Dismal performance!!! • Tata Global Beverages :: ICICI Securities, report

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Dismal performance!!! • Tata Global Beverages (TGBL) reported dismal results with mere 2.7% growth in net sales, flat growth in the tea segment and 9.5% growth in the coffee business. However, within the tea segment, green tea & speciality tea has been growing at a more rapid pace compared to de-growth in conventional black tea • Operating margins dipped 14 bps to 9.3% mainly due to higher raw material cost, which was set off by 164 bps lower marketing spend • Tax outgo increased from | 11.8 crore to | 57.8 crore as the corresponding quarter witnessed | 46 crore of tax credit Eight O’ Clock to face competition from market leader TGBL’s US business, comprising one of the company’s strongest coffee brands, Eight O’ Clock Coffee (~13% contribution to revenues in FY14 at | 1026.3 crore), is set to face increasing competition from market leader, Nestlé, in its US coffee business. The increasing competition would be on the back of the expanding presence of Nestlé in the K-cups segment of branded coffee consumption in the US with Nestlé entering into a multi year agreement with Keurig Green Mountain to serve Nestlé’s Coffeemate brand in K-cups. The K-cups or single serve pods consumption is the new upcoming trend of coffee consumption in the US and constitutes 18-20% of branded coffee sales (CY13). Eight O’ Clock entered the pods market in FY12 through a tie-up with Keurig, which has, thereby, aided in reviving the brand’s profitability to ~15% (FY14) from less than 1% in FY12. Hence, the entry of Nestlé in TGBL’s high growth segment could pose a threat to the company in the long term. Higher Indian tea prices to limit margins for standalone business Following a weak monsoon (until June, 2014), tea prices in North India (~75% of tea producing region for the country) witnessed an increase YoY of ~4% in May, 2014 and ~11% in June, 2014. Further, with tea prices expected to be higher by 5-6% YoY in FY15E on the back of lower production in the country, we expect margins of the standalone business to witness contraction by ~60 bps YoY to 10%. Margins would, however, receive some support from the increasing consumption of tea bags (higher margin products) and specialty tea (green tea and fruit teas). Starbucks expansion remains strong, opens 49th store in India! Tata Starbucks, a 50:50 JV between TGBL and Starbucks Coffee International Inc US, the star in TGBL’s portfolio, is continuing to expand at a robust pace. The JV has expanded from only nine stores in two cities until June, 2013 to 49 stores in five cities by June, 2014. The company operates 19 stores in Mumbai, 18 in Delhi NCR, six in Bengaluru, five in Pune and one in Chennai. With the aggressive expansion of the company, we expect it to open ~70 stores by FY15E and ~100 stores by FY16E with revenues at ~| 230 crore and | 360 crore, respectively. Earnings growth to remain healthy; maintain BUY We expect that with healthy brand investments in both tea and coffee, and traction in growth of premium tea, revenues and earnings (adjusted PAT) growth would remain moderate for TGBL at 5.4% and 8.9% CAGR (FY14-17E), respectively. Also, the entry into higher growth out-of-home coffee consumption business through Starbucks would aid the earnings growth, going ahead. We value the stock on an SOTP basis arriving at a target price of | 182 and maintain our BUY rating

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