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Research
Accumulate Tata Global Beverages - Hot coffee spilt on recovery hopes - Elara Capital
Posted On : 2010-11-04 22:30:40( TIMEZONE : IST )
- Tata Global Beverages
- Rating : Accumulate
- Target Price : INR143
- Upside : 15%
- CMP : INR125 (as on 29 October 2010)
Muted growth on lower US coffee sales; trend may persist
The company continued to report lower sales growth, this time at 3% YoY for the quarter. Higher coffee prices dragged down US coffee sales by 11.5% YoY to INR2.8bn in Q2FY11 though Europe and the Middle East sales surged by 43.5% YoY to INR1.7bn with consolidation benefits of Grand, the second-largest tea and coffee brand in Russia. We expect the company to post a muted topline growth in the medium term as the business moves into the consolidation phase.
Volatility in raw material prices remains a key concern
Although tea seems to come off from its highs in coming quarters, thus easing the pricing pressures, coffee prices are expected to remain strong. Higher coffee prices impacted the EBITDA margins by 346bps YoY to 8.9% in Q2FY11; prices jumped up by 25.8% YoY in H1FY11. On the contrary, tea prices came down by ~12% in this period.
New product launches in major geographies to improve earnings
The company has launched innovative beverage products in different geographies; Tion in India, Sukk, T4 Kidz, soya in UK and Africa, Infusions in Canada and South Africa – all innovative in beverage categories. We find that these products have the potential to generate a healthy earning in the long term.
Valuation and recommendation
As the company moves through a transition phase, the simultaneous, the increase in tea and coffee prices is hampering its earnings growth. However, we believe the company is likely to continue to drive growth through acquisitions, hence its valuation would see such related triggers in the future. At the current price, the stock is trading at 16.7x FY11E earnings of INR 7.5 and 15x FY12E EPS of INR 8.3. We maintain our 'Accumulate' rating on the stock with 15% upside and a target price of INR143, arrived at by SOTP of valuation done on the basis of PE, EV/EBIDTA, MCap to Sales and DCF.
