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Tata Global Beverages Ltd (TGBL)’s Q3FY2011 results were slightly below our
expectation. However its operating margins are above our expectation mainly on
account of a lower than expected raw material cost during the quarter. Hence the
operating profit stood at Rs184 crore, ahead of our expectation of Rs156.7 crore
for the quarter.
Result highlights
TGBL’s consolidated total income grew by 3.8% year on year (YoY) to Rs1,608.0
crore in Q3FY2011 (slightly ahead of our expectation of Rs1,580.0 crore). The
standalone (domestic) business revenues grew moderately by 5.5% YoY, predominantly a price-led growth.
Tata Coffee (consolidated) registered a robust revenue growth of 14.5% YoY
during the quarter (Eight O’clock coffee revenues grew by ~10%YoY).
We believe Tetley’s revenues must have remained flat during the quarter.
The higher Y-o-Y raw material cost and other expenses resulted in a 120 basis
points YoY decline in the operating profit margins (OPM) to 11.4% in Q3FY2011.
However the same was above our expectation of 9.9%, mainly on account of
lower than expected raw material cost for the quarter.
The key highlight of the quarter was the 140 basis point quarter on quarter
(QOQ) decline in the raw material cost as a percentage to sales to 41.0% and
the consequential 251 basis points QOQ improvement in the operating margins.
The operating profit declined by 6.0% YoY to Rs184.1 crore (ahead of our
expectation of Rs156.7 crore) for the quarter.
This along with a higher interest cost and a higher tax
incidence resulted in an ~23% YoY decline in the
adjusted profit after tax (PAT; before minority interest,
share profit from associates) to Rs80.0 crore, slightly
below our expectation of Rs86.0 crore for the quarter.
Key monitorables going ahead
The volatility in the key input prices (raw tea and
coffee) in the domestic as well as international market.
Sustenance of good performance by Eight O’ clock
coffee.
Product launches under joint venture (JV) with PepsiCo
India and strategic alliance with Kerala Ayurveda Ltd.
Outlook and valuation
We are encouraged by the sequential decline in the
(consolidated) raw material cost, strong performance by
Tata Coffee (consolidated) and an above expected
operating performance (at consolidated level) during the
quarter. However one has to keenly watch whether this
trend continues in the coming quarters.
On the other hand we like TGBL’s strategic initiatives
(TGBL JV with PepsiCo India, strategic alliance with Kerala
Ayurveda and Tata Coffee alliance with Starbucks Coffee
Company [Starbucks]) to diversify itself from the
commoditised tea and coffee business to the value-added
beverages and food business. We expect these initiatives
to add several growth levers for the company in the long
run. We have revised our price target to Rs122 (based on
17x its FY2013E earning per share [EPS] of Rs7.2). In view
of the 26% upside from the current levels, we have
upgraded our recommendation from Hold to Buy. At the
current market price the stock trades at 15.2x its FY2012E
EPS of Rs6.4 and 13.5x its FY2013E EPS of Rs7.2.
Standalone (domestic) performance—subdued operating performance
TGBL’s standalone business revenue grew by 5.5% YoY to
Rs475.2 crore; largely a price-led growth. The sales
volume must have remained flat Y-o-Y during the quarter.
The operating margins declined by 504 basis points YoY
mainly on account of higher year-on-year (Y-o-Y) raw
material cost and other expenses during the quarter. The
raw material cost as a percentage to sales went up by
425 basis points YoY to 61.8% during the quarter. Also the
other expenses as a percentage to sales surged by 268
basis points YoY to 19.7% in Q3FY2011. Hence the
operating profit declined by 45.1% YoY to Rs26.1 crore.
However the higher other income, lower Y-o-Y interest
cost and depreciation charges resulted in a strong 28.3%
YoY growth in the reported PAT to Rs47.2 crore.
Tata Coffee (consolidated) performance—Eight O’ clocked good performance
Tata Coffee’s revenues grew by 14.5% YoY to Rs26.1 crore
during the quarter. The standalone business revenues grew
by a strong 27% YoY to Rs99.1 crore. The growth was driven
by sales volume and an increase in the coffee prices in
the range of 13-14%. The Eight O’ clock revenue growth
was back on track with revenues growing by ~10% YoY
(~17% on constant currency basis). Tata Coffee
(consolidated) operating margins improved by 616 basis
points to 24.4% on the back of 178 basis points YoY decline
in the raw material cost as a percentage to sales and 209
basis points YoY decline in the other expenses as a
percentage to sales during the quarter. Thus the operating
profit grew by 53.0% YoY to Rs85.5 crore. This along with
a higher Y-o-Y other income and lower interest cost
resulted in a strong growth in the bottom line during the
quarter. The adjusted PAT during the quarter stood at
Rs34.8 crore in Q3FY2011 as against Rs2.8 crore in
Q3FY2010.
