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BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY
Equity Research Report On
Tata Tea Limited
For Institutional Clients
Analyst:
ANKIT KHAITAN
akhaitan@hemonline.com

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BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY
Tata Tea Limited th
17 April 2009 BUY
th
Market Cap: Price as of 17 April: 52 Week Range: Beta: Industry: Target Price:
4190.27 Crore 677.60 961.00 / 430.00 0.84 FMCG 820.00
Outstanding Shares: Book Value Per Share: Face Value Per Share: BSE Code: NSE Code: Upside:
6.18 Crore 309.18 10.00 500800 TATATEA 142.00
TATA TEA BUSINESS DESCRIPTION
TATA TEA LIMITED IS A GROUP COMPANY OF
TATA GROUP, ONE OF THE LARGEST AND MOST
RESPECTED BUSINESS HOUSES OF INDIA. THE
COMPANY IS ENGAGED IN PRODUCTION OF
TEA, COFFEE, MINERAL WATER, CHAI OUTLET
AND RECENTLY LAUNCHED PRODUCT IN NON-
CARBONATED DRINKS. TEA BUSINESS CON-
TRIBUTES MORE AROUND 80 PER CENT OF THE
TOTAL REVENUE TO THE COMPANY.
STOCK PERFORMANCE
1m 12m
TATA TEA 26.67% -23.20%
SENSEX 26.18% -30.14%
GROWTH (%) Recommendation
Last Qtr. Last Yr. 3 Yr. CAGR Drought in tea producing region has resulted into low production of tea
REVENUE 8.385% 8.47% 12.605% for this quarter. This could result in the rise of the price of tea and a
PROFIT 115.09% 247.93% 91.42% significant rise in top line. Tata Tea Limited is a market leader in tea
segment.
EPS ANALYSIS
We are very positive on the long term business prospects of the com-
pany and financial performance. At Current Market Price of INR
677.60 and with non adjusted trailing EPS of INR 129.78 and adjusted
trailing EPS of INR 61.50 the stock is trading at a PE of 5.2x and 11.0x
respectively. We reiterate “BUY” on the stock with target price of INR
820.00 with a medium term investment horizon.
Highlights/Recent Updates
Tata Tea to acquire 51 per cent stake in Russian firm Grand
Tata Tea has announced to acquire 51 per cent stake in Grand, a Rus-
sia's tea and coffee major, through one of its overseas subsidiaries, in
DIVIDEND ANALYSIS partnership with European Bank of Reconstruction and Development
(EBRD). Post acquisition, Tata Tea will hold 33.2 per cent stake and
EBRD will hold 17.8 per cent.
Tea production drops; as drought hit in North-East India
Drought in North-East India, a major tea growing region, has led to a
dramatic fall in production during the first quarter of this year. The pro-
duction for this quarter is expected to be less by around 12,000-15,000
tonnes. We can see a rise in price of tea as a result of the falling pro-
duction.
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INDUSTRY SNAPSHOT
India is one of the fastest growing economies in the world. While we
are moving towards becoming a services-led economy but still agricul-
ture contributes around 17 per cent of the total GDP and employs 60
per cent of the population.
Assam and neighboring states account for
more than 70 per cent of total tea production Beverage Industry
in India. The beverages market primarily consists of non-alcoholic beverages
which can be broadly classified into carbonated drinks, non-
carbonated drinks and hot beverages.
India tea production is more than a million Carbonated Drinks
tones per year. Carbonated drinks are beverages which contain carbon dioxide (soda).
Soda improves the taste, texture, or both of the beverages. The prod-
uct of carbonated drinks includes cola, flavored orange, flavored lime,
etc. The total market of carbonated drinks is expected at around INR
India tea industry is expected at around 10,000 crore.
10,000 crore.
Non-carbonated drinks
Non- carbonated drinks are beverages composed of fruit drinks, nectar
and juices. Non-carbonated drink is consider as hygienic and healthy
Indian tea plantations employ nearly three drink as appose with carbonated drinks. In INR 500 crore non-
million people. carbonated beverage fruit drinks contribute around 50-60 per cent of
the total non-carbonated drinks market.
