Tata Tea: Tetley drag

Indian business comes in handy for Tata Tea in the March quarter

Tata Tea reported a slight improvement in performance in the March quarter. Consolidated revenues grew 7.8 per cent compared with a 3.7 per cent increase in the nine month period till December 2004.

The doubling of growth rate is nothing to get too excited about, since growth is still in single digits.

Operating margins rose by about 180 basis points, more or less in line with the trend in the rest of the year. For the whole year, profit before exceptionals and tax rose by an impressive 25 per cent, despite a meagre 4.7 per cent increase in sales.

Much of the growth came from Tata Tea's Indian business. Tetley, which accounts for over 63 per cent of consolidated revenues reported a flat trend in sales for the year.

It was the non-Tetley business, mainly consisting of Tata Tea's Indian business (80 per cent contribution), that drove revenue growth with a 13.9 per cent increase in sales last year.

The domestic branded tea business benefited last year not only from high volume growth but also an improvement in realisations, thanks to crop shortage.

Higher realisations coupled with cost savings led to a massive 39.3 per cent jump in profit before exceptionals and tax for the non-Tetley business, and accounted for over 72 per cent of the total incremental profit.

Even the Tetley business reported an improvement in profit margins, thanks to a change in promotion mix which resulted in lower promotion cost and other cost cutting measures.

Despite sales being flat, Tetley's profit before taxes and exceptionals rose by 13 per cent.

Yet, as pointed out earlier, it was the Indian business that drove growth last fiscal. While the outlook for volume growth continues to be good, tea prices have corrected which means that the upside from higher realisations may not be available this fiscal.

The Tetley business is expected to be a drag this year as well, since revenue from the key UK region could continue to decline or at best be flat.

On the cost front things look much better with the hive-off of the South Indian plantations, especially since these are loss making. Further, Tetley is expected to save about Rs 23 crore (0.75 per cent of sales) on interest thanks to a restructuring of its debt.

Yet, since sales growth is expected to be in low single-digits, Tata Tea's valuation of over 15 times FY05 earnings seems rich.

Neyveli Lignite

Neyveli Lignite Corporation has reported a 9 per cent growth in its net profit to Rs 500.57 crore, despite a mere 5.56 per cent growth in net sales.

Profit growth was aided by a 64.4 per cent jump in other income to 225.43 crore and that was largely due to reversal of provision for impairment of assets coupled with a withdrawal of a contingency provision.

On the operational front, profit growth in the lignite mining division helped offset the lacklustre performance of the power generation business.

Segment profit of the lignite mining business expanded 289.4 per cent to Rs 439.74 crore, which analysts point out was thanks to increased transfer prices for lignite.

Profit of the power generation division fell 64.12 per cent to Rs 139.11 crore, despite segment revenues growing 5.5 per cent. No doubt, incentives to electricity boards for securitisation of dues has reduced 19 per cent, but the power generation division had to contend with the double whammy of higher inputs costs and lower tariffs.

Overall operating profit, however, rose 7.8 per cent to Rs 672.61 crore in the March quarter, thanks to the growth in the profit of the lignite mining division.

For the whole year, operating profit margin expanded 96 basis points to 5.64 per cent, again thanks to the improved performance at the lignite mining division.

The Neyveli Lignite stock has lagged the market in the recent past-it has been more or less steady in the past month, even though the Sensex has risen 5 per cent.

It'll be a long while until the projects under the company's expansion plans near completion, which means that profit growth may not be high in the short term.

VSNL

VSNL's revenues grew 4.3 per cent last fiscal, after three years of decline, thanks to a 100 per cent jump y-o-y in the enterprise segment (corporate data services).

The enterprise segment now accounts for about 35-36 per cent of the sales and commands a profit margin of around 35 per cent. In the mainstay ILD business, the management claims that margins have been stable despite a fall in rates, thanks to higher volumes.

The company's operating profit grew 45 per cent per cent to Rs 769.1 crore, reversing a four year trend. Operating profit margin at 23.2 per cent was up by a massive 650 basis points.

For the quarter ended March 05, VSNL sales grew 15.8 per cent to Rs 901.7 crore, again driven by the enterprise segment. Operating profit rose 21 per cent, as profit margin improved by 100 basis points thanks to the higher contribution from the enterprise segment.

Profit before taxes and exceptionals, however, rose just four per cent because of a 48 per cent jump in depreciation. Depreciation rose because the company capitalised the cost of Chennai-Singapore sea link last quarter.

Besides, the company had acquired about 25,000 km of cable network, which also resulted in higher depreciation.

The outlook for the outgoing ILD business continues to be bleak with BSNL now opting for a tendering system. Since the broadband business is yet to gain critical volumes, the enterprise segment will continue to be the main growth driver.

The VSNL stock was up 3.7 per cent at Rs 228 on Friday, and now trades at 15 times forward earnings.

Given the concerns with the mainstay ILD business and the fact that the TYCO undersea network would take a couple of years to turn in profits, the stock seems fairly valued.

With contributions from Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian