Buy Tata Global Beverages - BP Wealth Diwali Picks 2012

Tata Global Beverages Ltd is the second-largest tea company in the world, operating in over 40 countries. The company is engaged in processing, marketing and distribution of tea products. In the past decade, TGBL transformed into a global beverage company by acquiring several companies including Tetley (U.K.) and Eight O'clock coffee (U.S.). TGBL has added 11 new products to its portfolio over the past 3 years to be innovative and win customer loyalty across countries. Innovative Product mix and perfect positioning to improve international exposure TGBL has always innovated and expanded its product line with new offerings in various markets. Its domestic as well as international presence has helped the company to register volume growth. TGBL launched Eight O Clock coffee in partnership with Green Moun-tain Coffee Roasters (GMCR), which is a leader in specialty coffee and single serve brewing systems in North America. Eight O'clock coffee K-cups are now available on retail shelves in the United States of America, for GMCR's Keurig single cup brew-ing systems. We expect the innovation and new product launches will help the company grow its presence in international market and increase market share.

New tie-ups and JVs to fuel growth

TGBL has also entered in a JV with Starbucks with 50:50 JV under the name TATA Starbucks Ltd. This JV will own and operate retail stores across India with the first launch in Delhi and Mumbai in CY12. Company has already opened three store in Mumbai during October 2012 and it has drawn excellent consumer response. We believe Starbucks brand to help the company attract customers and will contribute to topline from Q3 FY13. The company formed Nourish Co which is the JV between TGBL and Pepsi Co India to launch India's first nutrient water, Tata Water Plus which will come in 750ml bottle with the price tag of INR16 only. The brand has already been well accepted in the market on the back efficient distribution network.

Investments to payoff, Will start generating Free cash flow

TGBL spent Rs 48bn over the past decade to acquire tea and coffee brands to enter into new geographies. We expect the payback to start from FY14 because revenue and margin of TGBL's brands in the US, Australia, Russia, and Africa are improving. It will help the company to improve its return ratios going forward. With moderation in Capex and operational efficiencies we expect the company to turn positive free cash flow at the end of FY13.

Outlook and Valuation

In view of its leadership position in the Indian packaged tea market, No. 2 position in the global tea market and generating ~90% of its total revenue from branded products, TGBL is trading at ~23.7x FY13E and ~20.9x FY14E Bloomberg earnings estimates. This is at significant discount to its FMCG peers that are trading at 30x/28x FY13/14E EPS. We expect the gap to narrow and give a buy rating with a target price of Rs 200.

Technical Outlook

The stock has started moving upwards after giving breakout from bullish consolidation price pattern broadening wedges descending after which it is expected to head towards 195-210 in long term while support comes @150-140.

Source : Equity Bulls

Keywords