India tea business adds flavour to Tata Global’s Q2

Brokerages revise earnings estimates, valuation multiples upwards

A strong July-september quarter (second quarter, or Q2) result led to a 9 per cent surge in the stock price of Tata Global Beverages. In a weak environment, the company reported a healthy showing across its segments. What stood out was the performance of the standalone business (India tea business), with volumes and revenue growing 8 per cent year-on-year, driven by market share gains.

The ability to maintain volume growth trajectory on sequential comparison, despite a worsening macro picture, was a key positive, according to analysts at JM

Financial. The operating profit in the domestic tea business saw a robust 26 per cent growth (including IndAS benefit), led by lower commodity costs and operating leverage benefit (sales, general, and administrative expenses grew at a slower pace than revenue growth).

Reported operating profit margins on a standalone level grew over 190 basis points to 11.6 per cent. The branded coffee business, too, saw good growth, with profits at the earnings before interest and taxes level growing at 51 per cent, led by benign raw material prices. The India business accounted for more than half the ~1,834-crore consolidated revenues of the company.

Its joint venture with Starbucks in India continues to exhibit growth, led by new stores. The company posted a growth of 26 per cent, led by opening 12 stores.

In international markets, the US revenue growth was down 3 per cent, despite a 4 per cent volume growth in the coffee business (Eight O’clock Coffee). Higher promotional spending and increased competitive intensity led to a fall in revenue.

The UK and Canada business (tea) posted a volume growth of 2 per cent, though revenue growth fell by a similar proportion. The company’s market share in the UK by volumes is 22 per cent, while it is 40 per cent in Canada. Both the US and Canadian businesses showed higher profitability, aiding consolidated margins.

The Q2 results (improved profitability due to cost efficiencies, lower costs) led to a revision in earnings per share estimates of 4- 6 per cent by analysts at Kotak Institutional Equities. They also increased the valuation multiple for the tea business due to improved execution. In addition to the existing business, the next trigger will be the impending merger of the consumer business (salt and spices) of Tata Chemicals.