Tata Tea stocks look promising

21 Sep 2009, 0213 hrs IST, Kiran Kabtta Somvanshi, ET Bureau

Tata Tea, one of the earliest multinational company from India is working to emerge as an international giant with a leading presence in all segments of nonalcoholic and non-carbonated beverages market.

The company been steady on its growth trajectory and is now set to get bigger and more profitable. Long-term investors are advised to but the stock on dips.

BUSINESS

Set up in 1964, tea accounts for nearly 78% of its revenue and the rest contributed by coffee and bottled mineral water. Tata Tea earns nearly two-thirds of its consolidated revenues from the overseas markets. In 2007, Tata Tea hived-off its 24 tea plantations in the north India to 50% owned Amalgamated Plantations. In the south, Tata Tea owns only two tea estates.

The company's 90% consolidated sales are contributed by branded tea and coffee, and the balance comes from plantation and extraction businesses. The company has divided its basket of brands into two classes: global and regional. While brands such as Tetley, Tata Tea, Good Earth and Himalaya are available globally, Eight O'Clock coffee is marketed in the US, Vitax and Jemca in Eastern Europe and Chakra Gold and Kanan Devan in India.

GROWTH STRATEGY

Tata Tea wants to consolidate its international reach and shed the image of a tea company. It has divested its plantations and is investing heavily in brand building. Recently it diversified into specialty and green teas, coffee, mineral water and ready-to-drink beverages, a move which is expected to yield financial benefits in 2-3 years.

Acquisitions have been an integral part of Tata Tea's growth strategy. It is focusing on markets in west Asia, South America, South Africa and the former Soviet republics including Russia.

The competition is coming from long established brands - such as Brooke Bond and Lipton in tea and Nescafé in coffee. In an effort to better manage its growing global reach, the company has divided its operations into six global regions: US, Canada and South America, Europe including UK and Poland, Russia, India-Bangladesh-Pakistan and East Asia. A change in name to reflect its new identity is also in the offing.

FINANCIALS

Net sales of the company have grown at a compounded annual growth rate (CAGR) of 10.6% since 2003-04 to touch Rs 4,848 crore in FY09. The adjusted consolidated net profit has grown at a CAGR of 2.4% over five financial years ended 2008-09. Equity dividend during the period grew at a CAGR of 18%. With cash and investments of Rs 1,440.50 crore in its books, the company has a enough war chest to fund its inorganic expansion.

In last two years, Tata Tea's operating margin has been hurt by costlier inputs, which has been partially offset by double digits hike in prices. The company expects to reach its earlier level of profitability once raw materials are cheaper or retail prices rise.

VALUATIONS

Tata Tea is trading at a consolidated price-to-earnings (P/E) multiple of 9, up from a year ago level of 3. The company has two smaller listed subsidiaries -Tata Coffee and Mount Everest Mineral Water. A merger of these three entities would improve the valuations of the combined entity.

Long-term investors can benefit from accumulating the stock on dips.