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Tata Global Beverages (TGBL)
Consumer products
Recovery in volume growth; margins remain weak. 2QFY12 was marked by
(1) double-digit volume growth in the domestic business, (2) recovery in Eight O’Clock
volumes, (3) gross margin pressure across the domestic and international businesses
due to high commodity prices, and (4) lower interest burden due to restructuring of
debt in India and repayment of debt in UK. TGB’s struggle for profitable growth
continues, so are the cheap valuations (stock trades at ~1X sales).
Good volumes in domestic tea; weak market positioning, limited pricing power impact margins
On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs4,982 mn (+13%, KIE
estimate Rs5,215 mn), EBITDA of Rs379 mn (+24%, KIE estimate Rs539 mn) and PAT of Rs539 mn
(+24%, KIE estimate Rs462 mn).
�� In the domestic business, sales growth of 13% was largely driven by volumes (likely ~10%). The
company also effected price hikes selectively during July 2011.
�� Gross margin declined 262 bps to 38% on account of high tea prices. Tea prices have started
correcting in India and margins could likely improve over the next few quarters if lower tea
prices sustain. EBITDA margin improved marginally by 69 bps yoy to 7.6% likely due to lower
adspends and SG&A.
�� The company achieved market value leadership with September 2011 market shares at 21.5%
and maintained volume leadership with share of 19.7%. The continued focus on niches in
various geographies within India and the success of ‘Jaago Re’ campaign were the key
contributors, in our view.
�� Interest burden declined to Rs15 mn as the company has repaid its UK debt and restructured its
domestic debt. As of September 30, 2011, the company had debt of Rs5,042 mn in the
standalone entity versus Rs6,137 mn as of September 30, 2010.
At a consolidated level, TGB reported sales of Rs16,120 mn (+12%), EBITDA of Rs1,175 mn (-4%)
and PAT of Rs888 mn (+34%).
�� Sales growth of 12% was primarily driven by strong growth in coffee (+38%) while growth in
tea was modest (+5%). Gross margin declined by 269 bps to 55% due to higher commodity
cost. Segment-wise at EBIT level, tea margins improved by 166 bps to 9.8% and coffee margins
declined 858 bps to 9%. Coffee margins are likely the lowest historically.
�� EOC reported strong sales growth of 49% yoy – net realizations after trade spends
increased by 15%. Volume growth during the quarter was strong, marking substantial
recovery from 1QFY12. However, margins during the quarter were eroded due to impact
of high commodity cost and trade spends.
�� Mount Everest Mineral Water (MEMW) results were disappointing – sales decline of 40%
and loss for the quarter at Rs13 mn. Based on our estimates, Tetley sales growth in INR
terms was flat during the quarter (implying volume decline).
�� Extraordinary expense of Rs105 mn is towards redundancies in UK and US and
restructuring of Good Earth manufacturing facility.
Other highlights from the analyst meet
�� Tea prices in India have started correcting but continue to remain high in other markets
such as Africa. The inflation in tea price in these markets is primarily demand-led. Coffee
prices have started correcting from the earlier high but still continue to be higher on a yoy
basis. While this has impacted the margins of the branded business, it has improved the
realization of the coffee plantation business in India.
�� Competitive intensity from local players in the UK market such as Asda, Tesco and
Sainsbury continued to remain high.
�� After several weak quarters, EOC sales bounced back in this quarter and the growth was
driven by strong volumes. However, margins were low and the company reported loss of
US$0.6 mn during the quarter. With continued correction in coffee prices, margins could
potentially improve.
�� The company’s consistent focus on the value-added tea market in UK is yielding results
and Tetley Green and Tetley Redbush have gained leadership position in the respective
segments.
