• OCTOBER 30, 2004

Tata Tea: The right blend

Performance Summary
Tata Tea Limited has reported an encouraging 8% growth in consolidated revenues during the September quarter. The company's net profits are up over 55% led by improvement on the operating margin front, as well as higher other income owing to dividend received this quarter. The company's India operations continued to show a good turnaround reporting over 15% topline growth. Improved operating margins and buoyant other income saw profits growing by a significant 52% for the domestic business.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Income from operations 7,010 7,561 7.9% 13,804 14,631 6.0%
Expenditure 5,712 6,110 7.0% 11,314 11,859 4.8%
Operating Profit (EBDITA) 1,298 1,450 11.7% 2,491 2,771 11.3%
EBDITA margin (%) 18.5% 19.2%   18.0% 18.9%  
Other income 41 126 204.6% 144 132 -8.7%
Interest (net) 311 334 7.4% 632 646 2.1%
Depreciation 201 196 -2.6% 399 384 -3.6%
Profit before Tax 828 1,047 26.4% 1,604 1,873 16.8%
Tax 262 313 19.4% 502 579 15.3%
Minority interest (13) (15) - (32) (26) -
Share of profit/(loss) from associated undertakings (62) 43 - (62) 43 -
Profit after Tax/(Loss) 490 761 55.3% 1,008 1,311 30.1%
Net profit margin (%) 7.0% 10.1%   7.3% 9.0%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted Earnings per share (Rs) 34.9 54.2   35.8 46.6  
Price to earnings ratio (x)         8.8  

What is the company’s business?
Tata Tea is the largest integrated producer of tea in the world and has a market share of 23% in India. It has a total acreage of 24,500 hectares located in Kerala, Assam, Tamil Nadu and West Bengal and owns a majority stake in Consolidated Coffee Limited, the largest coffee company in Asia. Tata Tea's profile changed the day it acquired Tetley (FY01). From being a key player in a commodity industry (tea), it made an overnight transition to becoming the No. 2 globally in the branded tea market. Tetley has 29% share of the UK, 43% of Canada, 11% in the US and 19% of the Australian tea market. The company is looking to expand to regions in Asia Pacific and the Middle East.

What has driven performance in 2QFY05?
Sales: Globally, Tata Tea (including Tetley) has grown by nearly 8% during the September quarter. Of the total, non-India operations accounts for nearly 70% of consolidated revenues. Its Tetley subsidiary, which accounted for nearly 63% of consolidated operations, reported an improved 3% growth in 2QFY05 revenues (as compared to a 2% decline in 1QFY05). The effects of the promotional activity conducted in the June quarter seem to be making an positive impact on the topline. On the other hand, Indian operations were strong mainly owing to improved realisations on garden tea and strong performance of its branded tea operations. Together, both these entities led to the overall improved performance on a consolidated basis.

India operations
(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net Sales 2,017 2,349 16.5% 3,829 4,407 15.1%
Expenditure 1,580 1,742 10.3% 3,134 3,445 9.9%
Operating Profit (EBDITA) 437 607 38.9% 695 962 38.4%
EBDITA margin (%) 21.7% 25.9%   18.2% 21.8%  
Other Income 90 169 88.4% 204 191 -6.0%
Interest (net) 23 23 1.3% 46 45 -2.2%
Depreciation 58 55 -5.3% 112 107 -4.3%
Profit before Tax 446 698 56.6% 740 1,001 35.2%
Tax 96 166 72.5% 168 244 45.9%
Profit after Tax 350 532 52.2% 573 757 32.0%
Net profit margin (%) 17.3% 22.6%   15.0% 17.2%  
Effective tax rate (%) 21.6% 23.8%   22.6% 24.4%  
No. of Shares (m) 56.2 56.2   56.2 56.2  
Diluted earnings per share* (x) 24.9 37.9   20.4 26.9  
Price to earnings ratio (x)         15.2  
(* annualised)            

Operating margins: Both India as well as consolidated performance reflected strength in operating margins. Lower staff costs and other expenditure head was the key driver of operating margins of India centric operations. Consumption of raw material increased during the quarter due to increased utilisation of auction bought teas in brands pursuant to lower production in the company's own plantations (because of adverse weather conditions). In case of global operations, lower material costs (tea prices) as well as the operational restructuring benefits seem the key operating margin drivers.

Cost break-up (India operations)
as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
Material cost 3.4% 9.7% 6.9% 14.5%
Staff cost 31.9% 27.8% 31.6% 26.8%
Other expenditure 43.0% 36.7% 43.3% 36.9%
Total expenditure 78.3% 74.1% 81.8% 78.2%

Net profit: For both India and global operations, the over 50% profit growth came largely owing to the increase in income from investments (dividend income). It is slated to come in during the September quarter. Excluding this, growth in net profits during the first half of 2004 would have been over 20% for both Tata Tea consolidated and Tata Tea India.

Over the last four quarters (India operations)
  2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
Sales growth (YoY) 6.9% 6.6% 2.2% 12.5% 15.3%
OPM (%) 21.9% 13.3% 0.3% 17.2% 25.9%
Net profit growth (YoY) 13.6% -8.2% 433.4% 0.5% 52.2%

What to expect?
At Rs 410, the Tata Tea stock trades at 8.8x 1HFY05 annualised consolidated earnings. Though the management had indicated at its analyst meet recently that FY05 EPS could be lower than FY04, we believe, Tata Tea has restructured itself well. The company's move towards hiving off some of its plantation businesses is also a positive move over the long term, as the potential to expand margins increases (plantation is a high fixed-cost business).

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