'Himalayan' prop for Tata Global

Successful roll-out of water brand will pave way for more launches in the US; stock gains 8%

It was double delight for Tata Global Beverages (TGBL) when it opened trade on Wednesday. If results, published last Friday, were mildly encouraging, an announcement on Independence Day, to introduce its premium natural mineral water brand ‘Himalayan’ in the US market was seen as a bigger positive. These factors lifted TGBL’s stock by over eight per cent to trade at a one-year high on Wednesday, 18 per cent over the past two trading sessions.

The Himalayan brand would be one of the first premium Indian FMCG (fast-moving consumer goods) brands to target the US audience, according to TGBL. Domestically, even the water business, a part of Nourishco subsidiary, doesn’t add up much to the revenue at a time core segments such as coffee and tea post sluggish growth, its performance offers some comfort.
 
Nourishco, according to the management, is still in an incubatory stage. In the June quarter (Q1), other business (which includes Nourishco and Starbucks joint venture) posted revenues of Rs 9 crore, up 31 per cent year-on-year (y-o-y). Nourishco has also seen an improvement in operating profit, though high investment costs, mainly depreciation and interest expenses weigh on the margins of the water business.
 
TGBL already has an exposure in the US, through its Tetley range of flavoured iced tea and coffee infusion products. Analysts believe that Tuesday’s announcement would help to maximise the marketing efforts underway in the region.
 

A successful roll-out of the Himalayan brand in the US will also pave the way for more launches.
 
In Q1, consolidated revenues at Rs 1,704 crore, down 1.8 per cent y-o-y, were marginally ahead of the estimates. With domestic revenues at Rs 796 crore, up four per cent y-o-y, TGBL has been impacted by the transition to the goods and services tax regime. Overall, the tea business (73 per cent of consolidated revenues) grew 2.5 per cent y-o-y to Rs 1,246 crore, while the performance of the coffee business was marred by higher input prices. Therefore, the segment’s revenues dipped 16 per cent y-o-y to Rs 250 crore. However, the quarter saw a 58 basis points y-o-y rise in operating profit margin to 14.3 per cent, as overall costs were kept in check. If not for the 13 per cent increase in advertisement costs, the margins may have been even better.
 
The company’s cost control efforts, exit from loss-making geographies and business restructuring, would help improve profitability. Also, an increased focus on premiumisation and strengthening core brands, such as Tata Tea and Tetley, should improve core revenues of the tea and coffee businesses.
 
Analysts at Kotak Institutional Equities have upped their target price for TGBL stock to Rs 200, from Rs 160, while those at JM Financial lift it to Rs 175, from Rs 170 earlier. However, Wednesday’s price reaction could limit the near-term upside.