�� 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 ADD rating with a revised TP of Rs110 (Rs120 previously). We tweak our estimates
as we build in lower margins; our FY2012-13E earnings estimates are cut by ~12%. While
fundamental worries regarding demonstrated execution capabilities of the management and
TGB’s predominant presence in low-growth markets remain, cheap valuations likely captures
most of the negatives. TGB is the only consumer stock 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’. Key risks are
continued input cost inflation not neutralized by price increases and increase in competitive
activity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Global Beverages (TGBL)
Consumer products
Recovery in volume growth; margins remain weak. 2QFY12 was marked by
(1) double-digit volume growth in the domestic business, (2) recovery in Eight O’Clock
volumes, (3) gross margin pressure across the domestic and international businesses
due to high commodity prices, and (4) lower interest burden due to restructuring of
debt in India and repayment of debt in UK. TGB’s struggle for profitable growth
continues, so are the cheap valuations (stock trades at ~1X sales).
Good volumes in domestic tea; weak market positioning, limited pricing power impact margins
On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs4,982 mn (+13%, KIE
estimate Rs5,215 mn), EBITDA of Rs379 mn (+24%, KIE estimate Rs539 mn) and PAT of Rs539 mn
(+24%, KIE estimate Rs462 mn).
�� In the domestic business, sales growth of 13% was largely driven by volumes (likely ~10%). The
company also effected price hikes selectively during July 2011.
�� Gross margin declined 262 bps to 38% on account of high tea prices. Tea prices have started
correcting in India and margins could likely improve over the next few quarters if lower tea
prices sustain. EBITDA margin improved marginally by 69 bps yoy to 7.6% likely due to lower
adspends and SG&A.
�� The company achieved market value leadership with September 2011 market shares at 21.5%
and maintained volume leadership with share of 19.7%. The continued focus on niches in
various geographies within India and the success of ‘Jaago Re’ campaign were the key
contributors, in our view.
�� Interest burden declined to Rs15 mn as the company has repaid its UK debt and restructured its
domestic debt. As of September 30, 2011, the company had debt of Rs5,042 mn in the
standalone entity versus Rs6,137 mn as of September 30, 2010.
At a consolidated level, TGB reported sales of Rs16,120 mn (+12%), EBITDA of Rs1,175 mn (-4%)
and PAT of Rs888 mn (+34%).
�� Sales growth of 12% was primarily driven by strong growth in coffee (+38%) while growth in
tea was modest (+5%). Gross margin declined by 269 bps to 55% due to higher commodity
cost. Segment-wise at EBIT level, tea margins improved by 166 bps to 9.8% and coffee margins
declined 858 bps to 9%. Coffee margins are likely the lowest historically.
�� EOC reported strong sales growth of 49% yoy – net realizations after trade spends
increased by 15%. Volume growth during the quarter was strong, marking substantial
recovery from 1QFY12. However, margins during the quarter were eroded due to impact
of high commodity cost and trade spends.
�� Mount Everest Mineral Water (MEMW) results were disappointing – sales decline of 40%
and loss for the quarter at Rs13 mn. Based on our estimates, Tetley sales growth in INR
terms was flat during the quarter (implying volume decline).
�� Extraordinary expense of Rs105 mn is towards redundancies in UK and US and
restructuring of Good Earth manufacturing facility.
Other highlights from the analyst meet
�� Tea prices in India have started correcting but continue to remain high in other markets
such as Africa. The inflation in tea price in these markets is primarily demand-led. Coffee
prices have started correcting from the earlier high but still continue to be higher on a yoy
basis. While this has impacted the margins of the branded business, it has improved the
realization of the coffee plantation business in India.
�� Competitive intensity from local players in the UK market such as Asda, Tesco and
Sainsbury continued to remain high.
�� After several weak quarters, EOC sales bounced back in this quarter and the growth was
driven by strong volumes. However, margins were low and the company reported loss of
US$0.6 mn during the quarter. With continued correction in coffee prices, margins could
potentially improve.
�� The company’s consistent focus on the value-added tea market in UK is yielding results
and Tetley Green and Tetley Redbush have gained leadership position in the respective
segments.
�� 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 ADD rating with a revised TP of Rs110 (Rs120 previously). We tweak our estimates
as we build in lower margins; our FY2012-13E earnings estimates are cut by ~12%. While
fundamental worries regarding demonstrated execution capabilities of the management and
TGB’s predominant presence in low-growth markets remain, cheap valuations likely captures
most of the negatives. TGB is the only consumer stock 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’. Key risks are
continued input cost inflation not neutralized by price increases and increase in competitive
activity.
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