The juice market contribute around 30 per cent where as nectar just
contribute a little amount of around 8-10 per cent of the total non-
carbonated drink.
India has the largest irrigated land in the
world. It is also world’s largest producer of
We have seen a shift from carbonated drinks to non-carbonated drinks
milk, tea and pulses.
as customers are becoming more health conscious. The non-
carbonated drinks market is expected to register a growth rate in be-
tween 30 to 40 per cent per annum.
Hot beverages
Hot beverages include white beverages and brown beverages. Indian
beverage segment has made it presence felt across the globe. Under
white beverage which are consider as health drink, the major brand
are Horlicks, Boost, Viva, Maltova, etc. The total market share for
The wholesale price index (WPI) after hitting white beverage is expected around INR 3,000 crore.
a high of 12.63 per cent in September quar-
ter has fell to 0.18 per cent for the week Brown beverages mainly constitute tea and coffee. Tea contributes a
th
ended 4 April 2009. major part in hot beverage industry and is expected at around INR
8,000 crore. India is a largest producer and exporter of tea in the
world. But recently there is a decrease in production of tea from major
tea producing country which could result in increase in price of tea.
Coffee also contributes a significant part in hot beverage market. More
than half of brown beverage is available in unpacked or loose form.
Other
Mineral water is packaged water which is sold across shops. People
are becoming health conscious, which is leading to the demand of
mineral water. Market for mineral water is expected around INR 250
crore. During summer, the demand is at the peak.
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COMPANY OVERVIEW
India, which is the largest tea producer and Tata Tea Limited is a group company of Tata Group, one of the larg-
consumer in the world, recorded a 4 per cent est and most respected business houses of India. Tata Tea was
growth in tea production in 2008 at 981 mil- formed in 1983 from the erstwhile Tata Finlay Company, a joint ven-
lion tonnes as compared to about 945 mil- ture company formed in 1964.
lion kg the previous year.
Tata Tea Limited is involved in the tea extract business for last 40 odd
years. The company manufactures Black Tea extract in their factory
situated in South India which is exclusively for the export markets. The
Exports rose by 10 per cent to about 196 company has a unique manufacturing process using fresh green tea
million kg in 2008 from about 179 million kg leaves gives an exotic taste to their tea extract products and has found
in the previous year. Tea companies re- wide acceptability in western markets. Tata black tea extracts has also
corded robust sales on account of rising tea capture significant market.
prices and high export demand.
After the acquisition of Tetley Group, in the year 2000, the combined
entity represents the second largest global branded tea operation with
product presence in more than 40 countries.
The consolidated worldwide branded tea
business of the Tata Tea Group contributes The company has five major brands in the Indian market - Tata Tea,
to around 86 per cent of its consolidated Tetley, Kanan Devan, Chakra Gold and Gemini to cater to all major
turnover with the remaining 14 per cent com- consumer segments for tea. Tata Tea leads market share in terms of
ing from Bulk Tea, Coffee and others. value and volume in India. The company has a distribution network
with 38 C&F agents and 2500 stockists to cater over 1.7 million retail
outlets in India.
The company brand is accorded "Super The Company owns 27 tea estates in the states of Assam and West
Brand" recognition in the country. Bengal in eastern India, and Kerala in the south.
