Tata Global Beverages - Brewing it up the 'star'ry way... - ICICIdirect.com

Tata Global Beverages (TGBL) is the second largest branded tea player in the world and the market leader in the domestic tea market with its flagship brands, Tetley and Tata Tea, respectively. Apart from tea, TGBL's increasing presence in the coffee and water businesses through acquisition of dominant brands (Eight O' Clock Coffee, Grand Coffee, Himalayan water) has transformed the tea company into a 'good-for-youbeverages' company. Further, we believe TGBL's JV with Starbucks Inc US, to establish Starbucks stores across the country, and PepsiCo Ltd, to handle distribution of its water products, are key positives for revenue and earnings growth, going ahead. Accordingly, we expect revenues, earnings (adjusted PAT) to grow at a higher CAGR (FY13-16E) of 12%, 15.7%, respectively. We initiate coverage on TGBL with a BUY rating.

Brand strength in tea to drive revenues across geographies

TGBL derives ~70% of its revenues (FY13) from tea. Tea revenues have grown at a healthy CAGR of 9.2% in FY08-13. The growth has been aided by its leadership position in Canada (Tetley), India (22.2% value share of Tata Tea), UK (27% value share of Tetley), acquisition of leading brands across the globe, Good Earth in US (20.6% volume share), Joekels in South Africa (third largest player), Jemca in Czech Republic (market leader) and Vitax in Poland (16% share of fruit tea market). Further, capitalising on Tetley's brand strength TGBL has successfully ventured into Australia and the Middle East. Therefore, we believe with a strong portfolio of tea brands across geographies, TGBL would continue to grow its tea revenues at reasonable CAGR of 7.6% in FY13-16E.

Strengthening coffee business to aid earnings

The coffee business contributes 35.8% (6.1% in FY06) to PBIT and 26.2% (4.3% in FY06) to revenues (FY13). The increasing contribution of the business has aided PBIT margins as earnings from the coffee business are higher (15.2% in FY13) compared to tea (10.2% FY13). We expect coffee's contribution in revenues to increase to 29% by FY16E, consequently driving margins (PBIT) growth, going ahead.

Earnings growth to gain traction, attractively valued

We expect TGBL's earnings (adjusted PAT) to witness a higher CAGR of 15.7% in FY13-16E led by changing sales mix, premiumisation across the portfolio and Starbucks JV contributing positively to EBITDA from FY16E onwards. We believe the stock is trading at an attractive P/E of 18.8x and 16.5x FY15E and FY16E EPS of Rs. 8.9 and Rs. 10, respectively. We have valued the stock on an SOTP basis assigning it a target price of Rs. 182.

Source : Equity Bulls

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