Shares of Tata Global Beverages on Monday fell 5.5 per cent to Rs 163.95 after Morgan Stanley downgraded its rating on the stock from ‘equal-weight’ to ‘underweight’. So far this year, the stock price has almost doubled, following its joint venture with Starbucks in India.
“The TGBL (Tata Global Beverages Limited) stock has benefited from improved investor sentiment, following the Starbucks launch in India. Except the cyclical improvement in the international coffee business, we fail to see any structural change in growth, profitability, market construct or return ratios for the company,” Morgan Stanley analysts, led by Nillai Shah, said in a client note on Monday.
While raising its price target for the Tata Global stock from Rs 101 a share to Rs 140 a share, the brokerage said the stock movement was exaggerated and recommended booking profits. “The price-to-earnings valuation gap with its peers in the FMCG (fast-moving consumer goods) segment has decreased significantly over the past six to eight months. We believe TGBL should trade at a significant discount to other FMCG companies, owing to lower earnings visibility, cost and competitive pressures, large exposure to developed consumer markets, sluggish industry growth and lower capital efficiency,” the analysts said.
Morgan Stanley said the stock was trading at 21.8 times the 2014 estimated earnings, compared with its one-year average forward multiple of 17 times in the last five years.
“Though we view the management change and the joint venture with Starbucks as incrementally positive, we expect the contribution to earnings to be limited,” the analysts said, adding, “TGBL stands to benefit from a cyclical uptrend in its international business, driven largely by the favourable impact of foreign exchange and input tailwinds in its US coffee business. However, we fail to see any sustainable structural improvement in the tea business. We see limited upside in the US coffee business, against market expectations.”
