Brewing ambitious plans

After the recent name change to Tata Global Beverage (formerly Tata Tea), the company spelt out its new roadmap on Tuesday. From the present bouquet of tea, non-tea non-carbonated beverages and mineral water, among others, the company intends to foray into food and fortified health drinks. Tata Global Beverage (TGB) intends to become a diversified global beverage company. It is targeting a revenue of $5 billion (around Rs 23,400 crore) by 2015, as against Rs 5,784 crore in 2009-10, implying a compounded annual growth rate of 32.4 per cent. While these figures sound positive, it needs to be seen how well the company executes its plan. If successful, it will translate into robust stock returns.

Ambitious growth plans
To start with, the company plans to merge like businesses to rationalise operations and improve efficiencies. The management has already hinted at the merger of Tata Coffee and Mount Everest, two of its listed subsidiaries, with itself. Restructuring of Tetley is also on the cards. These moves, along with the introduction of value-added products in the beverage portfolio, will help enhance earnings before interest, tax, depreciation and amortisation (Ebitda) margins by 250 basis points to 15 per cent in the next five years, the company believes. While enhancing profitability, the company has set an ambitious goal of growing revenues more than three-fold. The task is uphill, given that TGB’s consolidated top line has been largely stagnant in the last two years. To achieve this, the company is exploring partnerships to enhance its product reach. It recently tied up with PepsiCo for global distribution of its products, excluding tea, which should help increase the reach of its Himalayan drinking water.

More important, it will need to take the inorganic route, especially in categories like foods. TGB Vice-Chairman R K Krishna Kumar said growth would come from acquired and own brands, product development and acquisition. TGB might look at acquisitions of the order of $1 billion. The company’s current debt-equity ratio is 0.48. With cash of Rs 1,904 crore and investments worth Rs 519 crore as of March 2010, such a large acquisition may lead to higher debt levels.
 

PICKING UP
in Rs crore	FY10	FY11E	FY12E
Net sales	5,700	6,400	7,100
Ebitda	710	800	900
Ebitda (%)	12.5	12.5	12.7
Net profit	400	450	520
EPS (')	6.5	7.3	8.4
P/E (x)	18.3	16.2	14.0
E: Analyst estimates

Investment rationale
Sourcing advantages, widening global footprint (around three-fourth of revenues), expanding product profile and foray into new categories bode well for the company. Profitability may also get a boost as international raw tea prices, which had move up of late, are expected to soften in the second half of the financial year, led by improved production in large tea-growing countries like Kenya and Sri Lanka. Overall, expect Ebitda margins to hover at 12.5 per cent in 2010-11.

The stock has risen almost seven per cent in the last few days. At Rs 118.15, it is trading at 16 times its 2010-11 earnings. While the price to earnings valuations are lower than other fast moving consumer goods companies, the trend is indifferent from a historical perspective. Any rerating in the company’s valuation in the long run will hinge on its ability to meet its growth targets. Investors with a long-term horizon may consider the stock on dips.