After significantly underperforming the Bombay Stock Exchange fast moving consumer goods index in 2011, Tata Global Beverages is back with a bang this year. Since January 30, when it signed a 50:50 joint venture (JV) with US-based Starbucks Coffee, the stock has gained 20 per cent.
The move augurs well for Tata Global, which has been affected adversely by its aggressive inorganic expansions in low-growth markets.
It is also an important milestone for driving long-term growth. The first store will open only by the end of the first half of 2012-13, so there won’t be any immediate impact. Analysts believe the stock has got rerated too fast.
Though they feel margins have bottomed out in its core business, these are unlikely to recover substantially, as the company is struggling to push volumes in a slowing international market, which accounts for 70 per cent of its consolidated revenues.
| AWAITING MARGIN EXPANSION | |||
| In Rs crore | Q3’ FY12 | FY12E | FY13E |
| Net sales | 1,802.0 | 6,570.0 | 7,146.0 |
| % chg y-o-y | 12.1 | 9.8 | 8.8 |
| Operating profit | 181.0 | 594.7 | 680.0 |
| % chg y-o-y | -1.1 | 1.5 | 14.3 |
| Adjusted net profit | 80.0 | 335.3 | 399.0 |
| % chg y-o-y | 11.0 | 36.8 | 19.0 |
| Consolidated financials Source: Company, Analyst estimates | |||
Himani Singh, analyst with Elara Securities, says: “We do not see a reason to upgrade our recommendation (Reduce) on Tata Global due to uninspiring topline volume growth, stiff challenges to pass price rises in developed modern retail and continued margin pressure.”
Starring with ‘Starbucks’
The JV with Starbucks, through its 58 per cent subsidiary Tata Coffee, will open 50 shops by the end of the year. Tata Coffee will be the exclusive supplier of premium coffee beans to the JV, Tata Starbucks Ltd. Besides, Tata Global will also get to sell its products like specialised premium tea and Himalaya bottled mineral water in Starbucks’ 17,000 cafes in 60 countries.
Manoj Menon, analyst at Kotak Institutional Equities says, “This JV could potentially be a win-win for Tata Global, as it will ensure appropriate allocation of capital in growth businesses (a significant challenge faced by the company) and hence, effectively utilise its cash (net Rs 600 crore), besides leveraging on Starbucks’ retail skills. We view this as a medium-term positive.”
Improved fundamentals
After a subdued performance in the first half of 2011-12, with 9.6 per cent sales growth, sales jumped 12.1 per cent in the December quarter, mainly due to rupee depreciation, price rises and volume growth. Consolidated operating profit margins declined by 134 basis points (bps) to 10 per cent, largely due to higher ad spends.
Though prices of tea and coffee corrected sequentially, these remained firm on a yearly basis at the consolidated level.
While revenue growth is likely to remain subdued due to slow growth in the international markets, substantial margin recovery is unlikely, as lower raw material prices will be compensated by higher promotional activities. Says Kotak’s Menon: “We see signs of turnaround with a relatively strong third-quarter performance (led by India) and expect the trend to continue due to correction in tea and coffee prices, along with price hikes taken during the year. Margins have likely bottomed out.”
Sreekanth PVS, analyst at Angel Broking, echoes a similar opinion, but for a different reason. He says, “We model in Tata Global’s operating margin to improve from 8.6 per cent in 2010-11 to 10.1 per cent in 2012-13, due to a shift in the company’s focus from the plantation business to branded products, focus on volume growth, selective price increases and stable ad spends, and rationalisation in the operating cost structure. Besides, auction prices of tea are expected to soften due to five per cent higher production in calendar year 2011 over 2010.”
But Hemant Patel, analyst, Enam Securities, believes with tea prices moderating and coffee prices correcting, the company will utilise the gain in gross margin to beef up ad spends. He has increased his estimates to 17.4 per cent of sales for both 2011-12 and 2012-13, from 16.9 per cent in 2010-11.
Further rerating unlikely
After the stupendous rise in 2012, the stock trades at 18.4 times 2012-13 estimated earnings, towards the higher end of 10-25 times (average 17.5) historical one-year forward price to earnings multiple. Elara Capital’s Singh and Angel Broking’s Sreekanth ascribed a target multiple of 14 times, while Patel from Enam estimated 15 times.
The stock seems over-bought and is unlikely to go up further until the JV actually starts delivering in a material way or the fundamentals of existing businesses improve. Besides, inability to pass on the entire cost inflation and increasing competitive activity, forcing higher promotional spends, remain key risks and resistance factors.
