Multi Baggers

Tata Tea

Q4FY09 Results below our estimates – Tata Tea (consolidated) posted flat growth of 4% yo-y to 1,226.1 crore in Q4FY09. This was despite the 27% growth in domestic tea business during Q4FY09. Operating profit in Q4FY09 grew by 5% to Rs 168.9 crore and OPM was flat at 13.8%. Net Profit was reported at Rs 23.5 crore.

FY09 Results – Net sales grew by 12% to Rs 4,874.0 crore from Rs 4,336.3 crore in FY08 on the back 10% growth in tea business and 20% growth in coffee business. Operating profit was Rs 650.5 crore, 8% down compared to FY08 mainly because of increase in consumption of raw material on account of hardening of commodity prices. OPM declined by 303 bps to 13.4%. Interest cost declined drastically. Net profit before exceptional items increased by 21% to Rs 530.8 crore on account of increase in interest outflow. Other exceptional items include restructuring cost of Rs 23.8 crore, provision for retirement of Rs 54.9 crore, expenses of new business initiatives of Rs 5.9 crore and amortization of employee separation scheme of Rs 8.9 crore net of profit on sale of investment of Rs 5.1 crore. Net profit for the year was Rs 831.9 crore, not comparable with last year as it included one time item of profit on sale of investments in Energy Brands Rs 1,607.5 crore.

Flat growth in Tetley affected top line growth- Net sales of Tetley (Tata Tea’s 78.8% UK subsidiary) were flat at Rs 2,406.3 crore in FY09, 4.6% up compared to last year. Net profit for the year was Rs 775.8 crore compared to Rs 93.9 crore last year. Tetley contributed 49% to Tata Tea (consolidated) revenues and 93% to its net profit.

Operating profit grew by 5% in Q4FY09 on the back of decline in advertisement expenses during as a % to sales from 21.7% in Q4FY08 to 11.8% in Q4FY09.

Net Profit before tax & exceptional items declined by 1% y-o-y during Q4FY09 because of increase in depreciation.

Key Financials (Rs Crore)

Valuations & Views – More than 70% revenues and ~80% of EBIT come from tea business, which is likely to face margin pressure in FY10 as tea prices are likely to remain firm on account of decline in production by 5%. However, with company planning to leverage its tea & coffee brands in other beverage products would help it to diversify and become a complete beverage company. The company plans to focus on six key geographies - Great Britain and Africa, Europe and Middle East, the US, Canada and South America, South Asia and Asia Pacific, innovation and distribution going ahead to integrate the business, take advantage of economies of scale. Its recent launch T!ON - an active drink made from fruit juice, tea extracts and ginseng in Chennai has been performing well. At CMP of Rs 716, we maintain our ‘BUY’ recommendation on the stock with a target price of Rs 859, which gives it an upside potential of 20%. At the CMP, the stock is trading at 4.9x FY10E earnings of Rs 143.8.

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