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Aarati Krishnan

INVESTORS can book profits in the Tata Coffee stock to capitalise on the sharp uptrend in its price over the past six months. The stock has appreciated by 115 per cent since Business Line's `buy' recommendation on it in February 2003 at Rs 70.

Tata Coffee has managed a sharp ramp-up in its profits over the past six months, driven by improving global prices of coffee, cost-cutting and debt restructuring efforts.

But the recent run-up in the stock price appears to have captured the company's improved business prospects. With coffee prices cooling off from their peaks, the company's earnings growth may also slow from the scorching pace set last year. At its current price of Rs 172, the stock trades at a demanding price-earnings multiple of around 20 times its forward earnings.

Tata Coffee's good earnings performance in 2002 - 03 has continued in the first half of 2003-04.

In the first half, the company's net profits, after excluding one-time items, have risen almost threefold from Rs 1.8 crore to Rs 5.1 crore, even as net sales remained almost flat.

Operating profits rose on the back of higher export realisations from coffee and the company's cost-cutting efforts. The effect of improvement in the operating profit margin on profits was magnified by significant savings in interest costs, which have halved in the first half of 2003-2004. But Tata Coffee's performance in this period has benefited significantly from the revival in coffee prices from the depressed levels of 2001-02.

This revival has been driven by expectations of lower global output in the current crop year, resulting in a drawdown of accumulated stocks. But having risen to some extent from their lows, the prices have stabilised over the past quarter.

A further uptrend of the magnitude seen in the first half of 2003, seems unlikely for now.

With debt costs significantly lower, the scope for further savings in interest costs also appears limited.

Over the past six months, the company has redoubled its efforts to shake off the strong commodity influences in its business.

For one, it has picked up an additional stake in Barista coffee, the retail chain, to enhance its domestic presence in this high margin segment. Second, it has augmented its retail presence through the launch of Mr Bean, a filter coffee brand.

If these initiatives pay off, it could help insulate a part of the company's revenue streams from sharp swings in global coffee prices.

But the payoffs from these ventures may take time; there is also the attendant uncertainty.

Given the intense competition in the branded coffee segment from the likes of Nestle India, Hindustan Lever and a host of other regional and local brands, promotional and advertising outlays may be high in the initial stages.

The Barista investment also has the potential to pay off over the long term, but this business is again characterised by competition and high initial investments.

In this context, given that the Tata Coffee stock already enjoys a price-earnings multiple that is in line with second line FMCG companies, it may be better to take advantage of the price spurt to book profits.

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