Tata Global Beverages: Hold

With more than half its revenues coming from overseas markets, Tata Global Beverages stands to gain from a weak rupee. Good growth in the Indian market, a gradually rising share of higher-margin coffee and successful launches of premium tea varieties are other factors holding the company in good stead.

However, growth in markets such as Canada and Europe has been weak. Raw tea prices have been on the rise for the past two years. Product price hikes may dampen the already slowing demand.

The stock has gained rapidly over the past few quarters, spurred in part by Tata Global’s partnership with Starbucks for its India venture. But this has led to valuations moving up to 23 times trailing 12-month earnings now, close to the 3-year average price-earnings multiple of 25 times.

Global presence

The past few quarters have seen other income contributing to profit growth while sales grew in single digits. Investors can continue holding the stock. Performance now hinges on initiatives to push growth in the European and Canadian markets, as well as sustenance of growth in the US and domestic markets.

With Tata Global’s operations spread across continents, about 65 per cent of revenues come from overseas markets. The company’s flagship brand is Tetley, sold across 70 countries, with key markets being the UK and Canada.

While Tetley still remains Tata Global’s biggest brand, dependence has slowly come down to 38 per cent now from 52 per cent five years ago, pointing to better off-take in its other brands. Important ones in the global marketplace include Good Earth (US), Vitax (Poland), Jemca (Czech Republic) and Laager (South Africa). All feature among the top in each market.

But Europe and West Asia, which contribute about 30-34 per cent of total revenues, saw sales expand just 5 per cent in the previous fiscal. Stiff competition and a decline in black tea demand in the UK told on growth. The company has begun pushing green and specialty teas to counter the slowing black tea demand. These teas also offer higher margins. Similar moves of introducing differentiated and specialty teas have worked earlier in Australia, boosting the otherwise sluggish demand.

In Canadian markets too, where growth is subdued, the company has pushed single-serve packs, green, and herbal teas. It also recently tied up with hospitals across the country to supply black teas. This could boost its sluggish growth. Performance of this market did improve in the recent June quarter.

Coffee steps up

Indeed, sales from Canada, Australia and the Americas did better than the European region, clocking a 9 per cent growth in the 2013 fiscal. While improved performance in Australia helped, better growth in the coffee market in the US also benefited.

Via its subsidiary Tata Coffee (57 per cent), the company holds Eight O’ Clock Coffee, the third largest coffee brand in the US. The Eight O’ Clock brand brings in about 17 per cent of Tata Global’s revenues.

Besides retailing this brand, Tata Coffee also exports green as well as higher-quality premium roasted beans to a number of regions including Russia, West Africa, Japan, and Korea. Meanwhile, Tata Global itself is present in the coffee market directly through brands such as Grand in Russia.

On a consolidated basis, share of coffee in Tata Global’s revenues has inched up from about 23 per cent in the 2010 fiscal to 26 per cent now.

A rising share will help improve profitability as margins on coffee are higher (about four to five percentage points) than on teas .

Domestic promise

While most global markets turned in slow growth, the Indian market did well, with 16 per cent growth in sales in the 2013 fiscal. That’s better than the 13 per cent growth the year before. Apart from its marquee Tata Tea, the company has strong regional brands such as Chakra Gold and Kanan Devan. Good progress into rural markets, which hold immense potential, also helped.

But average raw tea prices in India shot up 16 per cent, prompting significant product price hikes. Tea prices have risen still further by 11 per cent so far this year. Cautious consumers still fighting high living costs, and slowing volumes could limit the room the company has now to hike product prices on premium teas. But given the relatively essential nature of teas, plain black teas will still see sustained growth despite price hikes

Other initiatives, such as water, partnerships with Starbucks and Pepsi Co. also provide good diversification from the tea and coffee businesses.

Slow sales growth

For the June 2013 quarter, consolidated sales grew 5 per cent. Over the past three years, sales have clocked an annual 8 per cent growth, with net profits remaining flat in the period. Input costs account for more than 40 per cent of sales. A further 22 per cent is taken up by selling costs. Both these costs could rise in the near term, compensating for margin improvement from a higher share of coffee and product price hikes. Re-launch and introduction of new brands across markets call for more spend on marketing and promotion.

Operating margins have hovered around 11 per cent over the past three years. Net profit margins fell slightly from 6 per cent to 5.3 per cent in the same period.

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