India Research

Target Price: Rs 808

Potential Upside: 4%

Tata Tea Ltd
Relative to sector: Underperformer
Analyst: Hemant B Patel
Email: hemantp@enam.com Tel: 9122 6754 7617

CORE EARNINGS TO MODERATE
Revenue growth of 9% in FY08 was led by the base effect of the Eight O’ Clock and Vitax acquisitions. Despite firm branded sales growth in India ( 15% YoY) and Tata Tea GB ( 6% YoY in £ terms), forex translation losses neutralized overall growth. We believe commodity led price increases and gains from rupee depreciation will drive 10% revenue growth in FY09. Drivers for accelerated growth include acquisitions in specialty tea and ready-to-drink beverages, extension of the branded coffee portfolio beyond the USA and entry into the Chinese green tea market. While in the past, Tata Tea (TTL) acquired controlling interest in large cash cow businesses (Tata Tea GB and EOC), we believe future scalability rests in the company’s ability to make big-ticket acquisitions in high growth categories such as RTD beverages etc, at reasonable valuations. Core growth remains unattractive, EBIT growth at 7% CAGR over 2 yrs: The sharp increase in tea (Kenyan prices 37% in 2MFY09) and coffee bean prices ( 27% in 2MFY09) is likely to impact margins, despite the rational price hikes effected across categories. Low debt burden to drive pre-tax earnings: Sale of its investment in Energy Brand Inc. (Oct-07) resulted in a profit of Rs 16bn, significantly reducing the net debt position from Rs 41bn in FY07 to ~Rs 25bn in FY08. Lower interest cost is expected to drive 16% growth in pre-tax profits over the next 2 yrs. Unattractive at current growth: In our opinion, TTL’s current valuation of 14.6x P/E FY09E is a tad below mid-cycle valuations and adequately reflects lower core earnings growth as well as its significant presence in mature categories. We do not see any scope for a re-rating, despite reasonable pre–tax earnings growth due to a lower interest burden. We have lowered our earnings estimate for FY09E to Rs 53.8 ( 18%) and FY10E to Rs 60.2 ( 19%), reflecting inflationary cost pressures and are downgrading our rating on the stock to sector Underperformer.

Akhil Kejriwal
Email: akhil@enam.com

Relative Performance

160 140 120 100 80 60 Jun-07 Dec-07 Jun-08 TTL

ENAM FMCG Index
Source: Bloomberg, ENAM Research

Stock data No. of shares Market cap 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code : 61.8mn : Rs 48bn : Rs 1,014/ Rs 586 : 186,500 shares : TT IB : TTTE.BO

Shareholding (%) Mar-08 QoQ chg Promoters FIIs MFs / UTI Banks / FIs Others : : : : : 35.3 12.9 9.8 16.9 25.0 (0.1) (0.3) 0.4 0.5 (0.6)

Financial summary
Y/E Mar 2007 2008 2009E 2010E Sales (Rs mn) 40,249 43,923 48,403 50,969 Adj .PAT (Rs mn) 2,772 2,207 3,319 3,708 Consensus Adj. EPS EPS* (Rs.) (Rs.) 70.3 82.5 48.4 35.8 53.8 60.2 Change YoY (%) (3) (26) 50 12 P/E (x) 21.6 14.4 12.9 RoE (%) 12.7 6.3 7.5 7.9 RoCE (%) 13.2 9.0 9.6 10.5 EV/EBIDTA (x) 11.5 10.7 9.6 DPS (Rs.)

15.0 35.0 16.0 18.0

Source: *Consensus broker estimates, Company ENAM estimates. Note: ^Includes special one time dividend of Rs 20 per share.

