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Jul 26, 2013, 06.36 PM IST | Source: CNBC-TV18

Expect hardening of Arabica & Robusta prices: Tata Coffee

Hameed Huq, MD of Tata Coffee told CNBC-TV18 that the coffee prices Arabica and Robusta has not been very strong, but he is expecting hardening of Arabica and Robusta Prices in second half of FY14.

Tata Coffee on Friday reported 43 per cent increase in its consolidated net profit at Rs 40.38 crore for the first quarter ended June 30 on lower expenses and better margins.

Tata coffee has three major businesses in the US; plantation coffee, instant coffee and the branded business and all three of them have shown uniform improvement on margins. Hameed Huq, MD of Tata Coffee told CNBC-TV18 that the coffee prices Arabica and Robusta has not been very strong, but he is expecting hardening of  its prices in second half of FY14.

Also read: Tata Starbucks appoints Manmeet Vohra as Director, Mktg

Below is the verbatim transcript of his interview to CNBC-TV18

Q: I have your topline numbers, not too much of a growth on the topline at Rs 418 crore, take us through this quarter’s performance and how have you done in terms of revenues and margins?

A: It has been a good quarter for us. Net profit level there is 43 percent improvement but this improvement in this quarter must be seen against the backdrop of a fairly difficult green coffee prices. The coffee prices Arabica and Robusta has not been very strong but the fact that we could show not much of a topline growth, but improved margin largely on a much improved profitability shows that now this Tata Coffee has become truly integrated coffee company. There the dependence on plantation has come down substantially and our other value added business like instant coffee and our overseas subsidiary 8o’clock bring up these numbers.

Q: Can you elaborate on how your US subsidiary did this quarter?

A: US subsidiary has shown a marked improvement. Largely it has been driven both by a factor of holding on to market share in a difficult environment and also getting the advantages of the lower commodity prices. We had been very aggressively buying into the green coffee and results of that are now showing into the bottomline of our subsidiary.

Q: You have seen quite a bit of a jump up in your EBITDA performance this time around like you mentioned because of a lower raw material cost but what about ad spends, have you managed to scale down your ad spends as well this time and what could a sustainable run rate be there?

A: We are maintaining. I am not saying that we have cut back or increased aggressively on the ad spend. So at that level we have maintained it. Largely we have been holding on and gaining marginal market share over there in the US. The other important part that has come in this quarter, we have commissioned our high quality freezed-dried plant in Theni. There we have added another 30 percent capacity, the plant was commissioned during the quarter and going forward we see the results in the balance of the fiscal.

That will also position our instant coffee interest slight definitely higher market share than we have been. It is a project that was on anvil for almost a year now. We have rolled it up on time. So, again that will also insulate this company from any further downturns in coffee prices. In fact, it will add to the benefit because that again green coffee is the input cost for the instant coffee.

Q: Margins seems to be the real uptick or the real surprise factor this quarter for you. In terms of the mix that you spoke about that there will be less dependence on plantations and more on instant coffee especially within the domestic business as well, can you explain to what the margin breakups would then be between these two segments and how much of a trajectory or an uptick could we see going forward from this current 24 percent that you have clocked this quarter?

A: I cannot discuss specific margins with you. If you look at this scenario, we are focused on margin as a business and we have looked at it. If you look at all our three major businesses, which is plantation coffee, instant coffee and the branded business in the US, all of them have shown uniform improvement on margins.

Both the volumes in instant coffee, which has gone up has let you better absorption of our costs. In the plantations also although on pressure on the terminal prices we have had volumes. So, we are not going into specifics which I don’t have at the moment, all three businesses have shown improving margins over there to result in this overall numbers that you are seeing.

Q: Do you think coffee bean prices will continue to remain benign, what is your assessment of how bean prices will pan out in this particular fiscal or for the next six-eight months?

A: The coffee prices have bottomed out. This has been a factor of two successive large crops in Brazil and a fairly large crop in Vietnam but what has happened is this correction in prices has almost brought the realisation, the terminal prices close to cost of production.

So, this is a normal cyclicity we have seen in a commodity once the prices come down then they will retract back. I am quite optimistic in the second half of this fiscal, we will see hardening not to the levels earlier on but definitely hardening of both Arabica and Robusta prices. There is an overall not large surpluses as we have seen in the early years to lead to a continuous downturn and governments have also taken corrective action. The realisation is very close to cost of production, they cannot afford the large farmer segment to suffer indefinitely. So, prices have bottomed out and we should see uptick in the second half.

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