Why Tata Global Beverages Surged Ahead Of The FMCG Pack In 2019
Shares of the world’s second-largest maker of branded tea have risen 44% year-to-date, beating Nifty FMCG Index that has fallen 1%
Shares of Tata Global Beverages Ltd. have returned the highest gains among fast-moving consumer goods peers this year, driven by growth in core brands and restructuring to cut costs in international operations.
Shares of the world’s second-largest maker of branded tea have risen 44 percent year-to-date, beating the Nifty FMCG Index, which has fallen nearly 1 percent. The benchmark Nifty 50 Index has gained 13 percent during the period.
The share price surge reflects the improvement in the company’s near-term revenue and profit projections. Bloomberg consensus indicates an annualised 12 percent growth in consolidated revenues through 2020-21. The beverage maker’s operating margin is expected to expand by nearly 220 basis points over the next two years, aiding its earnings per share.
Here’s what has helped Tata Global Beverages:
Consistent Growth In Core India Business
The Tata group company’s tea business has seen its revenue grow at an annualised rate of 10 percent and operating profit rise at 13 percent in the last 10 years, according to its exchange filing. Nearly half of the company’s consolidated revenue in FY19 came from selling tea in India.
Branded players like Tata Global Beverages benefited by taking over the market share of the unorganised sector, Motilal Oswal Financial Services Ltd. said in a note. Informal players in India’s tea industry still hold 35 percent market share, giving the company further potential to grow, the brokerage said.
The company gets 90 percent of its revenue from branded products, Ajoy Kumar Misra, managing director and chief executive officer at Tata Global Beverages, said in an earnings call. Volumes of flagship brands—Tata Tea Premium and Tata Tea Gold—have so far grown in high single digits in the second half of the ongoing fiscal, beating its biggest rival Hindustan Unilever Ltd. that clocked a volume growth of 5 percent.
HUL’s Brooke Bond and Tata Tea currently lead the domestic market with volume share of 19 percent each, according to Motilal Oswal.
The jump in sales in 2019, according to Misra, was aided by media campaigns and raising awareness against adulterated teas. Festive packs kept volumes of branded teas buoyant, he said, adding that green teas, along with the Premium and Gold brands, led to a pick-up in sales.
According to ICICI Securities, the company continues to focus on strengthening its four core brands—Tata Tea, Tetley, Eight O’Clock Coffee and bottled mineral water Himalayan—to develop a strong global brand portfolio.
Synergies From Tata Chemicals’ Brands
In May 2019, the Tata Global Beverages agreed to acquire food brands—salt and pulses—from group peer Tata Chemicals Ltd. The merger is expected to be completed by June 2020.
Tata Global Beverages, which will soon be renamed Tata Consumer Products, will see an annual revenue addition of Rs 2,400 crore from these new products in FY21, according to Motilal Oswal’s estimates. Salt, pulses and related businesses will contribute nearly a quarter to the company’s overall revenues once the merger is complete, the brokerage said.
Tata Global’s revenue is likely to jump from around Rs 7,770 crore to more than Rs 10,692 crore in FY21, according to the brokerage. Similarly, its operating profit is likely to rise to Rs 1,485 crore from Rs 1,000 crore in FY21.
Once salt, pulses and other businesses from Tata Chemicals become part of the company, the overseas tea business is likely to contribute nearly a fifth to its revenue, Motilal Oswal said. But growth is likely to remain flat because of the slowdown in western markets, said the brokerage, which expects profitability to improve in the foreign markets in the near term.
Also Read: The Valuation Question In The Tata Chemicals-Tata Global Deal
International Restructuring
The last time Tata Global Beverages traded at current market levels was in 2017, a year in which the company sold its loss-making subsidiaries in China and Russia and divested stake in its Sri Lankan plantations.
This was followed by merging its Canadian, American and Australian units into one in mid-2018. These units also catered to Europe, West Asia and Africa. Misra had then said the restructuring of international businesses would help the company reduce costs and focus on core markets, improving margins.
Analyst estimates compiled by Bloomberg suggest that the company’s operating margins will rise to 13.2 percent by FY21 from 11 percent in FY19.
Also Read: Tata Global Beverages Restructures Overseas Operations
Tata Coffee’s Prospects
The company’s coffee business contributes over 20 percent to its revenues, according to Motilal Oswal. The commissioning of Vietnam plant in FY19 is expected to its boost instant coffee capacity significantly, translating into higher earnings, the brokerage said.
Tata Global Beverage also operates Tata Starbucks—a 50:50 joint venture with Starbucks Corp. Gross margins of Tata Starbucks improved with Ebitda breaking even for the first time in FY18, the brokerage said.
Valuations
Tata Global Beverages trades at 37 times its FY20 estimated earnings, according to Bloomberg data. That’s a small premium to its five-year average of 33 times.
Among FMCG companies with a market capitalisation of over Rs 19,000 crore, it trades at a premium only to ITC Ltd. However, this is largely because Tata Global Beverages’ operating margins are nearly half to two-thirds of what its peers command, implying a lower return on capital employed.