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Tata Global Beverages (TGBL)
Consumer products
Margins have likely bottomed out; reiterate BUY. 3QFY12 was a demonstration of
our thesis articulated in a TGB upgrade note of December 20, 2011 - (1) volume-driven
11% sales growth in India (2) lower tea commodity prices drove 600 bps expansion in
standalone EBITDA margin (3) sales growth in Tetley, finally (4) EOC turnaround likely –
margins remain weak yoy but improve qoq. While fundamental worries regarding
demonstrated execution capabilities of management and TGB’s predominant presence
in low-growth markets remain, cheap valuations (deservedly so due to low RoE) likely
captures the negatives. Initial signs of ramp-up in ‘Himalayan’ water are visible. BUY.
India, Tetley, MEMW do well; EOC lags – likely turnaround on the corner
On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs5,228 mn (+11%, KIE
estimate Rs5,395 mn), EBITDA of Rs574 mn (+158%, KIE estimate Rs392 mn) and PAT of Rs723
mn (+53%, KIE estimate Rs532 mn).
In the domestic business, sales growth of 11% was largely driven by volumes. The company
also raised prices selectively in 2QFY12, the benefits of it were seen in 3QFY12.
EBITDA margin improved 626 bps to 11% - a large part of this was driven by gross margin
expansion of 563 bps yoy. Good volume growth, price hikes and correction in tea prices likely
benefited the company. Staff cost and other expenditure was marginally lower by 24 bps and
39 bps respectively.
Interest burden declined to Rs46 mn as TGB has repaid its UK debt and restructured its
domestic debt.
At a consolidated level, TGB reported sales of Rs17,932 mn (+12%), EBITDA of Rs1,722 mn
(-3%) and PAT of Rs975 mn (+22%).
Sales growth of 12% was primarily driven by strong growth in coffee (+23%) and growth in
tea was modest (+9%). Gross margin declined by 110 bps to 58% due to higher commodity
cost (impact of currency translation in overseas markets as well). Segment wise at the EBIT level,
tea margins declined by 67 bps to 10.4% and coffee margins declined 801 bps to 12%.
Management highlighted that Tetley’s sales grew this quarter. This is a significant positive, in
our view, given that the black tea market is declining and there is stiff competition from local
players such as Asda, Tesco and Sainsbury.
Eight O Clock Coffee sales increased by 4% yoy. Margins were weak and reported PAT
was low at US$0.98 mn. However there was an improvement sequentially. In 2QFY12,
the company reported a loss of US$0.6 mn. While coffee prices have corrected qoq they
remain high yoy. Any sustained reduction in coffee prices will potentially help margin
expansion, in our view.
Mount Everest Mineral Water (MEMW) reported sales decline of 4% and PAT of Rs5 mn
(for the first time). The business has been restructured; ‘Himalayan’ brand has been
licensed to Nourish Co. (50:50 JV with Pepsi). Management said the arrangement with
Nourish Co was on a ‘cost plus’ basis and royalty would kick-in in the future. We reckon
that once ‘Himalayan’ reaches threshold sales, there is possibility of incremental revenue
for Mount Everest Mineral Water and TGB (in our view).
Extraordinary expense includes redundancy costs related to business restructuring of
Rs21 mn and cost incurred on new projects of Rs139 mn.
Highlights from the analyst meet – a positive flavor
India (predominantly tea):
This quarter sales were driven by volume growth and the company expects the trend to
continue. Volume growth was witnessed across the mass, mid and premium segments.
The relaunch of ‘Tata Tea Premium’ was a tailwind.
It had extended the ‘Jaago Re’ (Wake up) campaign to ‘Soch Badlo’ (Change your
thought process) as Tata Tea Premium celebrates 25 years.
The company has value and volume leadership with share of 21.3% and 19.5%
respectively.
It is focusing on penetration led growth with focus on rural markets. This is a potential
positive in our view, given that there is a steady shift from the unorganized to the
organized market and TGB with a complete portfolio of offerings across various price
points will likely benefit, if it can execute distribution expansion plans.
The US (predominantly coffee):
Performance in the US was impacted by high trade spends (to secure volume growth) and
high commodity costs. Coffee prices remain high on a yoy basis.
The company took price hikes to manage margins.
The UK (predominantly tea):
Sales grew this quarter after several quarters of flat /decline in sales, which is positive.
Relaunch of ‘Teapigs’ brand and the reintroduction of ‘Tetley Tea Folk’ (animated
character-based advertisements) are likely reasons, in our view.
TGB management said it achieved leadership position in Redbush and decaf tea.
Some of its innovative launches such as Tetley Chai Latte (slated for launch in Canada and
Australia), Teapigs brand of premium tea are doing well. Teapigs is likely to get listing at
Sainsbury soon. According to TGB, Twinings has introduced a me-too version of Teapigs.
Margins have likely bottomed out; reiterate BUY
We reiterate our BUY rating with a TP of Rs110. After posting weak 1HFY12 numbers, we
see signs of turnaround with a relatively strong 3QFY12 performance (led by the India
business). We expect the trend to continue due to a correction in tea and coffee prices and
benefit of price hikes taken during the year. Cheap valuations provide support as well, in our
view—the stock trades at 14.7X FY2013E P/E.
While fundamental worries regarding demonstrated execution capabilities of management
and TGB’s predominant presence in low-growth markets remain, cheap valuations likely
capture most of the negatives.
