The Hindu Business Line : Tata Tea: Buy

Investors can consider taking exposure in the Tata Tea stock, which is among the more reasonably valued ones in the FMCG sector. At Rs 755, the stock trades at 15 times its FY-06 consolidated earnings.

Tata Tea, along with its subsidiaries, is one of the larger integrated tea players in the world. Branded tea contributes about 85 per cent of its consolidated revenues and bulk tea 4 per cent. The company appears to be on an expansion spree through both the organic and inorganic routes. Its recent acquisitions provide it a broader spectrum of brands, which can be launched across geographies. Tata Tea's foray into Bangladesh, Pakistan, South Africa and Russia appears to be gathering pace. Its domestic branded operations have also been doing well with a 12 per cent growth in revenues.

Inorganic growth

In late 2005, the company acquired the Good Earth brand, which has a significant presence in the American specialty market. In February 2006, Tata Tea entered into an agreement to take over Jemca, which controls a 26 per cent market share in the Czech Republic. Though the black tea market appears to have stagnated in the developed countries, there appears potential for growth, as Tata Tea occupies the second slot in market share in most of these countries.

While the acquisition of Good Earth would help Tata Tea diversify from its black tea business, Jemca would provide it access to the East European markets. At an opportune time, the company may deploy these brands in the domestic market, which would help it garner a chunk of the tea market.

Phased exit from plantations

Tata Tea's strategy of disposing of its plantations in South India augurs well for its standalone operations. This division had been a drag on its earnings on the back of low realisations for South Indian tea coupled with high labour costs. The impact of this strategy has been felt in its fourth quarter earnings with employee cost (of the standalone entity) dropping sharply by about 40 per cent. The transfer of its freehold plantations in Tamil Nadu to its subsidiary would free up resources for Tata Tea to expand its branded tea business, while Tata Coffee would benefit from a diversified risk profile.

Impact on prices

Tata Tea can face margin pressure in the near term with prices in Kenya — the largest tea exporter — ruling at about $2 per kg. The tension over mechanisation of tea picking in Kenya and the breakdown of cease-fire in Sri Lanka — the second largest exporter of tea — could help keep current prices firm in the near term. This trend is, however, unlikely to stretch into the long term with fresh supplies from Kenya on the back of favourable weather conditions. If, however, the price trend sustains, global tea majors may pass on the price rise to consumers.

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