Tata Global: Getting back on track

Shedding unviable operations should improve growth prospects

Tata Global Beverages stock has doubled over the last year on the back of the company’s strategy to restructure its operations. The company has outlined a strategy of exiting non-performing business, focusing on core brands (Tetley, Tata Tea, Eight O’clock, and Himalayan), premiumisation, and improving operational efficiencies. The company has already announced that it is exiting loss-making geographies of Russia and China and mulling its course of action in Poland, another underperforming market. 

The improvement in operational efficiencies is reflected in the September quarter results, which saw its operating profit margins increase by 100 basis points to 12.6 per cent. After the results, Rohit Chordia and Anand Shah of Kotak Securities raised their FY18-20 earnings per share estimates by 12-13 per cent on the back of higher operating profit margin assumptions and lower interest costs. Earnings upgrades have been the key reason for the recent bullishness of the stock.

The Street will look at the performance of the tea segment, which accounts for three quarters of revenue with the largest geography being the Indian market. The company expects sales in India (45 per cent of revenue), led by the Tata Tea brand/sub brands, to sustain the 11.6 per cent growth achieved in the past nine years on the back of new product launches as well as a shift in the consumption pattern, from loose to packaged tea.

In the international markets, such as the UK, sales, especially in the black tea segment, have been on a declining trend. To offset the revenue loss, the company has revamped its product offerings with a focus on premium/health and wellness segments. The launches include RTD Green Tea in Canada and Tetley Indulgence range of teas in the UK. The company is entering key tea-consuming Asian markets, such as Singapore, Malaysia, and China. It has tied up with Alibaba to enter the Chinese market. The company believes that these steps will help it offset the loss from declining black tea sales while bringing profitable growth.

While the tea segment contributes a lion’s share, the company is expanding in the coffee business as well with the segment contributing 15-16 per cent to the revenues. Analysts at Edelweiss Securities say that in addition to Tata Coffee (57 per cent stake), its acquisitions and joint ventures (Starbucks India, Eight O’clock ) as well as the packaged water segment helped the company diversify its portfolio in its quest to become a global beverage play.

At the current price, the stock is trading at 27 times its FY19 earnings estimates. Given the recent run-up, there is little upside from these levels and investors should look at the counter on dips.