Key triggers are (1) potential of ‘Himalayan’ under the TGB-Pepsi JV, (2) media reports
suggest likely stake sale in Tetley and (3) potential of ‘Activate’ mineral water. Key risks are
input cost inflation not neutralized by price increases and increase in competitive activity
forcing higher promotional spends.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Global Beverages (TGBL)
Consumer products
Margins have likely bottomed out; reiterate BUY. 3QFY12 was a demonstration of
our thesis articulated in a TGB upgrade note of December 20, 2011 - (1) volume-driven
11% sales growth in India (2) lower tea commodity prices drove 600 bps expansion in
standalone EBITDA margin (3) sales growth in Tetley, finally (4) EOC turnaround likely –
margins remain weak yoy but improve qoq. While fundamental worries regarding
demonstrated execution capabilities of management and TGB’s predominant presence
in low-growth markets remain, cheap valuations (deservedly so due to low RoE) likely
captures the negatives. Initial signs of ramp-up in ‘Himalayan’ water are visible. BUY.
India, Tetley, MEMW do well; EOC lags – likely turnaround on the corner
On a standalone basis, Tata Global Beverages (TGB) reported net sales of Rs5,228 mn (+11%, KIE
estimate Rs5,395 mn), EBITDA of Rs574 mn (+158%, KIE estimate Rs392 mn) and PAT of Rs723
mn (+53%, KIE estimate Rs532 mn).
In the domestic business, sales growth of 11% was largely driven by volumes. The company
also raised prices selectively in 2QFY12, the benefits of it were seen in 3QFY12.
EBITDA margin improved 626 bps to 11% - a large part of this was driven by gross margin
expansion of 563 bps yoy. Good volume growth, price hikes and correction in tea prices likely
benefited the company. Staff cost and other expenditure was marginally lower by 24 bps and
39 bps respectively.
Interest burden declined to Rs46 mn as TGB has repaid its UK debt and restructured its
domestic debt.
At a consolidated level, TGB reported sales of Rs17,932 mn (+12%), EBITDA of Rs1,722 mn
(-3%) and PAT of Rs975 mn (+22%).
Sales growth of 12% was primarily driven by strong growth in coffee (+23%) and growth in
tea was modest (+9%). Gross margin declined by 110 bps to 58% due to higher commodity
cost (impact of currency translation in overseas markets as well). Segment wise at the EBIT level,
tea margins declined by 67 bps to 10.4% and coffee margins declined 801 bps to 12%.
Management highlighted that Tetley’s sales grew this quarter. This is a significant positive, in
our view, given that the black tea market is declining and there is stiff competition from local
players such as Asda, Tesco and Sainsbury.
Eight O Clock Coffee sales increased by 4% yoy. Margins were weak and reported PAT
was low at US$0.98 mn. However there was an improvement sequentially. In 2QFY12,
the company reported a loss of US$0.6 mn. While coffee prices have corrected qoq they
remain high yoy. Any sustained reduction in coffee prices will potentially help margin
expansion, in our view.
Mount Everest Mineral Water (MEMW) reported sales decline of 4% and PAT of Rs5 mn
(for the first time). The business has been restructured; ‘Himalayan’ brand has been
licensed to Nourish Co. (50:50 JV with Pepsi). Management said the arrangement with
Nourish Co was on a ‘cost plus’ basis and royalty would kick-in in the future. We reckon
that once ‘Himalayan’ reaches threshold sales, there is possibility of incremental revenue
for Mount Everest Mineral Water and TGB (in our view).
Extraordinary expense includes redundancy costs related to business restructuring of
Rs21 mn and cost incurred on new projects of Rs139 mn.
Highlights from the analyst meet – a positive flavor
India (predominantly tea):
This quarter sales were driven by volume growth and the company expects the trend to
continue. Volume growth was witnessed across the mass, mid and premium segments.
The relaunch of ‘Tata Tea Premium’ was a tailwind.
It had extended the ‘Jaago Re’ (Wake up) campaign to ‘Soch Badlo’ (Change your
thought process) as Tata Tea Premium celebrates 25 years.
The company has value and volume leadership with share of 21.3% and 19.5%
respectively.
It is focusing on penetration led growth with focus on rural markets. This is a potential
positive in our view, given that there is a steady shift from the unorganized to the
organized market and TGB with a complete portfolio of offerings across various price
points will likely benefit, if it can execute distribution expansion plans.
The US (predominantly coffee):
Performance in the US was impacted by high trade spends (to secure volume growth) and
high commodity costs. Coffee prices remain high on a yoy basis.
The company took price hikes to manage margins.
The UK (predominantly tea):
Sales grew this quarter after several quarters of flat /decline in sales, which is positive.
Relaunch of ‘Teapigs’ brand and the reintroduction of ‘Tetley Tea Folk’ (animated
character-based advertisements) are likely reasons, in our view.
TGB management said it achieved leadership position in Redbush and decaf tea.
Some of its innovative launches such as Tetley Chai Latte (slated for launch in Canada and
Australia), Teapigs brand of premium tea are doing well. Teapigs is likely to get listing at
Sainsbury soon. According to TGB, Twinings has introduced a me-too version of Teapigs.
Margins have likely bottomed out; reiterate BUY
We reiterate our BUY rating with a TP of Rs110. After posting weak 1HFY12 numbers, we
see signs of turnaround with a relatively strong 3QFY12 performance (led by the India
business). We expect the trend to continue due to a correction in tea and coffee prices and
benefit of price hikes taken during the year. Cheap valuations provide support as well, in our
view—the stock trades at 14.7X FY2013E P/E.
While fundamental worries regarding demonstrated execution capabilities of management
and TGB’s predominant presence in low-growth markets remain, cheap valuations likely
capture most of the negatives.
Key triggers are (1) potential of ‘Himalayan’ under the TGB-Pepsi JV, (2) media reports
suggest likely stake sale in Tetley and (3) potential of ‘Activate’ mineral water. Key risks are
input cost inflation not neutralized by price increases and increase in competitive activity
forcing higher promotional spends.
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