Coffee, higher ad spend hurt Tata Global

But, with these normalising, analysts are positive on the stock, available now at cheaper valuations

Tata Global Beverages’ (TGBL) revenue for the December 2013 quarter (Q3) were in line with estimates. Disappointment came on the operations front, which saw higher advertising spending and a weak performance in the coffee business impacting profitability. While it reported an exceptional expense of Rs 13 crore, it also saw tax liability fall sharply, more than offsetting the impact. As a result, net profit came in line with estimates. However, things are likely to improve.

The company hopes ad spend will normalise and the coffee business to see recovery. This and healthy growth in the tea business should lead to a better show. With valuations below the historical average, most analysts remain bullish on the stock.

“TGBL's diversification into water, green tea, Starbucks, speciality tea should bode well on revenue and margins. The constant efforts to revive revenue mix, turnaround of all global subsidiaries and new product launch, along with investments on selling and advertising, could lead to higher volume growth in global markets,” says Daljeet S Kohli, head of research, India Nivesh Research.

Of the 12 analysts polled by Bloomberg since November, eight have a Buy, three are Neutral and one has a Sell rating on the stock. Their average target price stands at Rs 163, an upside of 16 per cent from the current Rs 141. The stock, which has underperformed the S&P BSE 100 index over the past three months, currently trades at 15.3 times FY15 estimated earnings, lower than its historical average one-year forward price to earnings multiple (PE) of about 19 times.

Tea drives Q3
Revenue grew 8.1 per cent year-on-year to Rs 2,054 crore and were driven by strong performance of tea and favourable foreign exchange translation. While the tea business (76 per cent of total revenue, with brands such as Tetley, Tata Tea Gold, etc) posted a decent growth of 11.1 per cent, the coffee business (a fourth of revenue, with brands such as Eight O’Clock Coffee, Grand Coffee, etc) grew only two per cent. While the coffee plantation business performed well, with good production and pricing, branded coffee was under pressure due to volatile commodity prices globally and volume pressures (due to intensifying competition) in some regions.

The company is hoping its re-launches will start yielding results and expect coffee pricing to be stable. Volatile input costs led to a 46.6 per cent decline in this segment's profit, to Rs 38 crore. Profits of the tea segment, though, grew 16.6 per cent to Rs 194 crore and benefited from an easing of prices.

The others’ segment (constituting the Himalayan water and Tata Water Plus brands) posted 19 per cent year-on-year growth in revenue to Rs 16 crore, led by strong volumes. TGBL plans to launch Tata Water+ and Tata Gluco+ nationwide over the next two or three years. While this will fuel growth of the water segment, its profitability will be under pressure in this period, believe analysts. Notably, this segment reported operating loss of Rs 9 crore in Q3, down 25.3 per cent over last year.

Operationally, the fall in consolidated Ebitda (earnings before interest, taxes, depreciation and amortisation) margin was due to a 250 basis points increase in advertising expenses to 19.5 per cent of sales. TGBL re-launched four products -- Eight O’ Clock Coffee in the US, Grand Coffee in the Russia, Chakra Gold Tea in India and the Tata Tea Gold ‘Power of 49’ campaign. Other expenses surged 112 basis points to 15.3 per cent of sales.

"TGBL’s operating performance was below estimates. Operating margin contraction was higher than expected. During the quarter, the profitability was affected by higher investment behind brands and new initiatives," says V Srinivasan, fast moving consumer goods analyst at Angel Broking. He has a Neutral rating on the scrip.  The net profit was boosted by a one-time tax credit of Rs 46 crore, due to stake sale in a US-based functional beverage company.

Most markets do well
The international business (66 per cent of consolidated revenue) did well and grew 5.1 per cent to Rs 1,350 crore. It was driven by strong traction in the Europe and America markets. The company is witnessing a strong shift towards green tea in international markets. Its South Asia business (India, Pakistan and Bangladesh) also witnessed strong growth, of 14 per cent, led by double-digit volume growth. Tata Starbucks (India-based) continued to witness a positive response from customers. Q3 saw one new store launch, taking the total to 34.