Tata Global Beverages: Lack of pricing power ::Kotak Sec,

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Tata Global Beverages (TGBL)
Consumer products
Lack of pricing power. 1QFY12 saw (1) good domestic sales growth of 13% largely
led by volumes while consolidated sales growth was lower at 6% due to sales decline
in US , (2) significant gross margin pressure due to higher commodity cost. EBITDA
margin at 7.3% at the consolidated level is one of the lowest in the past eight years
(3) restructuring of debt in India and repayment of UK debt led to lower interest costs.
Retain ADD on inexpensive valuations.


Good domestic sales growth; margins under pressure
On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs5109 mn (+13%, KIE
estimate Rs5,011 mn), EBITDA of Rs517 mn (-1%, KIE estimate Rs575 mn) and PAT of Rs428 mn
(+19%, KIE estimate Rs408 mn).
􀁠 Sales growth of 13% is primarily on the back of volumes (impact of price increases in Tata
Premium brand was towards the end of 1QFY12). Gross margin declined 462 bps to 38%
(1QFY11 at 43% and 4QFY11 at 41%) due to higher tea prices however at the EBITDA margin
level the decline was arrested at 151 bps to 10.1% due to savings in other expenditure of 310
bps (likely lower adspends). Interest burden declined to Rs15 mn due to a restructuring of
domestic loan (the company has net cash of ~Rs6 bn or ~Rs10/share).
􀁠 At a consolidated level, sales growth was 6% driven by 4% underlying growth and 2% forex
gains. The inability to pass on the higher input costs (both tea and coffee) was the key reason
for gross margin decline of 308 bps yoy to 54% and EBITDA margin decline of 217 bps to
7.3% (lowest in the past eight years). Interest cost declined to Rs5 mn due to repayment of UK
debt. On segmental basis, tea and coffee sales increased by 5% and 14% yoy. Tea margins
declined 82 bps and coffee margins declined 557 bps.
􀁠 Eight O’Clock (EOC) sales declined 5% and PAT margin declined to 0.4% (6% in 1QFY11 and
4% in 4QFY11) as the business reeled under the pressure of higher commodity cost. Mount
Everest Mineral Water (MEMW) results were disappointing – sales decline of 19% and loss for
the quarter at Rs10 mn. Based on our estimates, Tetley sales growth was flat during 1Q.
􀁠 During the quarter, Tion, an ice tea beverage that the company was test marketing in south
India was withdrawn likely due to poor consumer offtake.
􀁠 Debt as of June 30, 2011 declined to Rs8.9 bn versus Rs17.5 bn as of June 30, 2010 due to the
repayment of UK loan and restructuring of domestic loan. Cash on book as of June 30, 2011 is
Rs14.6 bn.


Takeaways from the analyst meet
􀁠 Tea and coffee prices remained inflationary during the quarter. By the end of June 2011
while there was 20 mn excess tea in India compared to the same period last year, this is
on the back of a low base as there was a pest attack last year. Coffee prices have started
correcting from the earlier high but still continue to be higher on yoy basis. While this has
impacted the margins of the branded business, it has improved the realization of the
coffee plantation business in India
􀁠 India branded tea business: Competitive intensity from the unorganized market and
smaller regional players remained at elevated levels. The company has lost ~0.2% market
share in India whereas the unorganized market gained ~0.6% and smaller regional
players gained ~0.3%. HUL has also likely lost shares
􀁠 International business:
􀂃 Tetley is the volume and value leader for black tea and specialty tea in Canada.
However, at a category level, the black tea market is declining and the specialty tea
market is showing strong growth
􀂃 EOC sales declined ~5% over the last two quarters. However, the company indicated
that there are likely early signs of recovery and July sales have been ahead of their
internal expectations
􀂃 Similar to Canada, in UK, the black tea market is declining and the value added tea
market is growing well. Teapigs brand of super premium tea showed good growth
with distribution gains
􀁠 NourishCo Beverages, the 50:50 joint venture between Tata Global Beverages and Pepsi
will focus in the area of non-carbonated ready to drink products. Himalayan is already
being distributed in premium end channels through this entity
Retain ADD
We retain our estimates, ADD rating and TP of Rs110 for now. We note that TGB is the only
consumer stock (in our coverage universe of 14 stocks) trading at <1X EV/Sales (justified for
its low RoE though). Key triggers are (1) potential of ‘Himalayan’ under TGB-Pepsi JV, (2)
media reports suggest likely stake sale in Tetley and (3) potential of ‘Activate’. We will
review our estimates post a meeting with the management. Key risks are continued input
cost inflation not neutralized by price increases and increase in competitive activity.