The company has a 100% export-oriented unit (KOSHER & HACCP
Packet tea market contributes a little more certified) manufacturing Instant Tea in Munnar, Kerala, which is the
than a one- third of the total tea market. largest such facility outside the United States. The unit's product is
made from a unique process, developed in-house, of extraction from
tea leaves, giving it a distinctive liquoring and taste profile. Instant Tea
is used for light density 100% Teas, Iced Tea Mixes and in the prepa-
Over past five years, the company has been ration of Ready-to- drink (RTD) beverages.
continuously paying dividends to its share-
holders along with continuous growth. The company has an agenda of globalization which has resulted in
acquisitions of Good Earth in US, Jemca in Czech, Eight O’ Clock Cof-
fee in US and trademarks of Vitax and Flosana in Poland. Even the
company has signed a Joint Venture Agreement with Zhejiang Tea
Import & Export (ZTIE) Company of People's Republic of China. The
agreement involves setting up a joint venture Company at Economic
Development Zone of Anji County, Zhejiang, PRC for manufacture and
marketing of Green Tea Polyphenols, other green tea extracts, cold
and hot water soluble instant tea, liquid tea concentrates and other
value added tea beverage products. The acquisition of management
control of Mount Everest Mineral Water Company is in line with the
company growth plans in many forms in India and the global market
place.
Recently the company has announced to acquire 51 per cent stake in
Grand, a Russia's tea and coffee major. Post acquisition, Tata Tea will
hold 33.2 per cent stake.
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BUSINESS SEGMENT
The product offered by the company fall un- The product offered by the company fall under Beverage segment.
der Beverage segment. The company offer Tea, Coffee, Mineral water, Chai Outlet and re-
cently launched product in Non-carbonated drinks.
The company offer:
Tea Hot beverages
Coffee The company is market leader for tea in terms of value and volume in
Mineral water India. Tea contributes major revenue to the company. The company
Chai Outlet offer brands in the Indian market to cater all consumer segments for
Non-carbonated drinks tea. The company has five major brands - Tata Tea, Tetley, Kanan
Devan, Chakra Gold and Gemini.
The company offer tea in packet as well as in loose or bulk form. The
company owns 27 tea estates in the states of Assam and West Bengal
in eastern India, and Kerala in the south.
Tata coffee contributes little more than 21 per cent of the total revenue
to the company.
The Brands Tata Tea and Agni are the mar-
ket leaders in their segment. More than half of tea and coffee are available in unpacked or loose
form.
Mineral Water
The company produces and supplies mineral water under the brand
Himalayan. The company expects to see an increase in demand for
mineral water.
The company has registered 57 per cent
growth in sales volumes over the last 5 Non-carbonated drinks
years The company has recently forayed into non-carbonated drinks busi-
ness. The company has recently launch T!ON, a tea and fruit-based
cold beverage. The company expects to receive a good response from
the market. This is the first of cold package tea and fruit based bever-
age and could get appreciation from customer.
The non-carbonated drinks market is expected to register a growth
rate in between 30 to 40 per cent per annum.
Tata Tea sells 90 per cent of its teas in the
packet form & 10 per cent in loose or bulk Other
form in India. Mineral water is packaged water which is sold across shops. People
are becoming health conscious, which is leading to the demand of
mineral water. Market for mineral water is expected around INR 250
crore. During summer, the demand is at the peak.
Chai Unchai outlets
The company has launched Chai Unchai outlet in a moveable format.
The company has received good response for the market. Now the
company is set to expand Chai Unchai outlets this time in a tea parlour
format.
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SWOT ANALYSIS
Strength
Market Leader in tea segment
Tata Tea Limited is a market leader in tea segment. The company has
Market Leader in tea segment - Tata Tea Lim- an existence of more than 40 years. 90 per cent of tea revenue comes
ited is a market leader in tea segment through packet which is among the highest.
Backward Integration
Backward Integration - Owns 27 tea estates Tata tea owns 27 tea estates in the states of Assam and West Bengal
which provide as a cushion to the company in eastern India, and Kerala in the south. Tea field provide as a cush-
ion to the company against the price rise of raw material.
Wide market coverage
Wide market coverage The company has a wide distribution network with 38 C&F agents and
2500 stockists to cater over 1.7 million retail outlets in India.
Weakness
Concentration risk over single category
Concentration risk over single category- Tea The company has high reliance on a single category tea which ac-
accounts for more than 85 per cent of the counts for more than 85 per cent of the company revenue and profit.
company revenue But recently the company steps into non-carbonated drinks and other
product has diversified the risk of the company.
