Tata Global Beverages - phase of corporate actions:: Kotak Sec

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Tata Global Beverages (TGBL)
Consumer products
Likely entering a phase of significant corporate actions. TGB’s 2QFY11 results
disappointed line-by-line. Likely corporate actions to watch are
(1) transfer of ‘Himalayan’ mineral water to TGB-Pepsi JV,
(2) restructuring of Tata Coffee as a focused
plantations company—could have implications for holdings in Eight O’ Clock coffee,
(3) does recent stake purchase in ‘Activate’ make up for the missed ‘Glaceau’ opportunity? and,
(4) media reports regarding stake sale in Tetley to private equity players.


Uninspiring performance
􀁠 On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs4.4 bn (+4%, KIE
estimate Rs4.9 bn), EBITDA of Rs305 mn (-2%, KIE estimate Rs428 mn) and PAT of Rs434 mn
(+20%, KIE estimate Rs325 mn).
􀁠 Sales growth of 4% was primarily led by pricing growth, with volume growth likely declining
~2% (most of the price increases in early part of CY2009 has anniversaried and there is likely
mix deterioration due to consumer trading down). Gross margin improvement of 30 bps was a
surprise; however, higher other expenditure (likely higher adspends), led to 40 bps decline in
EBITDA margin to 6.9%.
􀁠 On a consolidated basis, net sales grew 3% to Rs14.4 bn, EBITDA declined 27% to Rs1.2 bn
and PAT declined 40% to Rs663 mn. Sales growth in a constant currency basis is ~10%, in our
view. We highlight that 1QFY11 includes Grand acquisition; hence the figures are not strictly
comparable on yoy basis. Gross margin improved 20 bps to 58.4% largely due to higher price
of green tea, red tea and coffee globally compensating for inflation in black tea and likely mix
improvement.

􀁠 Adspends were higher by 100 bps on the back of launch of Good Earth in Canada, Tetley in
USA, and entry into Middle East etc. On a segmental basis, tea sales increased 4% and coffee
sales increased 1% (including Grand). Eight O’ Clock Coffee (EOC) sales declined 11% in
constant currency terms, which was expected as TGB was facing increased competitive activity
in a highly fragmented market.
􀁠 We highlight that (1) coffee market is US is showing sluggish growth, (2) EOC is positioned in
the value gourmet segment and has limited pricing power, hence is typically a price taker, (3) to
manage input cost inflation, the company has resorted to grammage reduction, and (4) the
sales decline is on the back of a high base as EOC had got listing with Walmart and Target
during this period last year which would have boosted sales.
􀁠 In our estimate, Tetley sales increased 17% in GBP terms likely aided by Grand acquisition.