Brazil is one of the largest exporters of coffee in the
international market. Unfavourable weather conditions
have affected the coffee production in Brazil, which has
resulted in the supply disruption in the international
markets. Also unfavorable rains have affected the coffee
production in Columbia and Vietnam. This has resulted in
a demand-supply mismatch in the international market
and consequential increase in the prices of coffee in the
international markets (especially Arabica coffee prices).
The high Arabica (coffee) prices also resulted in an
increase in the prices of the second type of coffee
(Robusta). This is of great significance to Tata Coffee (one
of the largest processor of Robusta coffee in India) and
hence the company expects good revenue growth in the
coming quarters. Also the company is confident of
achieving around 25% operating margins (at consolidated
level) in the coming quarters.
Steps towards building value added products and
services
TGBL’s strategic alliance with Kerala Ayurveda Ltd:
TGBL signed a memorandum of understanding (MoU)
with Kerala Ayurveda Ltd to form a JV for developing
a range of beverages and food products based on
ayurvedic recipes and formulations.
Tata Coffee alliance with Starbucks: Tata Coffee and
Starbucks signed a non-binding MoU to collaborate in
sourcing of coffee beans and setting up of Starbucks
retail operations in India. The alliance aims at sourcing
and roasting of high quality Arabica coffee beans
through Tata Coffee’s Coorgs facility. Going ahead, both
Tata Coffee and Starbucks might consider jointly
investing in additional facilities for exporting to other
international markets. Both the companies will jointly
explore the development of Starbucks retail stores,
associate retail outlets and hotels in India
Outlook and valuation
We are encouraged by a sequential decline in the
(consolidated) raw material cost, strong performance by
Tata Coffee (consolidated) and above expected operating
performance (at consolidated level) during the quarter.
However one has to keenly watch whether this trend
continues in the coming quarters.
On the other hand we like TGBL’s strategic initiatives
(TGBL JV with PepsiCo India, strategic alliance with Kerala
Ayurveda and Tata Coffee’s alliance with Starbucks) to
diversify itself from the commoditized tea and coffee
business to value-added beverages and food business. We
expect these initiatives to add several growth levers for
the company in the long run. We have revised our price
target to Rs122 (based on 17x its FY2013E EPS of Rs7.2).
In view of a 26% upside from the current levels, we have
upgraded our recommendation from Hold to Buy. At the
current market price the stock trades at 15.2x its FY2012E
EPS of Rs6.4 and 13.5x its FY2013E EPS of Rs7.2.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Global Beverages Ltd (TGBL)’s Q3FY2011 results were slightly below our
expectation. However its operating margins are above our expectation mainly on
account of a lower than expected raw material cost during the quarter. Hence the
operating profit stood at Rs184 crore, ahead of our expectation of Rs156.7 crore
for the quarter.
Result highlights
TGBL’s consolidated total income grew by 3.8% year on year (YoY) to Rs1,608.0
crore in Q3FY2011 (slightly ahead of our expectation of Rs1,580.0 crore). The
standalone (domestic) business revenues grew moderately by 5.5% YoY, predominantly a price-led growth.
Tata Coffee (consolidated) registered a robust revenue growth of 14.5% YoY
during the quarter (Eight O’clock coffee revenues grew by ~10%YoY).
We believe Tetley’s revenues must have remained flat during the quarter.
The higher Y-o-Y raw material cost and other expenses resulted in a 120 basis
points YoY decline in the operating profit margins (OPM) to 11.4% in Q3FY2011.
However the same was above our expectation of 9.9%, mainly on account of
lower than expected raw material cost for the quarter.
The key highlight of the quarter was the 140 basis point quarter on quarter
(QOQ) decline in the raw material cost as a percentage to sales to 41.0% and
the consequential 251 basis points QOQ improvement in the operating margins.
The operating profit declined by 6.0% YoY to Rs184.1 crore (ahead of our
expectation of Rs156.7 crore) for the quarter.
incidence resulted in an ~23% YoY decline in the
adjusted profit after tax (PAT; before minority interest,
share profit from associates) to Rs80.0 crore, slightly
below our expectation of Rs86.0 crore for the quarter.
Key monitorables going ahead
The volatility in the key input prices (raw tea and
coffee) in the domestic as well as international market.
Sustenance of good performance by Eight O’ clock
coffee.
Product launches under joint venture (JV) with PepsiCo
India and strategic alliance with Kerala Ayurveda Ltd.
Outlook and valuation
We are encouraged by the sequential decline in the
(consolidated) raw material cost, strong performance by
Tata Coffee (consolidated) and an above expected
operating performance (at consolidated level) during the
quarter. However one has to keenly watch whether this
trend continues in the coming quarters.
