Buy Tata Global Beverages; target Rs 105: Greshma Research

“Tata Global Beverages’ revenue increased from Rs 5,820.92 crore in FY10 to Rs 6,004.54 crore in FY11, which is an increase of 3.15% on a YoY basis The EBITDA stood at Rs 608.04 crore (FY2011) as compared to Rs 721.64 crore in FY10, which is a fall of 15.75% on a YoY basis. The EBITDA Margins fell from 12.39% in FY10 to 10.12% in FY11.The reason for this 15.75% fall in the EBITDA was mainly the increased cost of raw materials. The expenditure on raw materials rose by 11% from Rs 2,070.69 crores in FY10 to Rs 2,305 crore in FY11.The PAT stood at Rs 292.04 crores in FY11 as compared to Rs 393.31 crores in FY11, a decline of 25.05% on a YoY basis.

Tata Global Beverages has put immense amount of weight behind building its brands and emphasized on maintaining its existing ones, specially the legendary Tetley brand. The company has already invested in its core brands and is set to reap its benefits. Coupled with brand image and its vast portfolio which is set to grow with its new Joint Ventures, we forecast a steady rise in its margins.
Commodity Prices-The surge in commodity prices which also drove raw material costs are set for a global correction and will thus ease the pressure, especially on manufacturing cost. With the consolidation in commodity prices the margins are set to substantially improve.
Consolidation of Coffee Prices-Coffee prices have seen a steady surge of price from 200-210 US cents/Pound levels to 300 levels in the past 12-14 months. The prices are set for correction in the near term to settle at their fair value at around 220-240 levels.
Stable Tea Prices-The price of tea has remained steady after a dip of about 17% during the April-July 2010 period. Since then the price has gained steadily and will remain around the current levels.

We expect an EPS of Rs 5.44 in FY12E and valuing the company at 19.3 times arrive at our Price Target of Rs 105. Maintain BUY with a 15% upside from CMP of Rs 91. At CMP, the stock trades at 16.72x FY12E EPS. Global tea prices remained firm in FY11 despite increase in production in key export markets such as Kenya (up 27% in CY10) & Sri Lanka (up 13% in CY10). In CY11, tea production in south Asia is flat India & Sri Lanka, down 24% YoY in Kenya for 3mCY11). We expect tea prices to consolidate at current levels. We believe TGBL can improve its margins in FY12E by benefiting from the decline the tea prices & earlier price hikes. We Maintain a BUY on the stock,” says Greshma Research report.

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