Tata Global Beverages - Things are falling in place; Buy - Anand Rathi

Key takeaways

Kenyan tea prices continue to ease. Tata Global Beverages' international operations, housed in Tetley, comprise 45% of its turnover and 28% of its EBIDTA. A disproportionately large portion of the tea sold by Tetley consists of black tea (~85%), largely sourced from Kenya.

Prices of Kenyan black tea have been gradually declining. They eased 20% from a peak of 341 cents/kg to 272 cents in May'13 due to favourable climatic conditions. Because of this, Kenyan black tea production in May'13 was ~38.2m kg (up 115% yoy). This is a positive development for Tetley's profitability in 1HFY14 as some degree of price-denominated operating leverage is imminent.

Indian tea operations stable. While the tea plucking season has begun on a sedate note, the outlook for production in FY14 is fairly stable. The imminent jump in output in FY14 would be balanced by strong demand for black tea on account of re-stocking. For 1QFY14 this should keep prices stable. We expect the company to maintain its FY14 OPM in tea, at 11%, through judicious cost control and timely price hikes.

Coffee business stable. The domestic and international coffee businesses have been going from strength to strength on account of a re-invigorated product portfolio and volume growth due to better distribution. Consequently, the contribution to EBIDTA and cash flows could surpass our expectations.

Our take. Despite challenges in several mature international markets, we believe growth will be effected through the focus on value-added products and strategic price increases. Simultaneously, efficiencies should be extracted from the operational setup. At the ruling price of Rs. 135, the stock trades at a P/E and EV/EBIDTA of 17.7x and 8.6x respectively, discounting its FY14e figures. We maintain our recommendation to Buy, with a price target of Rs. 168.

Risk: Inability to manage raw-material price gyrations.

Source : Equity Bulls

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