Tata Global Beverages: Building for the longer term: Nomura

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􀁾 Action
2QFY11 results again highlighted the company’s continuing focus on brand building
with a view to increasing the revenue per serving from its portfolio over the longer
term. We believe this will hold back margins in the near term, but could be a longer
term positive. However, with a muted EPS growth outlook and valuations towards
the top end of the long-term range, we maintain our NEUTRAL at these levels.


􀁡 Catalysts
Significantly lower tea prices and lower A&P spends could help improve
profitability; however, we consider this unlikely in the near term.
Anchor themes
Tata Global Beverages is increasingly focusing on innovation to diversify its product
offerings and become a global beverage player, moving away from being just an
integrated tea player. This would drive growth longer term, but is likely to hurt
profitability in the near to medium term.


Building for the longer term
􀁣 2QFY11 results below expectations
2QFY11 figures were below expectations. Consolidated revenue
increased 3% y-y to Rs14.4bn (vs our estimate Rs15.2bn) with
EBITDA declining 23.3% y-y to Rs1.5bn. EBITDA margins at
10.4% fell 360bps y-y, as higher material costs significantly
impacted profitability.
􀁤 Continuing investments behind branding
The company continued to invest in brand building during this quarter.
It is also committed to keeping the investments going over the near to
medium term with a view to building brands that have higher
profitability. However, this will hold back margins in the near term.
􀁥 Changes to estimates
We are changing our estimates marginally for FY11F and FY12F.
While headline estimates are rising, this is on account of higher base
of FY10, as we have now included audited numbers. If we exclude the
higher FY10 base, our estimates are cut by 4% for FY11F and FY12F.

􀁦 Increasing PT on account of rollover
We are increasing our price target by 4% on account of rollover by six
months. Our valuation methodology remains unchanged at 14x oneyear
forward earnings. This is a discount to FMCG names, as TGBL
offers much lower growth profile in the near term.
􀁧 Maintain NEUTRAL
We maintain our NEUTRAL rating and will look for a better entry point.
With valuations looking full and no visible near-term catalysts for the
share price, we believe the stock will trade sideways in the near term.