Saturday, January 28, 2012

>TATA GLOBAL BEVERAGES: Impressive performance by domestic tea business

Result highlights
OPM broadly in line: Tata Global Beverages Ltd (TGBL)’s Q3FY2012 consolidated results are lower than our expectation largely on account of a lower than expected top line growth. The consolidated gross profit margin (GPM) improved sequentially by 278 basis points year on year (YoY) to 58.0% and the operating profit margin (OPM) improved by around 170 basis points sequentially to 10.0% (which is broadly in line with our estimate of 10.3%) during the quarter. Some of the positives for the quarters include a strong year-on-year (Y-o-Y) improvement in the domestic operating performance, a rise in the sales of Tetley and an improvement in the profitability of the Mount Everest business.
Synopsis of consolidated results: The consolidated net sales of TGBL grew by 12.0% YoY to Rs1,801.8 crore (which is lower than our expectation of Rs1,864.3 crore). The growth was driven by a mix of (lower) single-digit volume growth, price hikes and favourable benefits from the rupee’s depreciation (5%+). Though the domestic raw tea prices were down on a Y-o-Y basis, but the higher green coffee prices affected the GPM at the consolidated level. The GPM was down by 105 basis points YoY to 58.0%. Also the company spent heavily on brand building and promotional activities during the quarter. The advertisement expenditures as a percentage of sales went up by 158 basis points YoY to 18.9% during the quarter. Hence, the OPM was down by 141 basis points to 10.0% and the operating profit was lower by 1.7% YoY to Rs180.9 crore. However, a lower interest cost on a Y-o-Y basis (due to debt restructuring) resulted in a 15.2% Y-o-Y growth in the adjusted profit after tax (PAT; before minority interest and share from associates) to Rs92.2 crore during the quarter (lower than our expectation of Rs112.6 crore).

Domestic tea business—stellar performance: The domestic business’ performance was the highlight of the quarter with a 594-basis-point Y-o-Y improvement in the GPM in Q3FY2012. This was mainly on account of the softening of raw material prices and the price increases undertaken by the company to mitigate the raw material cost pressure.

Most of the international markets performed well: Most of the international markets performed well during the quarter. The UK business witnessed a reversal in trend recording a growth in the top line during the quarter. Canada continues to be the leader (in volume and value terms) in the black and speciality tea market. TGBL’s new products found good acceptance in Australia. The quarter’s strong performance in various geographies could be attributed to the higher spend towards advertisements and promotional activities.

Outlook and valuation: We have trimmed our estimates for FY2012 by 3% to factor in the lower than estimated top line and bottom line growth in Q3FY2012. However, we have broadly maintained our earnings estimate for FY2013. The management of TGBL has hinted at a likely improvement in the margins of Eight O’clock Coffee business and the domestic business with the raw material prices having corrected from their highs and showing some stability in the past few months. Also the UK business has shown signs of improvement with revenue recording a growth during the quarter. The new launches have gained good acceptance in various international markets. This gives us visibility of the improved performance in the coming quarters. Having said that, the performance of the Eight O’clock Coffee business and any movement in the raw material prices have to be keenly monitored for the next one to two quarters. In view of the limited upside from the current level we maintain our Hold recommendation on the stock with the price target of Rs109. At the current market price the stock trades at 18.5x its FY2012E earnings per share (EPS) of Rs5.2 and 14.3x its FY2013E EPS of Rs6.8.

TGBL stand-alone: stellar operating performance: 
TGBL’s stand-alone performance was the highlight of the quarter with a strong improvement in the profitability during the quarter. The net sales of the business grew by 11.6% YoY to Rs530.5 crore and it was largely a volume-led growth. The management has hinted that adequate advertisement support helped the company to achieve a good revenue growth.

The consumption pattern for black tea in the domestic market is improving with an increase in the consumption of tea and the upgradation of consumers from loose tea to branded tea.

The company was able to maintain its leadership position in the domestic market with volume and value market share of 21.3% and 19.5% respectively during the quarter.

Raw tea prices declined by 5% on a Y-o-Y basis in Q3FY2012. This along with the price hikes undertaken by the company helped the company to achieve almost a 600-basis-point Y-o-Y improvement in the GPM during the quarter. Hence the OPM improved by 402 basis points YoY to 20.5% during the quarter.

