Buy Tata Global Beverage - EQUENTIS

Strong growth potential

TGBL holds a strong growth potential with increasing consumption of healthy beverages globally and in India. Acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks offer a huge market potential for TGBL, as it can develop and market products in local as well as global markets. The TGBL - Starbucks JV plans to scale up its operations quickly going ahead. Through its JV with Pepsico, TGBL has also entered the water business. It has launched two brands Tata Gluco Plus and Tata Water Plus in select cities in India. The initial response to the water brands has been encouraging with Tata Water Plus becoming the largest selling bottled water in Chennai.

Wide geographical reach

TGBL now has a wide geographical reach for its products and in some of the markets has leadership positioning. While in many of the markets, TGBL has enhanced its reach, the same has resulted in subdued margins. Once the maturity is achieved and pricing stability is attained, the ensuing operating leverage would be huge as any improvement in realisation would translate into increase in OPM directly.

Strong brand portfolio and focus on branded products to improve margins

TGBL has a strong repertoire of brands which it has built and nurtured assiduously over a period of time. This has enabled it to make strong inroads into most of the major markets. Simultaneously, its ability to manage brands successfully also has enabled TGBL to emerge as a partner of choice for several global players in some of the markets where it has a strong reach. TGBL has shifted its focus from plantation activities to branded beverages. In the long run this is expected to lead to rationalization in its operating cost structure leading to healthy operating margins. While TGBL's focus on volume growth remains intact, selective price increases and stable ad spends will further aid in margin improvement.

Healthy cashflows and low debt-equity ratio give strength to balance sheet

Despite having undertaken numerous acquisitions, TGBL's balance sheet has a low level of gearing. While the company has been prising open new markets, it is still able to generate decent amounts of cash which can support its organic scale up. Whilst it cannot be said to be FCF positive in the strictest sense, most of the working capital requirements of the company is being funded from operations, and thus, it is well positioned to undertake opportunistic acquisitions, if any in future.

Outlook and Valuation

In its December quarter results, on a consolidated basis, TGBL reported sales of Rs19 bn (+6%), EBITDA of Rs1.9 bn (+9%). In US Dollar terms, Eight O Clock Coffee sales declined by 15% yoy but PBT margins improved to 9% due to a correction in Arabica coffee prices. Volume share and value share in the US were ~7% and ~3% respectively. Starbucks opened its first store in Mumbai in October 2012 and now has six stores. We view TGBL's JV with Starbucks as a long-term positive. This JV could potentially address a significant challenge faced by TGBL-of appropriate capital allocation in growth businesses. This deal could potentially be a win-win for TGBL if it can leverage Starbucks' retail skills to effectively use its cash. At CMP of Rs 134, the stock is trading at a P/E of 17.2x its FY14E estimated EPS of Rs7.8. We recommended the stock at Rs178 on 16th Nov 2012 with a price target of Rs200 with 3-months view. 3-months have passed and the stock has corrected to an attractive level of Rs134, with no change in fundamentals and with decent results. Thus without closing the call, we give a fresh 'Buy' call with a revised target price of Rs175 for another 3-months horizon, which gives an upside potential of 30.6%. Investors holding the stock can add at Rs134 for the revised target of Rs175.

Source : Equity Bulls

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