Rich flavour - Business Standard
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PENNY WISE |
Sarath Chelluri / Mumbai December 1, 2008, 20:24 IST |
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Tata
Tea has come a long way from being a large domestic plantation company
into the world’s second largest branded tea player supported by various
tea brands (own and acquired). While these cater to nearly all
segments, cumulatively they have also helped the company sustain
leadership position in key global markets.
In
the domestic market, too, the company’s strategy of focusing on volume
growth has helped it attain volume-based leadership position. Notably,
its moves in the last two years, to enter or expand into other beverage
segments should see it emerge as a global beverage company in years to
come. Also, the company has significant amount of cash and investments
and an annual consolidated cash flow of over Rs 500 crore, which it can
use to materialise its growth plans.
Tea - a lion’s share
Tea segment contributes around three-fourths of the consolidated sales
of the company. The domestic tea segment, which accounts for 25 per
cent of consolidated sales (or a third of total tea sales), owns brands
like “Tata Tea Premium”, “Tata Tea Agni”, “Tata Tea Gold”, and “Tata
Tea Life”, coupled with regional brands like Chakra Gold, Kanan Devan
and Gemini is present across all segments in the value chain.
This business, which grew by around 8 per cent in FY08, has seen
growth rates perk up to 13 per cent in the first half of FY09 driven by
nearly 9 per cent growth in volumes across all brands. To an extent,
uptrading by customers, from the unorganised segment into the branded
segment, has also helped in the form of higher sales growth in Tata Tea
Agni (an economy brand).
While the consolidated Tea sales were not impressive (grew by only 3
per cent) in FY08, these have also been looking up off late. The slow
growth earlier can attributed to black tea major Tetley’s dominance in
the overall revenues (around two-thirds of consolidated Tata Tea
revenues) which caters to mature markets in UK and the Americas.
However, the focus on ‘health & wellness’ platform diversifying
away from the ageing black tea through aggressive promotion of new-age
green, fruit & herbal teas, iced ready-to-drink teas and exotic
specialty tea would drive the future growth in these markets.
While Tetley holds stranglehold in the developed markets, the
expansion of Tata Tea in other large markets (including Russia and
China) on the back of existing brands (Tetley and Tata Tea), will drive
future growth. Likewise, the company may also suitably deploy its
international brands in the domestic market, which would help it garner
greater share in the tea market.
Coffee and water
The coffee segment accounts for one fifth of the total revenues and has
grown by more than 30 per cent in FY08, with strong numbers from the
instant coffee segment. While majority of the coffee revenues come from
exports and instant coffee contributes around 60 per cent of the total
revenues earned by the coffee business, the company is gradually
enhancing its presence in the branded segment as well.
PERFECT BREW |
Rs crore |
FY08 |
FY 09 (E) |
FY 10 (E) |
Net Sales |
4,366.0 |
4,795.0 |
5,025.0 |
Adjusted PAT * |
281.0 |
369.0 |
417.0 |
EPS (Rs) |
45.4 |
59.5 |
67.3 |
P/E (x) |
11.6 |
8.9 |
7.9 |
E: Analyst estimates
* Excluding extraordinary items |
The company’s acquisition (through Tata Coffee) of US-based Eight
O’clock Coffee (among top three brands) in 2006 has helped gain a
strong presence in that market, and is reflecting positively on the
consolidated entity.
For now and in the branded coffee market, the company is also
focussing on Russia and other CIS countries, which are among major
markets, accounting for around three-fifths of global instant coffee
sales. Any action on the proposed acquisition or joint-venture in
Russia will further consolidate the company’s position in that region.
On the domestic front, brands like Coorg, Tata Café and Tata Kapi
face stiff competition from players like Nestle and Bru. The company is
looking towards pure coffee sales through its brand Coorg coffee in the
major markets of Andhra Pradesh and Tamil Nadu, as a growth driver.
Although Tata Coffee sold off its stake (around 34 per cent) in
retail coffee-chain, Barista, the company plans to enter this segment
once the non-compete agreement with Barista expires in the next year.
These plans would garner superior revenues and enhance the company’s
brand visibility in the domestic market.
Although very small, the ‘mineral water’ segment is estimated to
have promising prospects. Tata Tea’s acquisition of Mount Everest
Mineral Water (around 33 per cent) allows it to use their “Himalayan”
brand. This brand, which is primarily present in the institutional
segment, is now being expanded to the retail segment as well. ‘Natural
mineral’ water carries a premium price tag abroad for its health
benefits.
The proposed introduction of “Himalayan” in Europe and the US, by
leveraging the distribution network of Tetley and Eight O Clock, will
be beneficial as there is demand for mineral water in these countries.
Investment rationale
With Tata Tea preparing to launch several tea variants, energy drinks
along with promotion of existing tea brands as well as mineral water in
India and abroad, expect the company’s consolidated advertising
expenditure to remain unchanged (at an average around 20 per cent of
sales) in the future. In the near-term though, operating margins are
likely to remain under pressure due to high tea prices, even as the
company has undertaken selective price hikes in the previous quarters.
With regards to growth, domestically, factors like low per capita
tea consumption, rising in disposable incomes and increasing awareness
of health benefits of tea augur well for the tea industry. Tata Tea,
which is a leader in the business, should grow ahead of the industry,
given the initiatives undertaken as well as appetite for growth.
Globally, expansion of product offerings including herbal tea and green
teas and foray in newer markets in West Asia, Asia Pacific and Africa
will further help Tata Tea sustain growth at the consolidated level in
the future.
With low debt on its books and high amount of cash and investments
(worth about Rs 100 per share), Tata Tea is also comfortably placed to
grow inorganically. At Rs 528, the stock is trading at around 8 times
its estimated FY10 earnings and is expected to deliver 18-20 per cent
returns annually, in the next two years.
Edited by Hitesh Shah - 01/Dec/2008 at 12:40pm