Tata Tea: Mixed flavours

The firm is gaining market share at home but the overseas units are not doing well.

Tata Tea's consolidated numbers for FY08 have been a tad disappointing with a fall in the operating profit margin of over 100 basis points to 16.2 per cent on revenues that grew at 8.6 per cent to Rs 4392 crore.

The higher sales were the result of several acquisitions, including those of Eight O Clock Coffee (EOC), Joekels and Vitax. Adjusted for exceptional income, the net profit dipped slightly to Rs 283.5 crore.

Tetley appears to have gained market share in some geographies having spent heavily on promotions, but EOC has lost market share and its profitability could continue to be under pressure because of higher investments.

The profitability for the year were depressed because the international business fared poorly in the March 2008 quarter partly because of higher expenses on promotions and partly because of forex losses.

While, the numbers for the year are not strictly comparable because certain costs have been re-classified, the operating profit dipped by about 10 per cent.

The company is doing much better in the home market, gaining market share and giving Unilever a run for its money. Tata Tea posted a muted increase in sales the stand-alone entity of 9.5 per cent in the March quarter, but adjusting for the sales of the loss making plantation business, the growth in sales was a much healthier 17 per cent driven by a 15 per cent volume growth in branded teas.

The good news is that profitability has improved ""the operating profit margin is up 340 basis points to 9.4 per cent""partly because of better sales but mainly because the loss-making plantation business has been hived off.

Over the past couple of years, the Rs 4,392 crore Tata Tea has worked on almost all its brands""Agni, Gemini, Chakra or Kanan Devan, either re-positioning them , re-packaging them, strengthening the brew and supporting them with new advertisement campaigns.

In addition, to be able to take on smaller local or regional brands, the company has also been coming up with different pack sizes thereby also introducing newer price points.

The more affordable pricing has for instance has brought in new buyers and helped grow market share : during the March quarter, while most brands grew in single digits, the Agni brand grew 46 per cent.

Tata Tea now appears to have enough pricing power to fight increasing costs, the management says it will be able to push through higher prices to retailers, so as to protect profitability.

However, the international business needs to post better profits. At the current price of Rs 850, the stock trades at 13.5 times estimated FY09 earnings and is reasonably valued.

Mundra Port: Busy times

The port handled much higher volumes of crude and cargo in FY08 and should continue to do brisk business.

India's biggest non-major port, the Rs 817 crore Mundra Port and SEZ was busy in FY08, putting through a volume of 28.8 million tonnes, 46 per cent higher than in FY07. That together with lease rentals of Rs 52 crore from the company's special economic zone (SEZ) pushed up revenues by about 41 per cent.

With the facilities at the port being better utilised, the operating profit margin was up 1170 basis points at 65.4 per cent. However, the net profit increased just over 12 per cent to Rs 210 crore largely because tax benefits to the tune of Rs 130 crore were reversed.

Mundra port handles dry bulk, crude and and container cargo. The port has among the deepest drafts on the west coast which makes it possible for larger ships to berth and also makes it less expensive for shipping lines. Apart from being well-located , it is also connected by rail with Inland Container Deports in(ICDs) in northern India.

India's port traffic is expected to grow to about 1200 million tonnes by FY12 from an estimated 680 million tonnes in FY08.

However, the port capacity would perhaps be just around 1000 million tonnes of which the 12 major ports are expected to handle about 700 million tonnes. Growth for ports like Mundra, will be driven by assured contracts for coal and crude, especially with new refining capacity coming up.

The company is also developing a special economic zone over 32,000 acres along the Mundra port, of which 50 per cent is already understood to be in its possession.

The SEZ is expected to attract manufacturers that need to be located close to the port and which would benefit from the tax benefits.

In the initial years realisations from the SEZ might be low with the demand emanating mainly from industrial houses but at a later stage, demand for residential and commercial projects should fetch better realisations.

Mundra Port had raised Rs 1,771 crore through an initial public offering at a price of Rs 440 per share in November 2007. Analysts estimate that the company could close FY09 with revenues of close to Rs 1,100 crore and a net profit of Rs 500 crore.

At the current price of Rs 767, the stock trades at nearly close to 60 times estimated FY09 earnings and the growth potential notwithstanding, appears a tad expensive.