ENAM Research is available on Bloomberg (ENAM <Go>), Reuters.com and Firstcall.com

13 June 2008

COMPANY UPDATE

ENAM Securities

Rs 774

Thus a general increase in auction prices will have a direct bearing on raw material costs.3 4.2 1. tea consumption growth of 3%). Gemini. Tata Tea Premium and Tata Tea Agni.4%.763 15 1. ENAM Research 10.149 14. led by value market share gain of 180bps to reach 20.331 50 1. Core earnings (EBIT excluding other non operating income) for the standalone entity is expected to grow by 16% CAGR through FY08-FY10E.661 14 13. The largest brands in the domestic tea portfolio. Tata Tea has taken a price hike of Rs 5 to Rs 8 across its key brands. Thus we believe gross margin at best will remain stable in FY09.396 32 5.233 15 TTL’s branded tea sales grew by 15% in FY08 (vs. driven by lower employee cost and control on media spends.3 2.Tata Tea Ltd Tata Tea (Standalone) (Rs mn) FY07 FY08 FY09E FY10E Revenue % YoY RM % of revenue Other cost % of revenue EBITDA % of revenue EBIT % of revenue Source: Company.5 3.343 16 2.5 4.941 51. Growth in other regional brands.0 7. was driven by consumer promotion and market activation initiatives. Operating margin is estimated to improve in FY09.977 18 1.791 17 11. demonstrated strong growth over previous year despite price increases.0 6. Ltd).986 15 14. A variable cost model: Post the hive-off of South India plantations (17 estates in Dec 2005 to Kanan Devan Hills Plantations) and North India plantations (24 estates in March-2007 to Amalgamated Plantations Pvt.8 2.704 9. rising domestic consumption and low carry forward stock. JUNE 2008 ENAM Securities 2 . Other players including HUL are expected to follow suit.449 51.830 33.534 7.313 32.672 32. we expect prices to further increase by 8% in FY09 on account of shortfall of Kenyan tea (Indian auction prices largely governed by Kenyan tea production). While domestic auction prices increased by 3% to Rs 67/kg in FY08.8 5. TTL has now completely moved to a variable cost model. Domestic tea prices are firm: The average price of Indian tea at the auction centers has been on the rise in the first quarter of CY08.745 51.091 16 1. Kanan Devan & Chakra gold. The standalone domestic entity will now purchase nearly all its raw material requirements from the hived off estates at auction prices.0 3.464 10. We expect domestic sales growth to be maintained at 12% CAGR over the next 2 years.

2 Growth of 6% YoY in FY08 (at a constant foreign exchange rate) was largely driven by acquisitions.8 3. As Tata Tea GB financial accounts are in pound sterling and consolidated at the group level in Indian rupees.020 13. which accounts for nearly 25% of Chinese exports. Due to the ongoing political crisis in Kenya and the presence of drought-like conditions.200 13.3 3. acquired for Rs 390mn in May 2007) will help Tata Tea GB to build its presence in specialty teas (green/ fruit/ herbal) going forward. Kenyan production is expected to decline by around 10% to 335mn kg in 2008.7 9.Tata Tea Ltd Tata Tea GB Ltd.3 3. we expect higher raw material prices to impact the EBIT margin in FY09.313 13. liquid tea concentrates and other value added tea beverage products. the world’s 2nd largest tea market. the JV not only marks the entry into the world largest green tea market (Green tea production accounts for 93% of China’s total tea production and also forms the bulk of consumption) but also increases Tata Tea GB’s presence in higher growth categories. Tata Tea GB buys a bulk of its raw tea requirement from Kenya (in USD) apart from other regions.3 11. JUNE 2008 ENAM Securities 3 . we have considered rupee depreciation vs. Despite USD depreciation (against the pound sterling) providing a partial hedge.639 6.5% in US. ENAM Research 22.2 8. and Canadian has continued to decline. Value market share has also declined by 10bps to 26. The JV (70% owned by Tata Tea GB) will manufacture and market green tea polyphenols.9 11. Volume growth is still a struggle as black tea consumption in Tata Tea GB’s key markets i.0 10.1 3. the pound sterling in our revenue growth estimate of 4% CAGR over the next 2 years.927 38.000 47. tea auction prices in Kenya were up 37% YoY for the first two months of FY09. Great Britain. However going ahead we believe select price increases and a depreciating rupee will offset the impact of lower sales in FY09.129 12. Margin to remain under pressure due to sharp rise in tea prices. We have forecasted core earnings growth of 5% CAGR over FY08-FY10E.9 23.e. Strengthening its presence in China. Such acquisitions are not factored into our growth estimates. green tea extracts.020 39. We believe inorganic growth through smaller acquisitions (Vitax & Flosana trademarks in Poland.683 39.7 25.853 47. Tata Tea GB has entered into a joint venture with Zhejiang Tea Import and Export Company.040 0.862 39.7% subsidiary) (Rs mn) FY07 FY08 FY09E FY10E Revenue % YoY Cost of sales % of revenue Selling / Admin & Depreciation % of revenue EBIT % of revenue Source: Company.095 1.980 13. US. With the popularity of green tea going across global markets.0 9.9 11.1% in GB and 10bps to 5.1 24. (77.920 47. In fact.827 48. cold and hot water soluble instant tea.5 9.

