Tata Tea: Time to walk the talk

Tata Tea had said in its annual report for the year 2002-03, "In changing its focus on the global markets, the company is increasingly attempting to insulate itself from the vagaries of the plantation business..."

Was Tata Tea talking about reducing its dependence on the plantations business? Obviously not. Thanks to the acquisition of Tetley, there was already a surge in the sales of branded tea to 86 per cent of consolidated revenues. The company was probably already referring to its plans to exit the plantations business.

Of the 56,099 employees on its books as on March 31, 2003, 55,394 were employed in the tea estates and factories. As a proportion of revenues, staff cost accounted for a huge 30 per cent in FY04. An exit from plantations and resorting to buying tea from third parties would surely result in savings.

Meanwhile, realisations from bulk tea fell 5.2 per cent in FY04 year-on-year, which according to an analyst led to a negative contribution from the plantations business. This could have led to the management's resolve to exit from almost all of its plantations.

But the company itself will be the first to point out that disposing of a tea estate is not an easy task. It's a business few people want to get into. It's no wonder the company is reported to be looking at other options, such as an employee co-operative society or managers buying out the company's stake in plantations.

But even in these cases the transition will not be smooth, given the clout of employee unions. The markets, as a result, were hardly excited about the news report of the probable sell-offs, with the stock losing two per cent of its value on Monday.

The only explanation for this is that investors would like to see real examples of plantations being sold, rather than hear of mere possibilities.

Pharma sector numbers

The June quarterly results of large pharmaceutical companies are critical, at a time when these companies are grappling with the adverse FDA rules on generics.

For Dr Reddy, analysts are expecting an approximately 25-30 per cent drop in June quarterly profits, as it's facing pricing pressure in two important generic drugs in the American market.

But other companies are expected to do better. For Ranbaxy, analysts expect June quarterly profits to show a growth of approximately 18-20 per cent - with domestic sales expected to surge thanks to its anti-infective portfolio.

For Wockhardt, analysts expect June quarterly profits to show a 35-37 per cent year-on-year growth. In the case of Cipla, analysts are projecting June quarter earnings growth of 75-80 per cent thanks to overseas sales of anti-AIDS and anti-depressants.

MNC pharma companies are not affected by the recent move of the US FDA. GlaxoSmithKline Pharmaceuticals is expected to report a 25-30 per cent growth in June profits, riding on the back of strong sales of Augmentin (an antibiotic) and its skin anti-infectives in the domestic market.

Meanwhile, Aventis is expected to show a profit growth of 12 - 14 per cent, year-on-year, in the June quarter due to signs of improved sales of its rabies vaccine.

Not equitable Budget for mutual funds

How much damage can Palaniappan Chidambaram's Budget proposals do to mutual funds? Mutual funds which do not pay any tax on portfolio gains will now have to absorb the turnover tax of 0.15 per cent.

For equity funds, this shouldn't make a difference as an equity diversified fund, on an average, witnesses a portfolio turnover of 175-200 per cent in a year.

So about 30 paise will get knocked out of the fund's NAV in a year due to the additional tax "" minuscule considering the gyrations equities are subject to.

However, for debt funds this may see a serious dent in NAVs. A study by a Mumbai based research firm shows that a trader who bought at the day's lowest price and sold at the day's highest price would have made an average gain of 18 paise over the last two years when the debt markets were vibrant.

With the turnover at 15 paise and another 2 paise for other costs like brokerage, the trade becomes unviable even when the markets are buoyant.

Secondly, while the distribution tax on corporate investors lessens the tax arbitrage "" gains from direct capital market transactions are subject to corporate tax of 35 per cent "" tax savings continue through the mutual fund route.

Thirdly, the tax treatment of capital gains on open-end mutual fund units is not clear as these are not securities traded on stock exchanges.

There is no reason for keeping long-term capital gains tax on mutual funds when such a tax is not applicable if an investor chooses to invest in the underlying security directly. Similarly, short-term capital gains tax should be taxed at 10 per cent for mutual funds as well.

With contributions from Mobis Philipose, Amriteshwar Mathur and N Mahalakshmi