Saral Gyan Value Pick - Aug 2012


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Saral Gyan Value Pick - Aug 2012

  1. 1. EQUITY RESEARCH REPORTTATA COFFEE LTD BSE CODE: 532301 NSE CODE: TATACOFFEESector: Plantations – Tea & Coffee CMP: Rs. 964.70 (26/08/2012)Market Cap: 1801.03 (Crores) Target Price: Rs. 1320Date: August 26, 2012 Time Period: 12 – 18 months Saral Gyan Capital Services An Independent Equity Research Firm
  2. 2. VALUE PICKS – AUGUST 2012 TABLE OF CONTENTS.No Content Page No.1. Company Background 032. Recent Developments 093. Financial Performance 104. Investment Rationale 125. Risk & Concerns 136. Future Outlook 147. Saral Gyan Recommendation 168. Disclaimer 17 -2- SARAL GYAN CAPITAL SERVICES
  3. 3. VALUE PICKS – AUGUST 20121. Company BackgroundTata Coffee is Asia’s largest integrated Coffee Plantation Company and the largest grower– exporter of green coffee from India. The Company is the second largest exporter ofinstant coffee in the country and exports to countries in Europe, Asia and North America.Eight O’ Clock coffee is a segment leader in the US retail market. It is the only company tohave various certifications like Rainforest, UTZ and SA800. As per Nielsen, the Company’sflagship brand, Eight O’ Clock (EOC) coffee continues to be the No. 1 whole bean Coffeebrand in the grocery segment in USA and 4th in the overall branded segment. EOC hasentered into the fast growth single serve coffee segment in the US and this augurs well forthe future. Domestic coffee consumption has been growing steadily over the last severalyears driven by double digit growth in the instant coffee category and out of homeconsumption. Tata Coffee is gearing up to supply coffee beans to cafes and the tie up withStarbucks will propel this growth in the coming yearsTata Coffee has a hand in every aspect of the coffee making process, with businessactivities ranging from growing and curing of coffee and tea to the manufacture andmarketing of value-added coffee products. Tata Coffee grows coffee on its own estates,processes the beans, exports green coffee, manufactures and exports Instant Coffee andretails coffee with its own branding in the domestic market.The Company’s two main products are:a) Arabica Coffeeb) Robusta CoffeeTo improve the quality of its Coffee products, the Company is importing technology fromNetherlands. With this the Company would be moving in the premium segment whichwould boost its margin profile. -3- SARAL GYAN CAPITAL SERVICES
  4. 4. VALUE PICKS – AUGUST 2012The Company is now focusing towards producing Speciality Coffee. The Company has alsodeveloped new state of the art pulping facilities in Coffee estates.PlantationsCoffee: Tata Coffee owns 19 coffee estates located in ideal coffee growing highlands ofSouthern India, with fertile soils and invigorating climate. Spread over 8037 hectares inCoorg, Chickmaglur and Hassan districts of Karnataka and in Valparai district of TamilNadu, Tata Coffee produces 10,000 metric tonnes of natural shade grown Arabica andRobusta coffees, in both washed and unwashed forms.These estates are located at various altitudes, and the coffee produced possess distinctcup characteristics.Tata Coffees uniqueness lies in its ability to produce large quantities of estate specific,strain specific, speciality and premium coffee, while maintaining a strict consistency inquality. Apart from coffee and tea, pepper and cardamom are also grown as inter cropson its estates.Monsoon Malabar, Mysore Nugget Extra Bold, and Robusta Kappi Royale are three of theprominent speciality grades of Indian coffee it grows and processes apart from estatespecific coffees. Mr. Bean, a quality product made from the finest coffee beans at itsplantation, was recently introduced.Coffee curing: The Company has the largest curing facility in the country at Kushal nagarwith an installed capacity of 10,000mt. The coffee is cured in the companys state-of-the-art curing facility at Kushalnagar in Kodagu district. It has been awarded the prestigiouscertificate of approval for quality ISO-9002 through certification by Bureau Veritas QualityInternational, Netherlands. This unit is the first curing industry in India to receive ISO-9002certification.Tea: