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Tata Global Beverages Ltd- Q2F11: Sluggish Revenue Growth; Int’l Tea Business Margins Under Pressure
Results below expectations: Tata Tea reported
consolidated revenue, EBITDA and PAT growth of 3%,
(-)26% and (-)26% respectively for Q2F11. Operating
margins declined by 350bps, driven by a sharp decline
in profitability of the international tea business. We see a
combination of factors limiting near-term stock
outperformance: increased competition in the domestic
business, increased new product development
expenses, sharp increase in coffee prices, and likely
sub-economic returns on the cash that the company has
on its books. This along with valuation – the stock is now
trading at 20x F12e earnings (versus 15x long-term
average multiple) – supports our Equal-weight rating on
the stock.
International tea business disappoints… Tata Tea’s
International tea business continues to struggle. We
estimate that operating profit declined ~80-90% in
2QF11, with revenues declining by ~8-10% during the
quarter. This weakness in operating performance is
surprising against the backdrop of a ~14% decline in
international tea prices. According to management, the
combination of input cost inflation and investment
behind brands impaired margins during the quarter.
…as do international coffee prices: Eight O’Clock
coffee reported a revenue decline of 11% and PAT
decline of 30% during the quarter. The weak operating
performance was driven primarily by a sharp increase in
Arabica coffee prices of ~17% YoY, we believe.
Sluggish growth in domestic tea business:
Revenues and EBITDA grew by 4% and 13.5%
respectively during the quarter. Domestic margins
improved by 70bps, driven by other operational income.
Adjusted PAT grew by 19% during the quarter.
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