Tata Coffee Ltd - Q2FY21 Result Update - YES Securities

Numbers fall short of expectations, but deep value should protect further downside

- Management commentary - Stable performance despite global headwinds, better tea and coffee realisations, Arabica and Robusta prices correcting gain after moving up in August, second wave of COVID can further impact OOH consumption, coffee production in Brazil expected to be near record levels, prices likely to remain under pressure in coming months, focus on premiumization and cost optimization in both factories and estates, instant coffee business in India saw order deferments while Vietnam saw full utilization and PBT breakeven but 3Q uncertainty remains, coffee crop better than previous years, EOC continued with good momentum, company will continue to work on productivity improvement, cost controls and opening new geographies for sale.

- Financial summary - Overall revenue and EBITDA growth of 13%/17%, Standalone revenue flat, plantations revenue up 23% given better crop and realizations but instant coffee impacted by deferment in shipments, EOC revenue growth of 7-8% (3.3% in USD), Vietnam revenue around 60crs at 95% utilization, EOC/Vietnam margins up 70bps to 21.6% given better channel mix, standalone margins down 100bps to 8.4% adjusting for non-accounting of MEIS benefits given negative operating leverage.

- Vietnam business - Produced at 95% utilization but sales lower due to some logistics issues; margins much lower due to focus on building customer relationships and an inferior mix as of now; focusing on more SKUs and premium blends to drive up realizations and margins significantly.

- India instant coffee business - Impacted by order deferment of 200-300MT; demand now normalizing as customers getting used to new normal; not accounted for MEIS benefits given the ongoing uncertainty.

- EOC business - Better channel mix drove margins and sustained demand momentum drove sales value growth of 7-8% after 35% growth in 1Q; good momentum in new product development.

- Plantations business - Expect better coffee crop plus higher tea prices - should drive strong performance in 2H.

- Tata Grand coffee - While marketing remains with Tata Consumer, see the branded coffee business in India as a key priority with ramp-up in sales and distribution infrastructure.

- View - The overall numbers were about 10% below our expectations due to a combination of order deferments in India, slowdown in EOC traction and lower profitability in Vietnam and India plantations business. While this might drive some weakness in stock price in the near term, we continue to view Tata Coffee as a deeply undervalued stock mainly due to the volatile plantations business, and therefore, expect a gradual re-rating in line with continued traction in EOC and margin improvement in IC business, both in India and Vietnam.

Shares of TATA COFFEE LTD. was last trading in BSE at Rs.101.95 as compared to the previous close of Rs. 101.55. The total number of shares traded during the day was 87961 in over 1921 trades.

The stock hit an intraday high of Rs. 103.45 and intraday low of 99.65. The net turnover during the day was Rs. 8955308.

Source : Equity Bulls

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