The company also owns six tea estates which spans 4755 hectares in Coorg andChickmagalur districts of Karnataka and Annamalais district of TN and produce 6.5 millionkilograms of tea.Estate supplies: Tata Coffee also deals in plantation requirements such as fertilisers andchemicals, estate implements, and tyres and tubes through its Estate Supplies DivisionInstant Coffee: Tata Coffee also has the capacity to produce 5000 metric tonnes of InstantCoffee per annum, for which it has a sizable export market. International Tata Café,Mysore Gold and Malabar are the popular Instant Coffee brands which are exportedTimber: Tata Cofee has abundant reserves of timber, which is grown for shade. Thecompanys timber resources on its estates include Rosewood, Silver Oak, and othersoftwood trees. As part of its plans to optimise the utilisation of the companys captive -4- SARAL GYAN CAPITAL SERVICES
  5. 5. VALUE PICKS – AUGUST 2012timber resources, the company has entered into Timber Value-Addition industry bygetting its Silver Oak timber converted into plywood of different types and bearing thebrand name Conswood.LocationsPlantations: The Coorg district of Karnataka, India, is one of the main coffee-growingregions in India and the main plantation operations of Tata Coffee are in Pollibetta, in theSouthern part of Coorg. The company owns 19 coffee estates and 7 tea estates located inthe districts of Coorg, Hassan and Chickmagalur, including one recently acquired coffeeestate and five tea gardens in the Annamallais region of Tamil Nadu. The coffee grown onthese estates are naturally grown, in a mixed shade of two tiers. The plantations headoffice is at Pollibetta, Coorg, Karnataka.Instant Coffee: Tata Coffee has two Instant Coffee manufacturing facilities, one atToopran near Hyderabad and the other at Theni near Madurai in Tamil Nadu. Thecombined installed capacity of these two plants is 6500 metric tonnes.Corporate office: The companys marketing and corporate functions are based out of itscorporate office located in Bangalore -5- SARAL GYAN CAPITAL SERVICES
  6. 6. VALUE PICKS – AUGUST 2012Research & DevelopmentCompany R&D laboratory is recognised by the Department of Scientific and IndustrialResearch, Ministry of Science and Technology, New Delhi, as a centre for crop research.The R&D laboratory is well equipped with sophisticated equipments to undertake basicresearch work in areas of crop nutrition, quality testing, tissue culture research and crop-improvement through breeding, bio-control research and other related works.1. Specific areas where R & D is being carried out  Soil nutrient index.   Verietal trial of coffee, pepper and cardamom.   Bio-control research.   Pests and disease control research.   Coffee effluent treatment.   Compost — vermicompost experiment.   Quality analysis of coffee and pepper.   Analysis of agro-inputs for quality standards.   Water management research — drip irrigation for coffee   Water management research — drip irrigation for coffee   Crop diversification — Vanilla.  Pepper value addition 2. Benefits derived l. Crop nutrition research  Soil fertility status is monitored through soil and leaf analysis, and the results are calibrated to formulate optimum fertiliser recommendation and soil amendment application.  Our fertiliser programme is rationalised based on soil nutrients status, which is optimum and adequate, to enhance crop production and productivity.  Micro-nutrient research:- Monitoring the availability of micro-nutrients such as Zinc, Copper, Iron, Manganese and secondary nutrients such as Sulphur, Calcium & Magnesium to improve coffee, pepper and cardamom productivity. II. Coffee varietal trial experiments: Identified location specific high yielding and disease tolerant selection for planting in r estates III. Organic manure: Large scale manufacturing of compost with improved technology to enhance the soil fertility status. Introduction of trichoderma fungus to hasten the process of composting and as a control for soil borne disease. Addition of coffee effluent to hasten the process -6- SARAL GYAN CAPITAL SERVICES