On the other hand we like TGBL’s strategic initiatives
(TGBL JV with PepsiCo India, strategic alliance with Kerala
Ayurveda and Tata Coffee alliance with Starbucks Coffee
Company [Starbucks]) to diversify itself from the
commoditised tea and coffee business to the value-added
beverages and food business. We expect these initiatives
to add several growth levers for the company in the long
run. We have revised our price target to Rs122 (based on
17x its FY2013E earning per share [EPS] of Rs7.2). In view
of the 26% upside from the current levels, we have
upgraded our recommendation from Hold to Buy. At the
current market price the stock trades at 15.2x its FY2012E
EPS of Rs6.4 and 13.5x its FY2013E EPS of Rs7.2.
Standalone (domestic) performance—subdued operating performance
TGBL’s standalone business revenue grew by 5.5% YoY to
Rs475.2 crore; largely a price-led growth. The sales
volume must have remained flat Y-o-Y during the quarter.
The operating margins declined by 504 basis points YoY
mainly on account of higher year-on-year (Y-o-Y) raw
material cost and other expenses during the quarter. The
raw material cost as a percentage to sales went up by
425 basis points YoY to 61.8% during the quarter. Also the
other expenses as a percentage to sales surged by 268
basis points YoY to 19.7% in Q3FY2011. Hence the
operating profit declined by 45.1% YoY to Rs26.1 crore.
However the higher other income, lower Y-o-Y interest
cost and depreciation charges resulted in a strong 28.3%
YoY growth in the reported PAT to Rs47.2 crore.
Tata Coffee (consolidated) performance—Eight O’ clocked good performance
Tata Coffee’s revenues grew by 14.5% YoY to Rs26.1 crore
during the quarter. The standalone business revenues grew
by a strong 27% YoY to Rs99.1 crore. The growth was driven
by sales volume and an increase in the coffee prices in
the range of 13-14%. The Eight O’ clock revenue growth
was back on track with revenues growing by ~10% YoY
(~17% on constant currency basis). Tata Coffee
(consolidated) operating margins improved by 616 basis
points to 24.4% on the back of 178 basis points YoY decline
in the raw material cost as a percentage to sales and 209
basis points YoY decline in the other expenses as a
percentage to sales during the quarter. Thus the operating
profit grew by 53.0% YoY to Rs85.5 crore. This along with
a higher Y-o-Y other income and lower interest cost
resulted in a strong growth in the bottom line during the
quarter. The adjusted PAT during the quarter stood at
Rs34.8 crore in Q3FY2011 as against Rs2.8 crore in
Q3FY2010.
Brazil is one of the largest exporters of coffee in the
international market. Unfavourable weather conditions
have affected the coffee production in Brazil, which has
resulted in the supply disruption in the international
markets. Also unfavorable rains have affected the coffee
production in Columbia and Vietnam. This has resulted in
a demand-supply mismatch in the international market
and consequential increase in the prices of coffee in the
international markets (especially Arabica coffee prices).
The high Arabica (coffee) prices also resulted in an
increase in the prices of the second type of coffee
(Robusta). This is of great significance to Tata Coffee (one
of the largest processor of Robusta coffee in India) and
hence the company expects good revenue growth in the
coming quarters. Also the company is confident of
achieving around 25% operating margins (at consolidated
level) in the coming quarters.
Steps towards building value added products and
services
TGBL’s strategic alliance with Kerala Ayurveda Ltd:
TGBL signed a memorandum of understanding (MoU)
with Kerala Ayurveda Ltd to form a JV for developing
a range of beverages and food products based on
ayurvedic recipes and formulations.
Tata Coffee alliance with Starbucks: Tata Coffee and
Starbucks signed a non-binding MoU to collaborate in
sourcing of coffee beans and setting up of Starbucks
retail operations in India. The alliance aims at sourcing
and roasting of high quality Arabica coffee beans
through Tata Coffee’s Coorgs facility. Going ahead, both
Tata Coffee and Starbucks might consider jointly
investing in additional facilities for exporting to other
international markets. Both the companies will jointly
explore the development of Starbucks retail stores,
associate retail outlets and hotels in India
Outlook and valuation
We are encouraged by a sequential decline in the
(consolidated) raw material cost, strong performance by
Tata Coffee (consolidated) and above expected operating
performance (at consolidated level) during the quarter.
However one has to keenly watch whether this trend
continues in the coming quarters.
On the other hand we like TGBL’s strategic initiatives
(TGBL JV with PepsiCo India, strategic alliance with Kerala
Ayurveda and Tata Coffee’s alliance with Starbucks) to
diversify itself from the commoditized tea and coffee
business to value-added beverages and food business. We
expect these initiatives to add several growth levers for
the company in the long run. We have revised our price
target to Rs122 (based on 17x its FY2013E EPS of Rs7.2).
In view of a 26% upside from the current levels, we have
upgraded our recommendation from Hold to Buy. At the
current market price the stock trades at 15.2x its FY2012E
EPS of Rs6.4 and 13.5x its FY2013E EPS of Rs7.2.
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