A global brew

SPECIAL REPORT

Eight O'clock acquisition will help Tata Coffee foray into the US market.

Of late, the stock price of Tata Coffee, a 51 per cent subsidiary of Tata Tea, has been spiralling up like the delightful ghat roads winding up the salubrious coffee estates spread over the rolling slopes of the Nilgiris.

The scrip zoomed 28 per cent over the past week, while the markets have been falling and had earlier touched a high of Rs 370 on May 11.

The rich aroma of Tata Coffee's beans, (Rs 190 crore turnover), is expected to spread further as the company has gulped down a Goliath in the form of the $109 million (over Rs 490 crore) US-based Eight O'clock Coffee (EOC). The Tata Tea group consisting of Tata Tea, Tata Coffee, Tetley and Eight O'clock is all set to become a leading global beverage player.

The latest acquisition will give Tata Coffee an entry into the major existing markets of Eight O'clock and thus substantially contribute to its turnover. Firm coffee prices would add flavour to the brew.

Acquisition avenue
Tata Coffee's recent acquisition of EOC for a total acquisition price of $220 million (Rs 1,015 crore), is considered a strategic and operational gain for the company.

According to a report from SSKI Securities, the acquisition gives Tata Coffee an entry into the world's largest coffee market ($21 billion) and gives access to the distribution reach of EOC. The company enjoys significant retail distribution strength accounting for 67 per cent of all commodity sales (by volumes) of the US coffee market.

In 2005, EOC brewed net sales of $109 million and an EBIDTA of $27 million. This is another major step in Tata Tea group's global expansion plans after the takeover of Tetley, Good Earth (US) and Jemca (Czech Republic).

Tata Coffee is also setting up a marketing joint venture with Beeyu Overseas, with a 51 per cent stake for sale of its instant coffee abroad.

According to company chairman, R K Krishna Kumar, "By the end of the decade, we expect the Tata Tea group to become one of the largest beverage players in the world. This move is in line with the group's international strategy."

Estate expansion
The company has 26 coffee and tea estates across southern India and its curing capacity accounts for about 15 per cent of the total capacity in the country.

Apart from its estates in the districts of Coorg, Hassan and Chickmagalur in Karnataka, it has acquired five tea estates and one coffee estate in Tamil Nadu in October 2005. It has a curing facility with an installed capacity of 10,000 MT, two instant coffee manufacturing facilities near Hyderabad and Madurai with a combined installed capacity of 6,500 MT.

According to a statement by company managing director, M H Ashraff, the company is setting up a freeze-dried coffee facility at a cost Rs 100 crore, which will have a capacity of 2,000 tonne per annum, under the EOU/SEZ scheme, to cater to the demand from Europe and Russia.

Other plans are to invest Rs 50 crore to set up a soluble instant coffee plant in Uganda. With nearly 90 per cent of its instant coffee exports going to Russia and CIS countries, it has plans to set up a facility in the region. Plans are on to invest in Vietnam to explore trading in organic coffee. It intends to use its Ugandan operations to foray into China.

The company uses pepper and cardamom as inter-crops and grows and sells timber. It is now value adding the product by manufacturing plywood and blockboards under the brand Tata Conswood. It is also foraying into eco tourism on its estates in Karnataka.

Pricing
The coffee prices are expected to hold firm, according to market watchers, in line with the steady trend seen over the past six months in the spot prices on NCDEX.

Globally, as per the International Coffee Organisation numbers, the weighted average price of Robustas have increased from $0.34 per pound in 2004 to over $0.60 in May 2006. The prices for Brazilian Natural Arabicas have increased from about $0.62 to over $0.99 during the same period.

Analysts feel that green coffee prices may even see a growth of 30-35 per cent, going forward. However, others differ saying that coffee prices could soften a bit due to good crop globally. Ashraff feels that in 2006 and beyond, the company could face some margin pressure due to competition in India and abroad.

The trend of branded coffee consumption is picking up and Tata Coffee's efforts in branding through its brand Mr Bean are expected to pay off with better pricing, even as Brooke Bond Bru continues to be the leader with 29 per cent market share.

International Tata Café, Mysore Gold and Malabar are its instant coffee brands that are exported. It has also launched Mr Bean Coffee Junction in Chennai. The company is also in the process of unifying its various brands into a common stronger brand.

FY06 and beyond
Analysts attribute the decline in FY06 numbers to dispatch problems and lower exports.

For FY06, the company posted a five per cent fall in net sales to Rs 190 crore. Net profit declined by 22 per cent to Rs 22.3 crore. However, there has been a growth of three per cent and 32 per cent respectively, as compared to FY04.

Going forward, the capacity and estate expansions and acquisitions would help the company in improving its topline on the back of growing demand and access to new markets. Ajay Parmar of Emkay Share & Stock Brokers expects its business to grow by 8-10 per cent over next three years. 
 

FINANCIALS
(Rs crore)	FY06	FY05	Change %
Net sales	189.93	199.92	-5.00
Operating profit	36.24	31.85	13.78
OPM %	19.08	15.93	-
Net profit	22.32	28.70	-22.23
EPS (Rs)	17.90	23.02	-
P/E trailing 12 months			19.28x

Valuations
Tata Coffee trades at 19.3x on trailing 12 month earnings, which is cheaper compared to 22.5x of its parent, Tata Tea.

According to SSKI estimates, Tata Coffee trades at 13.1x FY07E and 11.7x FY08E.