  7. 7. VALUE PICKS – AUGUST 2012 of composting and to increase the nutritive value. IV. Bio-control research  Pepper wilt disease control: R and D pioneered the large scale culturing of good quality trichoderma fungus for use in the biological control of pepper wilt disease and root disease of coffee  Coffee berry bored control: Large-scale installation of berry borer traps with the use of organic solvents as part of integrated pest and disease management  In-house formulated high quality neem oil for integrated pest and disease management V. Organic farming system of coffee and pepper:  Conversion and pepper cultivation is in compliance with organic farming systems VI. Pepper value addition:  Developed improved methodology for dehydrated green pepper  Conversion of low grade pepper into oleoresin and oil VII. Training programmes and advisory circulars to estates to update current/new trends in cultivation practices3. Plan of action in-house: I. Improved crop varieties: Field Assessment of high yielding and disease tolerant selection of coffee, pepper and cardamom. II. Field evaluation of breeding plants of coffee: Field evaluation of breeding plants of coffee for its performance in the field regarding its yield potential and disease resistance III. Crop diversification: To study the opportunities of various crop diversification in the marginal coffee/paddy soil areas. IV. Coffee effluent treatment research: Experiments are under way to determine economical pollution control of coffee effluent. V. Drip irrigation: To develop an economically viable technique of irrigation for coffee and improve the efficiency of nutrient delivery through fertigation -7- SARAL GYAN CAPITAL SERVICES
  8. 8. VALUE PICKS – AUGUST 2012 VI. Mechanical trough drier: To preserve the quality of coffee during drying and to reduce the drying time in barbecue4. General I. Collaboration with Research Institute:  Central Coffee Research Institute, Balehonnur.  Indian Institute of Spices Research, CalicutAwards & Certifications Tata Coffee has been a significant contributor towards the growth and development of Indian coffee. Tata Coffee is committed to the environment and works in tandem with nature to produce quality crops. Agro- chemicals are scrutinised at the research and development laboratory and indigenous methods used to control pests instead of pesticides. Leaf litter, fruit droppings, cherry husk and coffee pulp are also used ascompost to retain the fertility of the soil. These factors contribute to the production oflarge quantities of Estate Specific, Strain Specific, Speciality and Premium Coffees whileconsistently preserving quality. The company takes pride in its efforts towards corporatesocial responsibility and estate workers enjoy very high living standards and congenialworking conditions.It has won several certifications and awards some of which are:  Utz Kapeh certification for growing coffee in a socially and environmentally responsible manner  Devarcadoo division of Balmany estate in Coorg is certified by IMO for manufacturing quality organic coffee  SA 8000 for social accountability  Instant coffee factory, Toopran is ISO 9001:2000 certified  Curing works, Kushal Nagar is ISO 9001:2001 certified -8- SARAL GYAN CAPITAL SERVICES
  9. 9. VALUE PICKS – AUGUST 20122. Recent DevelopmentsTata Coffee modern roastery to serve beans to Starbucks – July 26, 2012The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India,as well as to Starbuck operations overseaTata Coffee Ltd reportedly signed an agreement with Starbucks to source and roastpremium coffee beans for the global coffee chain, which will soon kick off a modernroastery in Kushal Nagar, Coorg in Karnataka.Hameed Huq, Managing Director, Tata Coffee informed that the Rs. 30mn, 375-tonne-a-year roastery is fully-automated. The roastery, which conforms to the best food safetystandards, will source and roast the best Arabica coffee beans from Tata Coffee estatesfor Starbucks as well as other coffee retailers.The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India,as well as to Starbuck operations overseas. -9- SARAL GYAN CAPITAL SERVICES
