Tata Coffee expects to see good growth in H2FY12

Managing director Hameed Huq indicated that the company will see good growth in H2FY12 as well. He mentioned that they have increased speciality coffee prices to protect their margins. He further added that the company is largely hedged from volatile forex market.

Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.

Q: What’s the status as far as coffee prices or raw material prices are concerned? Are we entering into a bumper and therefore cheaper raw material prices?

A: We have quoted the half yearly numbers. If you look at our two operations, we have branded operations in the US ‘Eight O' Clock’ that got impacted because of the high coffee bean prices. But, for the equal amount that we buy for ‘Eight O' Clock’, we produce and sell in Coorg where we have all our plantations and the company benefit out of the integrated business.

In the green coffee, the input cost went up for our branded business. As far as the standalone numbers are concerned, the commodity part of the business showed an improvement at PBT level of 94% and PAT level of 91%, which grew up our EPS from Rs 8.91 to almost Rs 17. It is largely reflected on the performance.

Q: At all times, are you hedged in times of a very good coffee crop? And, in terms of not so good coffee crop, would you be hedged because at one level you have one value added branded element and on another level you have the raw material element?

A: Yes, this makes Tata Coffee almost unique. It started off as a plantation company only with coffee. Then, within the plantation sector, we hedged it with tea and that helped us about three years ago when the tea prices were booming.

Further up the value chain, almost 50% of revenue comes from instant coffee. Then, the large part of our business is the branded operation in the US Eight O' Clock. All in all, this is a one commodity company or what was originally a plantation company, it is no longer plantation company. It is a FMCG now, which is largely hedged.

Our main part being green coffee, which has been very volatile over the last one to one-and-a-half year, we have been able to take advantage in spite of severe downturn in similar other companies. Tata Coffee has been able to maintain its bottomline and also show topline growth.

Q: On a consolidated basis, there have been some challenges at Eight O' Clock. On a full year FY12 ending, will you be able to show a decent profit growth risk? In the first half operationally, there has been a de-growth in terms of profits. Will you be able to recover profitability and at least end flat for the year on FY12 as a whole?

A: We took an impact on the first half because the green coffee prices went up and we had to take the prices up to protect our margins. So, there was certain impact on the volumes. Volumes have recovered.

We are more on target for the second half. The large Indian operation has benefitted largely on the depreciating rupee and forward covering of our coffee for the instant coffee. So, all in all, second half should be good.

Q: For the company as a whole, do you benefit from the rupee depreciation?

A: Yes. We largely depreciate because our green and instant coffee is almost 99% exported and dollar denominated. For the green coffee about 80-85% exported and dollar denominated.

Q: How do you see the early trends in 2012 for the company?

A: Commodities prices had adjusted in 2012 because of the euro crisis. If you look at Arabica prices, the adjustment of coffee prices has been lot less than the general commodity. It’s largely driven by shortfall in production for the high quality origin Columbia. Overall, there is a short fall of high quality Arabica coffee. The global production looks high with Vietnam and Brazil coming in. We are driving is to protect realisation. We are putting focus on our specialty, which is high quality coffee and a washed Robusta coffee of which Tata Coffee is the largest producer in the world.

Q: How much will your margins in higher segment increase by, since that’s where the scarcity is?

A: If the coffee prices have adjusted from 270 cents to 220 cents that’s 50 cents per pound down, which almost 20%. As again that, we have been largely able to protect that drop in realisation by increasing our specialty coffee sales. It is a large process as we have to integrate backwards into our processing of higher quality. So far, we have booked forward for the coming financial year. Whatever has been the fall in the commodity price of coffee, which has not been as much as other commodities, we are trying to protect our margins and increase on it by better realisations even in the commodity space.