Sell Tata Global Beverages For Target Price Of Rs. 89

Tata Global Beverages 1QF13 result review | TP – Rs89 | Rating: SELL

 Domestic tea, coffee and favorable FX buoy the earnings

Quick highlights: TGBL reported Net sales of Rs17.25bn (in-line with SSLe) up by 18% (const. currency growth at 9%). Overall volume growth was at 4.5% while inc. in prices contributed 4.5%. EBIDTA was Rs 1.8bn, 38% higher than SSLe mainly on account of sharp rationalisation in overhead costs. EBITDA margin was up by 240bps mainly led by gross margin expansion of 228bps due to lower tea and coffee prices. Net Profit  was at Rs 776mn (in-line with SSLe) and Rs 1.02bn on adj. basis. Tax rate was at 32% in 1QF13 compared to 13.8% last year mainly on account of higher income from high tax paying zones like USA and due to tax-free income on sale of non-core investments to the tune of  Rs 889mn 1QF12.

Strong volume growth and margin expansion in Indian tea business: Indian tea business recorded sales of Rs 5.7bn, a growth of 10% led primarily by volume growth. The company has raised prices of the products in India in 1QF13 the effect of which will show in the next quarter. Operating profit grew by 30% led by 251bps expansion in gross margin. As per the management, domestic tea prices will remain firm going forward even after sufficient rainfall in main tea growing areas like WB.

International business growth driven by higher realisations in USA & UK:  EOC posted sales/profit of $49.3mn/$1.43mn, sales growth of 2% was mainly on account of higher coffee prices. Margins for the business have improved as Arabica coffee has corrected sharply by 34% YoY. In UK (mainly for branded tea operations), the sales were up by 22% mainly on account of favourable currency impact. The UK black tea market declined by 3.6% in 1QF13. TGBL through Tetley has 23%/25.4% value/volume market share. The company is confident of raising prices further in tea category in UK, USA and Canada where they have strong brands and market position. We believe that USA & UK markets are driven by high promotional spends due to high competitive intensity, which could lead to erosion of margins in future.

Instant coffee division fetches higher prices; margin up by 200bps: The instant coffee division of Tata Coffee (57% subsidiary of TGBL) saw a top line growth of 29% and margin expanded by 531bps mainly on account of higher prices fetched in Russian markets. The company has started targeting US market for its washed Robusta coffee which could be a cheaper substitute for the higher priced Arabica. Tata coffee has planned to increase its FDC capacity from 6500tns to 8500tns by the end of FY13.The company has invested Rs550mn for this capacity expansion. We believe going forward, Indian coffee division will show expansion in margin since it will be led by higher coffee prices in Russian and European markets. Instant coffee comprises 50% of Tata Coffee’s total sales.

Differentiated water products to comprise 5% of sales in 5 years: TGBL launched ‘Tata water plus’ in two states of AP and Tamilnadu. Water plus is water fortified with zinc and was launched in 2 SKUs – 200ml at Rs3 and 750ml at Rs 10. TGBL also launched ‘Tata Gluco Plus’ which is a cold beverage with a  lemon and glucose base and is priced at Rs7. As per the management, water will comprise at least 5% of sales in the next 5 years and this will be done through Nourish Co which is a 50-50 JV between Pepsi and TGBL.

Valuation: All segments of TGBL showed improved performance due to higher volume growth or due to lower input costs. Favorable currency movements also helped buoy the results in this quarter. We believe that since 65% of the TGBL comprises of overseas operations and 80% of Tata Coffee India is export oriented, it will continue to benefit from weakness of INR against US$. Secondly, the company has shown margin improvement of around 200-250 bps in all major segments like Indian tea, instant coffee division, plantation and UK tea operations.

We believe that high competitive intensity in USA and UK, requirements for high promotional spend in international markets and volatile commodity prices will limit stock outperformance in the near term.

Based on the above factors we revise our F13 EPS estimate upwards from Rs 5.6 to Rs 6.6. Accordingly we revise our TP price upwards by 17% to Rs89 and maintain a SELL rating on the stock.