  10. 10. VALUE PICKS – AUGUST 20123. Financial PerformanceTata Coffee net profit rises 89.32% in the June 2012 quarterTata Coffee net profit rose 89.32% to Rs. 24.46 crore in the quarter ended June 2012 asagainst Rs. 12.92 crore during the previous quarter ended June 2011. Sales rose 26.16% toRs. 151.53 crore in the quarter ended June 2012 as against Rs. 120.11 crore during theprevious quarter ended June 2011Tata Coffee net profit rises 107.91% in the March 2012 quarterNet profit of Tata Coffee rose 107.91% to Rs. 28.13 crore in the quarter ended March2012 as against Rs. 13.53 crore during the previous quarter ended March 2011. Sales rose31.89% to Rs. 132.74 crore in the quarter ended March 2012 as against Rs. 100.64 croreduring the previous quarter ended March 2011.On standalone basis for the audited full year, net profit rose 43.16% to Rs. 78.85 crore inthe year ended March 2012 as against Rs. 55.08 crore during the previous year endedMarch 2011. Sales rose 27% to Rs. 509 crore in the year ended March 2012 as against Rs.393 crore during the previous year ended March 2011 - 10 - SARAL GYAN CAPITAL SERVICES
  11. 11. VALUE PICKS – AUGUST 2012Current & Expected Earnings: QUARTERLY RESULTS Sep 11 Dec 11 Mar 12 Jun 12 Sep12E Dec12E Sales Turnover 132.03 124.11 132.74 151.53 153.49 162.96 Other Income 0.36 0.01 2 2.23 2.17 1.42 Total Income 132.39 124.12 134.74 153.76 155.66 164.38 Total Expenses 102.06 95.36 107.45 114.02 118.31 123.53 Operating Profit 29.97 28.75 25.29 37.51 35.18 39.43 Profit On Sale Of Assets -- -- -- -- -- -- Profit On Sale Of Investments -- -- -- -- -- -- Gain/Loss On Foreign Exchange -- -- -- -- -- -- VRS Adjustment -- -- -- -- -- -- Other Extraordinary Income/Exps -- -- -- -- -- -- Total Extraordinary Income/Exps -- -- 11.13 -- -- -- Tax On Extraordinary Items -- -- -- -- -- -- Net Extra Ordinary Income/Exps -- -- -- -- -- -- Gross Profit 30.33 28.76 27.29 39.74 37.35 40.85 Interest 0.19 -0.5 1.48 1.47 1.34 1.74 PBDT 30.13 29.25 36.93 38.27 36.01 39.11 Depreciation 3.11 3.18 3.95 3.32 3.85 4.10 Depreciation On Reval. of Assets -- -- -- -- -- -- PBT 27.02 26.07 32.98 34.95 32.16 34.01 Tax 8.21 7.08 4.85 10.49 9.91 10.27 Net Profit 18.81 18.99 28.13 24.46 22.25 23.74 Prior Years Income/Expenses -- -- -- -- -- -- Earnings Per Share 10.07 10.17 15.06 13.1 11.91 12.71 Book Value -- -- -- -- -- Equity 18.68 18.68 18.68 18.68 18.68 18.68 Reserves -- -- -- -- -- -- Face Value 10 10 10 10 10 10Company sales was up by 27%, Profit before Taxes was up by 52% and Profit after taxeswas up by 44% in FY 2011-12 compared to FY 2010-11. EPS was up by Rs. 12.73 i.e. Rs42.22 in FY 2011-12 vs 29.49 in FY 2010-11.Company has delivered robust first quarter results and is expected to perform better withrealisation of higher income and profitability in coming quarters. - 11 - SARAL GYAN CAPITAL SERVICES
  12. 12. VALUE PICKS – AUGUST 20124. Investment Rationalei) Triple Certification - Key Differentiator for Tata CoffeeThere is growing demand in developed countries for sustainably grown coffees.TataCoffee is the only Coffee Plantation Company with comprehensive Triple Certificationleading to differentiation.  Utz - Efficient Farm Management Practices.  Rainforest Alliance - Bio-diversity (For Environment Protection)  SA8000 - Labour standard certificationii) Premium and Specialty ProductsThere is a high degree of focus on quality leading to well-established reputation in thepremium markets and company has achieved large number of National & Internationalawards year-on-year for quality, rapidly growing sales to the premium paying marketsegments for Certified and Specialty coffees. Company also entered into lucrative USmarket with washed Robusta.iii) Joint Venture with Starbucks Coffee CompanyTata Global Beverages and Starbucks Coffee Co. announced a joint venture between theiconic international coffee brand and the second-largest branded tea company in theworld. The 50/50 joint venture, named Tata Starbucks, will own and operate Starbuckscafés which will be branded Starbucks Coffee “A Tata Alliance”. Tata Coffee Limited willroast coffee to supply TATA Starbucks Limited, and to export to Starbucks Coffee Co.which is a big positive for the company.iv) Improvement in Sales & CAGRNet Sales of the company has increased to 509 Crs in FY-12 Vs 312 Crs in FY-09 growingwith the CAGR of 17.69% whereas Net Profit increases from 53.62 Crs to 124.72 Crs in just4 year registering a growth of 32.50%.v) Continuous Reduction in DebtDebt Equity Ratio of the company has constantly decreased from 0.58 in FY-09 to 0.06 inFY-12 i.e. almost NIL which is good indicator for the company and could expect betterdividend policy in coming Increase in Opetating MarginsNet Profit Margin of the company is increases from 5.95% in FY-09 to 15.46% in FY-12 andOperating profit margin increases from 17.13% in FY-09 to 24.45% in FY-12 whichindicates company is uses its resources very efficiently and effectively. - 12 - SARAL GYAN CAPITAL SERVICES