374 30.1bn led by increased instant coffee exports.216 29. Coffee prices continue to rise in CY08E due to increased demand.5 1. prices have been on a declining trend due to an estimated increase in production from Brazil.5 2. International coffee prices were up 22% for the first 4 months of CY08. as the company was acquired in August 2006).556 14.1 11.0 1.010 30.016 13. While rising commodity prices will benefit the plantation business in India.162 19.0 2.1 11.944 19. However growing demand for coffee worldwide (according to ICO –“imports by importing members during CY07 totaled ~100mn bags.896 33. EBIT for the consolidated entity is expected to grow by 6% CAGR over the next 2 years.651 33. we expect EOC margins to be marginally impacted despite select price increases.443 32.6 1. EOC now plans to extend the branded whole bean and value gourmet segment beyond the US retail market to other regions such as Russia and China.0 2.603 30.226 16. although from Feb 2008. the highest level ever recorded in the history of the coffee trade”) and coupled with the increase in crude linked input costs (transportation and fertilizers) will keep coffee prices firm in CY08.787 18.5 2.Tata Tea Ltd Tata Coffee Ltd.832 31 3. driven by improving realization of domestic plantation crops and inflation-led price increases by EOC. due to the base effect of the Eight O Clock Coffee (EOC) acquisition (only 8 months of financials included in FY07. On a consolidated basis we expect 10% CAGR in revenues over the next 2 years.661 14. ENAM Research 7. Tata Coffee (standalone) reported robust growth of 15% to Rs 3.4 1.4 1.6 9.090 31.1 Tata Coffee’s consolidated revenues increased 31% to Rs 9.814 7 3.6 1.062 13 3.876 17.304 19.614 21.8 3. EOC enjoys significant retail distribution with approximately 67% penetration in the US retail coffee market.5 1.5 3.0 1.484 15.500 304 2. (57% subsidiary) (Rs mn) FY07 FY08 FY09E FY10E Revenue % YoY RM % of revenue Ads % of revenue Other cost % of revenue EBITDA % of revenue EBIT % of revenue Source: Company. JUNE 2008 ENAM Securities 4 .011 17.2 1.5 3.8bn in FY08.

Tata Tea Ltd Mount Everest Mineral Water Acquisition summary: TTL acquired a 32% stake in Mount Everest Mineral Water Company. large & premium institutional buyers are slowly moving towards better beverage offerings and hence we believe that TTL with its present distribution network and institutional customers will be able to significantly scale up the Himalayan brand. which will have a negative bearing on the EBITDA margin. revenues of Rs 239mn and a profit of Rs 13mn in FY07). the water source located at the foothills of the Himalayas in Himachal Pradesh has been certified as one of the largest. and is highly fragmented with nearly 200 brands and a wide spectrum of price-value offerings. the bottled water segment is expected to grow in the 2530% range over the next few years. owners of the Himalayan brand of bottled water in June 2007. The Himalayan brand falls under the natural mineral water category. purest and perennial sources of natural mineral water in the world (certified by Hidell-Eyster International. Revenue growth potential: The bottled water segment in India is estimated in the range of Rs 13bn . packaged drinking water and convince them to pay a premium price. Having said that. Earnings impact on consolidated entity: Mount Everest Mineral Water reported revenues of Rs 247mn and a net loss of Rs 63mn in FY08 (vs. TTL will continue to incur higher ad spends and distribution costs. its financials are consolidated as TTL has a controlling interest in the company. packaged drinking water products. a leading water specialist in the USA). We have forecasted a revenue growth of 40% CAGR over the next 2 years.a.15bn and is growing at a rate of ~25% p. JUNE 2008 ENAM Securities 5 . Besides gaining an opportunity to enter the fast growing bottled water segment. We believe in order to scale the brand. through a combination of promoter stock and market offerings. which is retailed at a premium vs. With a growing number of water related diseases and higher awareness amongst consumers. The category covers both natural mineral water and packaged drinking water. However the challenge for TTL would be to educate the consumer about the benefits of natural mineral water vs. Despite being a 32% subsidiary.