Opportunity
Growth potential in Fruits and Herbals tea
Growth potential in Fruits and Herbals tea - Fruits and Herbals tea are in the market from a small time. The prod-
At a nascent stage ucts are at a nascent stage in India. These products could result into
growth in revenue.
Global Existence
Global Existence - Acquisition to penetrate The company has announced to acquire 33.2 per cent stake in Grand -
into Russia market a Russian branding, packing and distribution firm. The acquisition will
help the company to penetrate into Russia market, which is a biggest
consumer of tea in the world.
Low Penetration Level
Low Penetration Level Loose or bulk tea has high penetration in urban area. Hence there are
lots of untapped potential in rural market.
Threats
Competition from regional and local player
Loose or bulk tea command a major share in India. The low price of
Competition from regional and local player
loose product and heterogeneous taste of tea has a negative impact
on the revenue for the company.
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FINANCIALS
A growth rate in revenue stands at ~8 per
cent where as for profit it stands at ~247 per Annual Result
cent. Due to high income, from interest on
loans for acquisitions, the PBT and PAT are The company has registered a robust growth rate over the past few
not comparable. years. The company has recently reported total income of INR
4365.69 crore which was registered a growth of more than 8 per cent
over the last year which stands at INR 4024.89 crore.
The company has registered high growth in the PBT and PAT margin
in the last year, which was mainly on account of net interest income
and Interest on loans for acquisitions. The Company has posted a net
profit of INR 250.41 crore for the year ended March 31, 2008 as com-
pared to INR 77.46 crore for the last year to register a growth of more
than 247 per cent.
The company has reported a significant
growth in PBT and PAT, which was mainly Quarterly Result
on account of Exchange gain.
The Company has registered a marginal growth in PBITDA as com-
There is a continuous growth in top line as pare to last quarter. The PBT for the company has increased over
well as in bottom line. PBITDA. The company has reported extraordinary items - exchange
gain, which is the major reason for the rise in PBT and PAT. The com-
pany has registered continues growth in top line.
The company has performing well over the past year. The company
under tea segment has the largest market share in volumes. Recently
due to low production, we expect the price to go up. We could see a
growth in top line as well as in bottom line in the future.
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SHARE HOLDING
Holding Pattern for the last 4 Years
Tata Tea Limited has informed that 11.32 per
th
cent of total share has been pledge on 11
Feb 2009. Graphical presentation of Share Holding Pattern
Tata Sons, a promoter has pledge the share
at the market price. The pledging had
fetched the promoters over INR 389 crore.
Total promoter holding stands at around 35
per cent of the total outstanding share of the
company.
Total promoter holding stands at 35.32 per cent of the total out-
standing share of the company.
Out of 35.32 per cent, 11.32 per cent has been pledge by one of the
promoter of the company.
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KEY TAKEAWAYS FOR THE INVESTOR - ROAD AHEAD
Robust Growth rate
Market Leader in tea
The company is able to generate continuous
growth in Cash Flow from Operation. Growth potential in Fruits and Herbals tea
Margin and revenue likely to increase in the future
OUTLOOK
Drought in tea producing region has resulted into low production of tea
for this quarter. This could result in the rise of the price of tea and a
Tata Tea is World renowned and has the hi- significant rise in top line. Tata Tea Limited is a market leader in tea
ghest sales of tea in volume term. segment.
We believe Tata Tea’s focus on new geographies and new initiatives
(such as green and herbal tea, fruit-based beverages and mineral wa-
ter) augur well for the company to sustain the growth at a consolidated
level.
We are very positive on the long term business prospects of the com-
pany and financial performance. At Current Market Price of INR
677.60 and with non adjusted trailing EPS of INR 129.78 and adjusted
trailing EPS of INR 61.50 the stock is trading at a PE of 5.2x and
11.0x respectively. We reiterate “BUY” on the stock with target price
of INR 820.00 with a medium term investment horizon.
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