  13. 13. VALUE PICKS – AUGUST 20125. Risk & Concernsi) The first and foremost risk for any commodity is the Demand & Supply and Coffee is noexception. Demand for coffee is both within the country as well as outside, attheinternational market. The demand and supply is dependent on world coffeeproduction, stocks held by the producing countries and the political/economic situation intheimporting countries.ii) The second important factor that governs the demand/supply chain is the quality oftheproduct. In India, 98.8% of the coffee holdings are with small growers who holdbetween 2to 10 hectares and the balance 1.2% are large growers, holding above 10hectares. The small growers normally sell their produce at the farm gate to the tradersdue to economic conditions and the difficulties involved in taking the crop to a CuringWorks for curing and grading. The traders, who collect coffee from these small growers,cure it at their small mills or hullers without paying much attention to the quality. Thesecoffees are normally utilized to meet the demand inside the country.iii) The other major concern for Coffee plantations is the availability of labour andthecontinuing demand of the labour unions for wage increase. The minimum wages arebeing increased by the Government regularly on year-to-year basis, which has a directbearing on the cost of production. Apart from this, there is shortage of skilled labour sincethe younger generation is pursuing higher studies or migrating to cities, looking forgreener pasture.iv) Another big concern for any plantation Company is the vagaries of nature anduncertainty of weather conditions during critical months. - 13 - SARAL GYAN CAPITAL SERVICES
  14. 14. VALUE PICKS – AUGUST 20126. Future OutlookCoffee is getting more and more popular with both importing and exporting countries.Unfortunately, the situation in global commodity markets is ambiguous. The overalltendency is bearish. However, there are occasional hikes connected with bad weather andother factors affecting production. What should investors get ready for? What is thesituation in exporting countries?Analysts anticipate an abundant coffee harvest in Brazil, the world’s major producer ofthe premium-quality “Arabica” coffee.Brazil has been the world’s leading coffee producer over a long period of time (over 48%of the global production). Its influence on the global market of coffee can hardly beoverestimated. Experts anticipate a price decline attended by hikes in advance of masssupplies. However, unstable weather conditions may cardinally change the situation. Inparticular, Southern Brazil keeps suffering from droughts while scanty rains do little toincrease the crop capacity.Ethiopia and Columbia: These two countries are the runners-up in terms of coffeeproduction. According to the ICO (International Coffee Organization), this year Ethiopia isexpected to gather a more decent harvest than Columbia. Substantial rains are expectedto contribute to the harvests of coffee in both the countries.Vietnam: Its coffee harvest is expected to improve due to rainy weather. Vietnam grows acheaper sort of coffee. It is called “Robusta”. More affordable prices make it more popularwith the middle class. This year Vietnam is expected to gather a record-high harvest - 1.32million metric tons. The price on Robusta is expected to be around $1.9 per pound whileArabica is getting less popular (its price is around $1.82 per pound).The global consumption of coffee keeps growing every year:USDA: The experts anticipate a slight production decline. However, it will exceed theglobal consumption (135m bushels, 1 bushel = 60kg).ICO: The International Coffee Organization expects the global consumption to exceed theglobal production in 2012 due to Brazil’s lower production last year caused by unfavorableweather conditions.Chemico Limited: If to consider its forecast, the average annual price of Arabica willdecline by 8% but retail prices may stay unchanged as major coffee houses have alreadybought substantial amounts of coffee for sale.Masterforex-V Academy: Several factors may cause a sharp decline in coffee prices:volatile currency markets, weather conditions, speculative factors, higher refining of - 14 - SARAL GYAN CAPITAL SERVICES
