Dec 1, 2008

Business - Tata Tea

Sarath Chelluri

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.
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.

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