Tata Tea: Not a very strong brew

Tata Tea’s selling a lot of tea but not really making too much money. Consolidated revenues at the beverages firm last year grew a reasonably strong 12.5 per cent at Rs 4,848 crore, partly helped by favourable exchange rate movements.

Even as commodity prices were rising, the company managed to take a price hike of around 13 per cent (annualised) sometime during the second half of the year. Tata Tea sells mostly branded teas across segments and price points and is the market leader in the country in terms of volumes, ahead of Hindustan Unilever. The price hikes were taken for most brands, the highest increase being around 30 per cent for the Agni brand. In the overseas markets, the Tetley brands are understood to have faced stiff competition from private labels, one reason why revenues were not so strong.

The high cost of commodity tea resulted in a drop in gross margins of 330 basis points. TataTea managed its other costs fairly well — advertising spends were lower by about 100 basis points---so that the operating profit margin at 13.3 per cent was lower by only about 300 basis points. Nevertheless, the earnings before interest tax and depreciation (ebitda) came off by 9 per cent, partly because the water business incurred some losses.

The price increases could lead to some fall in volumes ---volumes are understood to have been flat in the March 2009 quarter---and as a results, analysts believe the current year may see muted revenue growth of around 6-7 per cent.

Operating margins will remain under pressure with prices of tea unlikely to fall. The Tata Tea stock fell by about 3 per cent on Thursday to Rs 788.