The Hindu Business Line : Tata Coffee: Invest

Investors can consider subscribing to the rights offer of the partly convertible debentures by Tata Coffee. Expansion plans, the Eight O 'Clock Coffee acquisition and the thrust on the CIS markets augur well for the company's earnings. A key risk to the investment is the high debt-equity ratio (2.5:1) of the consolidated entity. The conversion price of Rs 250 discounts the company's trailing earnings by about 23 times (on a fully expanded equity base), without factoring in the financials of Eight O `Clock Coffee.

Plantations

Among the larger coffee plantation companies in Asia, Tata Coffee derives a chunk of its revenues from growing and marketing coffee. Coffee prices, driven largely by production figures in Brazil and Vietnam, are likely to remain steady in the short term. The 27 per cent growth in Brazilian coffee production in the 2006 season is likely to be offset by the industry entering a low year. With Tata Coffee increasing its presence in instant coffee production and the FMCG space, the company's earnings would be less susceptible to volatility in prices.

Instant Coffee

Tata Coffee now has two instant coffee manufacturing plants with a total capacity of about 5,600 tonnes. The company is set to enter the freeze-dried segment by setting up a 2,000-tonne plant that is to be ready by January. This foray is likely to improve margins for its instant coffee business as the product enjoys higher value-add over agglomerated coffee. The company plans to expand its presence in this business by setting up a 3,600-tonne facility in Uganda through a joint venture.

Eight O 'Clock

Although the price for the Eight O 'Clock Coffee appears high, the acquisition augurs well for Tata Coffee as the American brand has strong brand recall. Among the larger whole coffee bean makers in the East Coast of the US, Eight O 'Clock is focussing on the ground coffee segment.

Offer Details

Tata Coffee is offering about 62 lakh partly convertible debentures on a 1:2 rights basis. It plans to raise about Rs 250 crore to repay its bridge capital loan of Rs 141 crore. The loan was contracted to fund the acquisition of Eight O 'Clock Coffee through an overseas vehicle. The company also proposes to deploy a part of the proceeds for expansion of its instant coffee business. The hybrid instrument, priced at Rs 400 each, is convertible into equity shares on allotment at Rs 250 per share; the company proposes to repay the balance debt component in three instalments of Rs 50 each at the end of the fourth, fifth and sixth years. The debt portion would carry an interest of 7 per cent to be paid annually. SBI Capital Markets is the manager to the offer that opened on November 16 and closes on December 15.

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