|
| Tata Tea: On the takeover trail |
| Shobhana Subramanian / Mumbai Sep 03, 2009, 00:53 IST |
|
A good buyout with potential for strong returns could help re-rate the stock.
 Tata Tea is looking to grow revenues ten times in about five years and is hoping for some acquisitions to achieve the target. This may not be a bad strategy as long as it doesn’t overpay for the businesses that it buys. Indeed, analysts believe it may not be worth it for Tata Tea to make small acquisitions that generate returns on equity (RoE) of just 10 per cent or so.
Already, the company’s RoE is in single digits and is expected to move into double digits in 2010-11. Also, it has taken Tata Tea a fairly long time to reap the benefits of the Tetley acquisition. Indeed, even in the June 2009 quarter, while the domestic tea business grew a smart 34 per cent, due partly to some price increases, Tetley is understood to have turned in a very ordinary performance. Analysts believe revenues may have fallen due to weak demand in the UK, Australian and Canadian markets.
As such, although subsidiaries such as Eight O’ Clock Coffee grew 30 per cent, having gained both volumes and market share, consolidated revenues were up 14.5 per cent to Rs 1,275 crore. That was not enough to combat the high cost of inputs and the company reported a fall in gross margins of around 400 basis points. Nevertheless, with other costs in check, the operating profit margin (OPM) was higher at 13.8 per cent and pushed up the operating profit by 20 per cent-plus to Rs 175.4 crore. The Tata Tea stock has traded at a discount to peers — even about a month back, the discount was fairly large, partly because earnings have tended to be somewhat volatile and also relatively muted.
However, the market has recognised the strength of its brands and pricing power, reflected in the June quarter results, and the stock has risen over 16 per cent since the end of July. At the current price of Rs 932, the stock trades at 12 times estimated 2009-10 earnings and is valued below peers. A good acquisition could change that.
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