Tata Tea Ltd TTL Consolidated: Revenue & growth trend 60.6 2.000 20.8 14. ENAM Research YoY growth (RHS) EBIT (LHS) EBIT margin (RHS) ^Note: EBIT is pre non-operating other income and extraordinary items Indian tea price trend 80 60 40 3 20 0 (5) FY04 FY05 (8) 2mFY09 FY06 FY07 FY08 9 (Rs/kg) 16 13 20 15 10 5 0 (5) (10) Kenyan tea price trend 250 200 37 150 100 50 0 FY04 FY05 FY06 FY07 6 (4) (4) 2mFY09 (%) 37 25 14 7 1 24 45 35 25 15 5 -5 2mFY09 FY04 FY05 FY06 FY07 FY08 (%) (US cent/kg) (%) 50 38 17 6 26 14 2 -10 Tea price (LHS) Source: CMIE YoY growth (RHS) Tea price (LHS) YoY growth (RHS) Robusta coffee price trend 300 250 200 150 100 50 0 2mFY09 FY04 FY05 FY06 FY07 FY08 9 2 26 33 35 53 60 50 40 30 20 10 0 -10 Arabica coffee price trend 500 400 300 200 100 0 (US cent/kg) (%) (US cent/kg) Coffee price (LHS) Source: CMIE YoY growth (RHS) Coffee price (LHS) YoY growth (RHS) JUNE 2008 ENAM Securities FY08 6 .000 (Rs mn) 6.000 13.6 14.000 4.000 50.1 14.000 0 (0) FY09E FY10E FY05 FY06 FY07 FY08 2 9 10 5 37 30 23 16 9 2 (5) TTL Consolidated: EBIT^ & margin trend 8.000 0 FY09E FY10E FY05 FY06 FY07 FY08 14.8 14.000 40.0 14 13 12 16 15 (Rs mn) 30 (%) (%) Net sales (LHS) Source: Company.000 10.000 30.

0 Dec-06 (24.5 Aug-05 Aug-06 Aug-07 Apr-05 Apr-06 Apr-07 ENAM FMCG Index Tata Tea Sensex Source: ENAM Research Note: ENAM FMCG composite includes 24 companies Index/stock performance (%) Mkt Cap (Rs bn) 3 mth 6 mth 1 yr Sensex ENAM FMCG Index Tata Tea ITC Ltd Hindustan Unilever LTD Nestle India Ltd Asian Paints Ltd Dabur India Ltd Colgate Palmolive India Ltd Marico Ltd Source: ENAM Research 48 744 493 164 121 86 50 39 Dec-05 (1.5 (0.4 2.5 0.1) (1.9) 1.9 (2.4 28.3 9.2) 4.1) Dec-07 Apr-08 8.0) 4.7 48.2) 0.2 (16.1 0.8) (17.1 7.2 JUNE 2008 ENAM Securities 7 .4) 29.8 Relative stock price performance 180 160 140 120 100 80 60 Jun-07 Sep-07 Aug-07 Dec-07 Nov-07 Feb-08 May-08 Jun-08 Jul-07 Oct-07 Jan-08 Apr-08 Mar-08 Tata Tea: 1yr Forward P/E trend 25 20 15 10 5 (Index) (x) Median = 16.5 1.5 20.3 26.7 11.9 (0.1 1.6 9.4 (4.4) (3.3 6.4 36.7) 6.1 18.4) (2.8 19.9 21.2 (0.0 5.1 12.9 18.7 20.8 41.1) 1.4 (0.Tata Tea Ltd TT: Branded tea market share trend Geography Volume (%) Mar ‘08 Change Value (%) Mar ‘08 Change GB Australia Canada France USA India Source: Company 30.3) (7.3) 0.5 24.2 1.8 0.7 16.3 41.2 (4.1) 4.

