Worst seems to be over for Tata Global Beverages
Tata Global Beverages continued on its trend of reporting better than expected performance in the March quarter as well. While growth in consolidated revenues was sustained in double digits (as in the previous two quarters), improvement in operating and net profit margins was impressive and the key highlight. The company’s overall performance in FY12 marks a recovery after the challenging times witnessed in FY11. The stock, which has outperformed the Sensex in the last one year, closed with gains of 1.4 per cent on Thursday, almost in line with the broader market.
Going ahead and even as they feel the worst seems over for the company, analysts advise investors should monitor the performance as concerns regarding its presence, in low-growth markets and challenges faced by its US-based subsidiary, Eight ‘o’ Clock Coffee (around 20 per cent of total sales) remain.
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While these concerns could keep a tab on the stock’s performance in the near term, at 18 times FY13 estimated earnings valuations look reasonable (historically, the stock has traded in the range of 10-25 times one-year forward multiple) and should provide support on the downside.
Consolidated growth in revenues was driven by both standalone and foreign operations. A nine per cent rise in domestic revenues was driven mainly by volume growth, though it was lower compared to the average of 13 per cent reported in the past three quarters. Subsidiaries, which include operations abroad (including Tetley, UK) and Tata Coffee and together form about 73 per cent of the overall revenues, witnessed a healthy growth of 11.3 per cent in sales. Here, the growth was led by Tata Coffee (22 per cent of total revenues; sales up 13 per cent) and favourable currency translation impact (dollar and pound appreciation).
|In Rs crore||Q4’ FY12||FY12||FY13E|
|% change y-o-y||10.7||10.5||8.1|
|% change y-o-y||18.6||2.5||10.8|
|Adjusted net profit||94||334||415|
|% change y-o-y||226||36.4||24.4|
|Reported net profit||54.2||356.1||450.0|
|E: Estimates Consolidated financials Source: Company, Analyst reports|
The company’s operating profit margin improved 72 basis points year-on-year 10.8 per cent — for the first time in the past 12 consecutive quarters — thanks to price increases undertaken in some markets (UK, Canada), lower commodity prices (on year-on-year basis), lower advertisement spends and better control over other overheads. In addition to improved operational performance, interest costs also fell 58 per cent due to repayment of debt (at UK subsidiary) and lower tax rate and boosted net profit margins by 358 basis points to 5.4 per cent for the March quarter.
For FY12, while the bounce-back in top line growth was led by the coffee business (up 20 per cent), gains on the profitability front was led by the tea business. Favourable currency translation impact and improved performance across key markets (Russia, Canada) eased the pressure on operating profit margins. The jump of 262 basis points in profit before interest and tax margin of the tea business partly compensated the 365-basis-point drop in the same for coffee. Net profit margins were up about 100 basis points, helped by substantial decline in interest costs.
Look for sustainable margin gains
Operating profit margins have improved sequentially for the past four quarters, which is positive. However, investors need to monitor this (trend needs to be sustained), given the company’s large presence in low growth markets and competitive intensity which can restrict price increases (thanks to the ongoing slowdown). While reiterating his ‘buy’ recommendation, Manoj Menon, analyst, Kotak Institutional Equities, points out, “Margins have likely bottomed out and cheap valuation provides support."
The company’s rural focus (footprint extended to eight states) and joint venture with Starbucks are long-term positives. The latter will boost growth in the long term (a significant challenge, given the size and nature of business) and will help utilise cash (Rs 736 crore as on March 2012 for the consolidated entity). However, the large benefits from this joint venture are some years away, as the first store is expected to come up only around October 2012. In this backdrop, the stock is likely to be a market performer in the near term.