Ideas for profit | Tata Global Beverages: Improving branded business share a key positive; accumulate

The second quarter performance of Tata Global Beverages was lacklustre due to higher competitive intensity in the domestic business, weak sales in the UK and pricing pressure in non-branded business. However, improving market share in key segments and improving contribution from JVs hint at positive trends in the making.

TGB’s quarterly sales grew 7 percent year on year (4 percent growth in constant currency on year) on like for like basis after excluding the impact of exit from Russian operations. Topline growth was mainly led by domestic branded business. International business was flattish with better coffee sales performance in the US offset by UK sales. Margins were impacted by higher commodity cost in India and UK as well as higher investment behind brands.

Net profit, however, was up 19 percent YoY due to lower taxation and higher profits from associates and JVs.

Domestic tea portfolio grew 9 percent in volume terms but on account of competitive intensity value grew by 7 percent only. However, sequentially, there was a marginal market share gain in value terms. The noteworthy category was Green tea, wherein 14 percent volume growth helped in market share gain.

Another branded business which continues to perform well is Tata Starbucks, which witnessed double-digit year on year (YoY) growth.  In the quarter under review, the company opened nine new stores.

The US operations witnessed 23 percent YoY sales growth in coffee which was aided by higher Keurig K-cups sales. However, the UK business sales were impacted by prolonged summer leading to the decline in the black tea market.

Non-branded business, particularly that of Tata coffee, was impacted by weaker realisations and the adverse impact on plantation crop. Pepper prices were lower due to cheaper imports from Vietnam and some of the plantation crops were impacted by rainfall. Instant coffee category, however, witnessed good volume growth.

The stock has corrected by more than 30 percent from its all-time high early this year and has been trading range bound for last three months. Currently, it is trading at 20x FY20e (estimated) earnings at a significant discount to FMCG universe.

For the company, some of the tie-ups (Keurig K-cups), investment in categories like green tea and JVs (Starbucks, Nourishco) are doing good. Market share gains in select market and categories are comforting. Further, the possibility for restructuring and re-positioning holds scope for rerating. A large part of such initiatives have played out in last about one year, yet few options remain in terms of hiving off of non-branded business and/or merging consumer food business at the Tata group level.