As a result, the operating profit grew by 39% YoY to Rs108.5 crore and the adjusted PAT grew by 33.3% YoY to Rs63.1 crore during the quarter.

Tata Coffee’s consolidated results—profitability affected by higher coffee prices
It was yet another quarter of a disappointing performance by Tata Coffee (consolidated) at the
operating level with the OPM contracting to 13.1% in Q3FY2012 (from 24.4% in Q3FY2011). The margin contracted because of high green coffee prices during the quarter.
The net sales grew by 18.7% YoY to Rs415.9 crore in Q3FY2012. This was driven by a 23.2% Y-o-Y growth in the stand-alone business and around a 17% Y-o-Y growth in the Eight O’clock Coffee business during the quarter.

The revenues of the Eight O’clock Coffee business (which contributes about 70% to the total revenues) grew by just 3.3% on a constant-currency basis. Eight O’clock Coffee maintained its volume market share during the quarter.

A higher realisation in coffee plantations and extraction helped the stand-alone business to post a strong 691- basis-point Y-o-Y improvement in the OPM. The Eight O’clock Coffee business’ PAT was down by about 85.0% YoY (on a constant currency basis) during the quarter.

At the consolidated level, Tata Coffee’s adjusted PAT declined by about 35.0% YoY to Rs22.7 crore during the quarter.

The green coffee prices have corrected from their highs and are showing a declining trend in past few months. If the prices remain stable or correct from the current level, we would see a sequential improvement in the margins of Tata Coffee (consolidated). The key focus area for the company would be improving the sales volume of the Eight O’clock Coffee business. Regional performance In the US business the revenue growth was driven by the price increases implemented at the Eight O’clock Coffee level. However, the profitability was affected by higher commodity and merchandise costs during the quarter.

Tetley continues to be the volume and value leader for black and speciality teas in Canada on the back of aggressive innovations. It has a 50% brand share in the black tea market in Canada. New products including Dark Chocolate Vanilla Bean Perk and Green Pomegranate 80s are gaining distribution.

The UK business showed a strong revival in Q3FY2012. The company recorded a sales growth for the first time after several quarters of low single-digit sales. The speciality category performed well during the investor’s eye stock update quarter. Tetley’s green tea saw an improvement in brand share while Teapigs brand of super premium teas continues to grow with distribution gains. Sensing the strong performance of Teapigs in the UK, the company is planning to launch the brand in Australia and Canada too. The profitability of the UK business was affected by higher spends on brand building and promotional activities.

The other geographies such as South Africa, Australia and Russia have shown a strong improvement in their performance.

Other highlights of the analyst meet

  • Mount Everest mineral water has posted a profit at the operating level for the first time in several quarters. Himalayan mineral water is reaping the benefits of strong distribution synergies of JV with PepsiCo. We expect the company to post an improved performance in the coming quarters as well.
  • The management has indicated that it would increase the penetration of branded tea in the rural markets in India. We believe this is a positive step towards improving the growth prospects of the stand-alone business.
  • Intense promotional activities in the developed economies helped the company to achieve incremental revenues of around Rs20.0 crore during the quarter.  The profit before exceptional items and tax would have been more than Rs200 crore had the Eight O’Clock Coffee business’ profits remained flat.
  • The management has hinted at launching new products under NourishCo (a 50:50 joint venture between TGBL and PepsiCo) in the coming quarters.

Outlook and valuation: We have trimmed our estimates for FY2012 by 3% to factor in the lower than estimated top line and bottom line growth in Q3FY2012. However, we have broadly maintained our earnings estimate for FY2013. The management of TGBL has hinted at a likely improvement in the margins of Eight O’clock Coffee business and the domestic business with the raw material prices having corrected from their highs and showing some stability in the past few months. Also the UK business has shown signs of improvement with revenue recording a growth during the quarter. The new launches have gained good acceptance in various international markets. This gives us visibility of the improved performance in the
coming quarters. Having said that, the performance of the Eight O’clock Coffee business and any movement in the raw material prices have to be keenly monitored for the next one to two quarters. In view of the limited upside from the current level we maintain our Hold recommendation on the stock with the price target of Rs109. At the current market price the stock trades at 18.5x its FY2012E earnings per share (EPS) of Rs5.2 and 14.3x its FY2013E EPS of Rs6.8.