>TATA GLOBAL BEVERAGES: Poised to perform

Tata Global Beverages Limited (TGBL) is an emerging player in the global beverage market. The company has made a strategic shift from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks. As a result, the company has made an entry into the top 10 global companies list in the hot drinks category, posing a challenge to global players like Nestlé, Unilever and Kraft Foods. The company’s product portfolio comprises leading global brands like Tetley, Eight O’ Clock and local brands like Tata Tea.


Bottomed-out margins; expect a positive surprise: We model in TGBL’s OPM to improve by ~150bp over FY2011-13E from 8.6% in FY2011 to ~10.1% in FY2013E, driven by a shift in the company’s focus from the plantation business to branded products and rationalization in the operating cost structure. While TGBL’s focus on volume growth remains intact, selective price increases and stable ad spends will further aid in margin improvement. Also, with the Tea Board of India estimating higher tea production in 2011 as compared to 2010 (~5% higher production), we expect auction prices of tea to soften, thereby providing a relief to the company from heightened input cost pressure.


Estimate ~40% plus adjusted EPS CAGR over FY2011-13E: We model a ~40% EPS CAGR over FY2011-13, led by (1) 9% revenue growth and (2) a ~150bp margin improvement. We believe the company is set to outperform the industry’s growth, with the help of selective price increases and strong brands like Tata Tea Premium, Tata Tea Gold, Agni Dust and Kanan Devan.


Key valuation trigger: Despite its leadership position in the Indian packaged tea market, No. 2 position in the global tea market and generating ~90% of its total revenue from branded products, TGBL is trading at 12.2x FY2013E EPS (which is at a discount to its FMCG peers, trading at 20x–35x FY2013E EPS). Also, on EV/Sales basis, the stock is trading at 0.6x FY2013E EV/Sales (historical average of 1x EV/ Sales). Hence, we initiate coverage on the stock with a Buy recommendation and a target price of `97, based on 14x FY2013E EPS of
`6.9(0.8x FY2013 EV/Sales).


To read the full report: TGBL
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