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The Tata Coffee scrip has under-performed the broader indices since mid-May, down a whopping 36 per cent as against a 3.8 per cent fall in the Sensex.
While the company performed well across all segments in the first three quarters of FY13, the fourth quarter was weak. Sales were flat, while net profits (adjusted for extra-ordinary items) fell 21 per cent year-on-year, at the consolidated level.
Experts say, some margin funding-related selling by lending firms in the counter was largely responsible for the stock’s sharp fall in June. However, analysts say, the company’s outlook remains healthy. A weaker rupee will also aid its financials, as exports and international sales form most of its revenues. Strong performance of its international business under the Eight O’ Clock (EoC) subsidiary (65 per cent of FY13 consolidated revenue) and the rising proportion of high-margin instant coffee are key growth drivers.
Tata Coffee is also scouting for attractive buyouts in Europe, which could further improve its prospects. Most analysts, thus, remain positive on the stock and believe recent correction provides a good entry point for long-term investors.
“Tata Coffee has shown consistent performance in its domestic market, as well its subsidiaries (Eight O’ Clock) with aggressive business expansions. Its debt position is comfortable and cash flow positive. The company is slowly turning from commodity segment to FMCG segment with the acquisition of Eight O’ Clock, mainly in the retail front. Tata Coffee is one of the best plays in the foods segment, and is now trading at 9.8 times its FY15 estimated earnings of Rs 101,” says Shweta Prabhu, analyst at Anand Rathi Securities. She has a target price of Rs 1,950 on the scrip. The consensus one-year target price, according to Bloomberg data, is Rs 1,700.
Nevertheless, the risk-reward equation is favourable, say analysts. In international business, EoC is expected to post strong performance as it enters into newer markets such as Canada. Commencement of its premium coffee extraction plant at its instant coffee unit in Theni, Tamil Nadu, last month will increase its total instant coffee capacity by 30 per cent to 8,500 tonnes per annum. Higher proportion of high-margin products like spray dried, agglomerated and freeze-dried instant coffee will improve earnings stability as the company would be less impacted by fluctuating coffee bean prices.
Notably, the prices of Arabica and Robusta coffee, under pressure earlier, are now stabilising. Last week, Hameed Huq, managing director of Tata Coffee, had told Business Standard he expected prices to rise 15-20 per cent in the second half of 2013. A gradual recovery in prices of Robusta (70 per cent of total production) and Arabica (30 per cent) will boost domestic performance. Analysts believe the Ebitda margins will remain stable at 15-16 per cent. In the long run, the alliance with Starbucks should also aid Tata Coffee's expansion in newer markets.
