a closer look at the transformation and how the company has achieved major milestones over the years.

The business and its journey…
Established in 1963, Tata Finlay was a joint venture between the Tata's and James Finlay to develop value added tea for its Indian patrons. In 1983, the company bought out the shareholding of James Finlay and since then, the company has continued its shopping spree. Tata sells its tea in India, under the brand name of Tata Tea premium, Gemini, Agni, Kanan Devan, Chakra Gold and Temptation. Branded teas contribute 88% of the turnover , with the remaining 12% coming from bulk tea and spices. (Source: Company website).

In 1991, the company acquired a 52% stake in Consolidated Coffee, which was re-christened Tata Coffee and is a subsidiary of the company. In the largest leveraged buyout of its kind (in India), Tata Tea bought out the Tetley group U.K. in 2000. Consequently, the group has come to become the No. 2 brand worldwide in the branded tea market, with Lipton of Unilever ensconced at the top.

Tata Tea's operations span the entire value-chain in tea, including research and development, tea cultivation, manufacture of black and distribution. It owns 51 tea estates and 1 coffee & cardamom estate in India, with an area of 26,500 hectares under tea cultivation and produces around 60 m kgs of black tea and 2 m kgs of instant tea annually. It operates 9 modern packaging units across the country. The company also has a major presence in Sri Lanka, through its 51% subsidiary, Watawala Plantations Ltd.

Current strategy…
The company has decided to exit its plantation business, which would lead to it emerging as a focused branded tea company. It will transfer 15 estates in Munnar (Kerala) to a new limited company which would be owned by the company workers and each worker could get a stake in the new company with a minimal investment of Rs 3,000.The Tata's would have a stake of around 20% and would continue to support the new company for its marketing and R&D needs. The other estates would be sold outright through the tender route.

The reason for this move was, when the Tata's bought over Tetley, the idea was that Tetley will source their tea from Tata Tea's gardens in India. Though this did happen on a limited scale, considering that Tetley required specific blends for its high value markets and the fact that tea prices touched all time low globally, the initial thought process was not entirely successful. It made more sense for Tetley to source tea competitively.

But overall, the company realised that by divesting this side of its business, all these negatives go away from its books and it merely sources tea from these very plantations (or may be other plantations globally) at competitive rates and changes its whole business profile. Also, the presence of the tea estates in the company's books was a burden to the tune of Rs 1 bn on the bottomline in the past 5 years, owing to high costs but low tea prices.

Over the years…
(Rs m) FY00* FY01* FY02 FY03 FY04
Sales 9,125 8,229 30,278 28,725 30,496
Other Income 620 683 436 953 626
Expenditure 8,094 7,636 29,447 27,889 28,110
EBDIT 1,030 593 831 836 2,385
OPM% 11.3% 7.2% 2.7% 2.9% 7.8%
Net profit after tax (Loss) 1,246 1,003 1,035 825 2,050
Interest 176 250 1,804 1,656 1,320
* Standalone basis

From the above table, it is evident that the acquisition of Tetley has come into its own over the past couple of years, giving it access to countries like USA, Australia, U.K, Canada etc. Although operating margins were not very high in FY02 and FY03, they catapulted to 7.8% in FY04, led by continued restructuring to align Tata Tea's and Tetley strengths. The high interest cost debt taken to acquire Tetley was retired and fresh debt that had a lower coupon was issued. The Interest outgo has reduced significantly during the years from Rs 1,804 m in FY02 to Rs 945 m in 9mFY05, which translates into a CAGR decline of 12% since FY02. The second round of debt refinancing will lower the interest burden further resulting in a savings of around Rs 120 m per annum.

Icing on the cake…

Tata Industries (at cost)
Company Qty Market Value* (Rs m)
Investments In Traded Stocks    
Rallis India Ltd 2,938,713 538
Tata Chemicals 15,545,522 1,749
Tata Coffee (Subsidary) 6,317,931 1,507
Indian Hotels Co. 122,268 59
Indian Resort Hotels 64,670 10
Tata Motors 368,322 124
Titan Industries 433,726 80
Barista (at cost)   290
Investments In Unlisted Stocks    
Tata Sons   3,179
Others   1,139
Value Of Investments per equity share(Rs)   164
* 25% below the market price on March 16, 2005

Tata Tea has various short as well as long term non – tea investments. In the recent past, the values of these investments have grown multiple times. Tata Tea has a 51% stake in Tata Coffee and a 22% stake in Rallis India.

What to expect?
At the current price of 525, the stock trades at 25x 9mFY05 earnings. Although, trading on a higher side of the price band currently, the fact that restructuring, both on the debt side as well as the plantation side is yet to fully filter in, the company looks fundamentally strong. Also, its international presence has made its business model more diversified and stable. The value of the company's investments in Group companies is an added positive. We are working on Tata Tea numbers and will put up our updated research on the company soon.

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