6 17.7 42.175 64.708 EPS Growth CEPS (Rs.157) 1.2 15.043 10.667 Cash-flow Y/E Mar Sources FY07 37.800 775 Source: Company.0 Balance sheet Y/E Mar Total assets FY07 73.4 13.2 3.810) 37.2 52.403 Oper. cap.0 0.045 450 8.0 56.7 35.875 275 0 3.837 0 (3.6 (21.778 412 616 42.858 0 4.138 1.4 14.cap / Net sales (x) Net sales / Gr block (x) Depreciation Interest Pre-tax profit 967 2.6) 65. mn) FY10E 50.481) 2.734 6.156) 72.495 COGS / Net sales Overheads/Net sales Depreciation / G.218 15.969 Key ratios Y/E Mar Sales growth OPM FY07 29.2 1.772 1.140 914 1.0 0.9 Tax provision (-) Minority Interests Associates Adjusted PAT 1.858 Incremental RoCE RoCE Debt / equity (x) Effective tax rate RoE 1.900 725 616 47.214 0 4.969 43.8 0.8 53.9 16.025 (2.0 7.3 0.696 73.7 0.7 (164. ENAM Research JUNE 2008 ENAM Securities 8 .) (2.401 3.403 Other operating income Total income 0 40.2 FY09E 10.601 10.172 916 2.5 21.162 7.9 7.7 25.110) 3.2 E/o income / (Expense) Reported PAT 1.031 73.497 27.473 4.0 7.805 3.708 Payout ratio (Div/NP) EPS (Rs.319 1.1) 50.433 13. (excl cash) Investments (trading) Cash / Bank balance Investment in sub.150 (15.599 3.473 (986) 3.4 68.0 0.457 2. Capital employed 71.6 7.3 5.689 3.025 64.789 26.249 0 0 0 50.199 0 3.3 15.377 3.923 48.362 FY09E 73.854 (715) 5.183 12.8 0.831 (2.4 9.724 0 5.994 FY08 1.8 3.368 928 1. mn) FY10E 72.622 675 616 44.229 110 1.473 159 1.7 12.5 0. profit growth Cost of goods sold A&SP Admin overheads Operating Profit Other income PBIDT 28.467 3.4) 9.994 3.667 Capital expenditure Investments Net current assets Change in cash 825 35.3 1.3 6.358 3.367 3. block Effective interest rate Net wkg.722) (218) (453) 4.997 24.473 FY09E (453) (Rs.448 30.277 925 967 741 (288) (1.0 50.534 627 0 2.764 45.645 176 0 3.) 19.074 326 0 2.1 6.1 0.4 48.265 2.100) (239) 499 28.805 64.8 30.487 0 (3.869 0 5.515 (2.3 7.696 Cash profit (-) Dividends Retained earnings Issue of equity Borrowings Others Applications 5.9 60.0 11.923 48.0 5.2 6.207 1.249 FY08 FY09E (Rs.031 (Rs.100 397 7.140 7.5 0.9 55.485 7.138 1. mn) FY10E 499 Gross block Net fixed assets CWIP Wkg.425 (120) 3.0 0.673 2.517 8.3 15.138 3.8 43.4) 10.0 35.517 420 7.0 FY08 9.Tata Tea Ltd Company Financials Income statement Y/E Mar Net sales FY07 40.288) 775 0 (242) (34) Equity capital Reserves Borrowings Deferred tax (net) 588 26.7 75.425 64.5 (%) FY10E 5.1 16.3 9.283 9.2 1.0 (26.541 FY08 74.9 1.096 105 1.144 7.7 9.6 32.450 1.195 8.362 73.475 23.188 2.0 18.5 32.6 55.937 28.307 150 382 2.661 4.772 1.541 72.1 6.501 810 0 1.696 74.853 1.947 (1.) DPS (Rs.672 73.8 29.7 35.

The following disclosures are intended to keep you informed before you make any decision. or solicit investment banking or other business from. from time to time we are faced with situations that could give rise to potential conflict of interest. Canada. Copyright in this document vests exclusively with ENAM Securities Private Limited.in addition. at ENAM. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information. their directors and the employees may from time to time. its affiliates. special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Firm ownership of the stock No 3. or deal as principal or agent in or for the securities mentioned in this document.guarded at all times. Nariman Point. is made as to the accuracy. 2008) 1. Neither this document nor any copy of it may be taken or transmitted into the United State (to U. 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