  15. 15. VALUE PICKS – AUGUST 2012coffee beans by major importers, higher re-export, seasonality, poorer harvest in Africaetc.Business Outlook  Global consumption maintained 2% growth rate to touch 137 mln bags in spite of high coffee prices.  Coffee is a biennial crop with alternating years of high and low production, also known as ‘ON’ and ‘OFF’ years leading to cyclic supply trends.  The world’s largest supplier, Brazil is harvesting it’s biggest ‘ON’ year crop, although the estimate has been downgraded from 60mln to 55 mln bags. But even at 55 mln bags, the tightness in the market has considerably eased resulting in Arabica prices softening.  World inventory in Arabica in producing and consuming countries is at an all time low but is expected to build up slightly with the big harvest from Brazil. Robusta inventories which peaked in July 2011, has started declining slowly. - 15 - SARAL GYAN CAPITAL SERVICES
  16. 16. VALUE PICKS – AUGUST 20127. Saral Gyan Recommendation Tata Coffee is Asia’s largest coffee plantation company and the 3rd largest exporter of instant coffee in the country. It exports green coffee to countries in Europe, Asia, Middle East and North America. We believe that demand of premium coffee will remain strong and company will do well with its new entrant - Washed Robusta in lucrative US market. As per our estimates, Tata Coffee can deliver total sales of Rs 630 crores and PAT of Rs 98 crores, resulting in EPS of Rs 52.5 in FY 2012-13. This translates in an expected PE multiple of 18.4 times based on FY 2012-13 earnings. We expect Tata Coffee net profit margin will be maintained at 15-16%. Tata Coffee operating margins is better to peers group companies and can improve further considering robust demand for its premium product range and recent agreement with Starbucks to source and roast premium coffee beans. Tata Coffee Ltd has declared good numbers in first quarter of current financial year registering sales growth of 26% and profit growth of 89% compared to same quarter - last year and is expected to perform better in coming quarters. On equity of Rs. 18.68 crores the estimated annualized EPS for FY 12-13 works out to Rs. 52.5 and the Book Value per share is Rs. 244.82. At a CMP of Rs. 964.70, price to book value is 3.94.Saral Gyan Team recommends “BUY” for Tata Coffee at current market price of 964.70for a target of Rs. 1320 over a period of 12-18 months.Buying Strategy:  50% at current market price of 964.70  50% at price range of 885-900 (If stock price falls during market correction) - 16 - SARAL GYAN CAPITAL SERVICES
  17. 17. VALUE PICKS – AUGUST 20128. DisclaimerImportant Notice: Saral Gyan Capital Services is an Independent Equity Research Company.Disclosure: The author of this article does not hold shares in the recommended company.© SARAL GYAN CAPITAL SERVICESThis document prepared by our research analysts does not constitute an offer or solicitation for thepurchase or sale of any financial instrument or as an official confirmation of any transaction. Theinformation contained herein is from publicly available data or other sources believed to be reliablebut we do not represent that it is accurate or complete and it should not be relied on as such. SaralGyan Capital Services ( or any of its affiliates shall not be in any way responsiblefor any loss or damage that may arise to any person from any inadvertent error in the informationcontained in this report. This document is provide for assistance only and is not intended to be andmust not alone be taken as the basis for an investment decision. - 17 - SARAL GYAN CAPITAL SERVICES