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Sunday, Jun 19, 2005

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Tata Coffee: Book profits

Alagappan Arunachalam

The company is trying to grow the branded business.

SHAREHOLDERS can book profits in the stock of Tata Coffee, which trades at a price-earnings multiple of 18 times its FY-05 earnings. This is substantially higher than the valuation commanded by other plantation companies. Interest in the stock has been driven by higher coffee prices. At the prevailing price, the stock appears to have already captured the growth prospects and the scope for further gains is limited.

Tata Coffee's valuations are influenced more by commodity prices than by its ownership of brands. At the current levels, the prices indicate the demand and supply conditions prevailing in the global market. Global coffee consumption is growing at a modest three per cent. While Vietnamese production is expected to fall by 15-20 per cent compared to last year, the Brazilian production in FY-06 is expected to decline by 17 per cent. Global production of coffee is expected to be lower by about 5 per cent. The expected dip in production is unlikely to lead to a spiralling of coffee prices. Prices are likely to stay flat, as concerns of frost in Brazil have eased.

With developed countries seeking to source coffee from plantations that employ fair labour practices, Tata Coffee stands to gain by having received the Social Accountability Certification 8000 — one of the few plantation companies to do so. Indian coffee is of high quality and Tata Coffee's product commands a premium in the world market. In October, the company had entered into an agreement with Starbucks — a coffee retail chain in the US.

Starbucks would procure coffee from it at a premium of 40 per cent to the market price. However, this agreement does not provide for volume commitment. This fiscal, Tata Coffee plans to invest Rs 150 crore to set up soluble instant coffee plants in CIS countries, Uganda and Vietnam.

It is considering debt options to fund these projects. Tata Coffee exports about 90 per cent of its instant coffee to Russia and the CIS countries. It plans to export organic coffee to the American and European markets.

Tata Coffee is also considering a foray into the Chinese market. The preference for Ugandan coffee in the Russian and CIS markets and the prospect of using Vietnam as a base for the Chinese market augur well for growth.

As part of its strategy to increase its market share in the domestic market, Tata Coffee has moved into retailing roast and ground coffee by setting up Mr Bean Coffee Junction outlets.

At these outlets, customers get to choose their blends of coffee. It plans to establish more such outlets in other parts of South India; simultaneously, it would also phase out its Coorg Coffee Works outlets.

Tata Coffee has got out of the coffee pub business by divesting its stake in Barista in which it was a minority shareholder. The latter is expected to continue purchasing its requirements from Tata Coffee, which also plans to launch two variants of its umbrella brand, Mr Bean.

Tata Coffee achieved an earnings growth of about 15 per cent in FY-05, if one ignores one-time incomes. The growth in earnings was aided by a 32 per cent rise in instant coffee exports and an increase in coffee prices.

The proposed merger of its 100 per cent subsidiary, Highhill Coffee India, with itself, which it acquired in November 2004, would bring in a capacity to produce 3,600 tonnes of instant coffee.

This would increase its capacity to 5,600 tonnes, enabling it to expand revenues over the longer term.

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