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Tata Global upward rerating unsustainable: Morgan Stanley

Downgrades stock to underweight, citing poor earnings visibility, weak market positioning, lack of pricing power, lower return ratios and high valuations

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Leading foreign brokerage downgraded Tata Global Beverages (TGBL) to underweight, citing poor earnings visibility, weak market positioning, lack of pricing power, lower return ratios and high valuations as key reasons.

The brokerage has assigned a target price of Rs 140 to the TGBL stock - which is a steep downside of 20% from Friday's closing price of Rs 173.45.

"The TGBL stock now trades at 22 times FY 14 estimated earnings (versus 17 times last five-year average 12 month forward multiple). Although we view the management change and the JV with Starbucks as incrementally positive, we expect the contribution to earnings to be limited", wrote Nillai Shah, Girish Achhipalia and Sanath Sudarsan of Morgan Stanley Research in a report dated 19th November 2012.

Not surprisingly, the stock tanked by 4.66% in the Monday's morning session to make a day's low of Rs 165.35 against a flattish Sensex.

Notably, the TGBL stock has doubled in 2012 so far, outperforming the benchmark Sensex by almost 80%. Further, the stock hit a new 52-week high of Rs 181.70 on 15th November 2012. This outperformance was driven by a host of positive news flow such as its joint ventures with Global giants Starbucks and Pepsi, management change and improving financial performance.

"There is lack of visibility in the international business for TGBL, and the international business remains vulnerable to input cost pressures. To that extent, the stock move seems exaggerated to us, and we would use this opportunity to book profits in TGBL", the report adds.

The brokerage has done a scenario analysis on the company and believes effective utilisation of its cash kitty (of about Rs 800 crore) along with improving pricing power/market share in its branded tea and coffee businesses could act as catalysts for TGBL in the best case scenario.

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