Ashish Chugh's Hidden Gems: Jay Shree Tea, Tata Global Bev

This company is the second-largest tea producer in India. Company has got 22 tea estates, which are present almost in the entire tea producing geography of the country. They have tea estates in south as well as in Assam and Darjeeling.

Besides tea, this company is also into manufacture of single superphosphate, sulphuric acid and they also have a sugar factory in Bihar.

If one were to look at their financials - FY13 sales were about Rs 660 crore with a profit after tax (PAT) of Rs 40 crore. In the first half of the current financial year they have registered sales of close to Rs 300 crore with a PAT of about Rs 46 crore.

The reason we like this stock is because of the  valuation gap between the largest and second-largest player in India that is McLeod Russell and Jay Shree. McLeod is the largest tea company and if one analyse both companies closely, the operations of McLeod is roughly 2.5 times that of Jay Shree Tea and for tea business it is roughly 3 times the size of Jay Shree Tea. The market cap of McLeod is Rs 3,400 crore and that of Jay Shree is just about Rs 240 crore, which means 14 times that of Jay Shree Tea. So I believe Jay Shree Tea is a deep value stock.

Second is this company has got an uninterrupted dividend track record for the past 20 years. This year the company paid a dividend of Rs 4/share, which at the current price of Rs 82 translates into a dividend yield of about 5 percent.

Promoters of late have been increasing their stake through market purchases. Also the best part is that you are getting this stock almost at four years low. The four year low for the stock is about Rs 74-75 and you are currently getting the stock for about Rs 82-83 and from these levels I do not see too much of a downside.

Moreover, if one looks at the balance sheet, they do have a debt of close to Rs 400 crore, but against that there is a cash and cash equivalent of about Rs 150 crore. Therefore the balance sheet of Jay Shree Tea seems to be comfortable.

You are getting an asset rich company in a business where there are entry barriers. I am sure a new player acquiring 22 tea estates of 10,000 hectors, the enterprise value if you see is just about Rs 500 crore. I believe it is available at very attractive valuations.

Q: What about Tata Global Beverages - Why do you like it? Is it a distant beneficiary of Starbucks at all?

A: I am not looking just at a benefit which Tata Tea is going to get from Starbucks, although that could be the trigger for rerating of the stock.

However, if you compare this company with the other FMCG players this company is available at attractive valuations.

This company was earlier called Tata Tea and so it is perceived more as a tea company and a commodity play. The company has got a number of brands, and Tata Tea is of course a super brand. It has also got Tetley which it acquired a few years back. Tetley has got operations in more than 70 countries.

The company also acquired Good Earth Tea in US and a few years back they acquired Eight O'Clock Coffee. This shows they have been on an acquisition spree. Himalayan Mineral Water is the latest one, and of course Tata Coffee is a subsidiary of Tata Tea.

The company had made a profitable exit in Glaceau which it sold to Coca Cola and made a profit of Rs 2,400 crore. That made the company's balance sheet very comfortable. They had a debt of close to Rs 4,500 crore in 2007, which today has come down to a level of about Rs 1,400 crore. The company is also holding cash of about Rs 700 crore in the balance sheet. So from a balance sheet point of view it is very comfortable.

We do not have an exact peer group to compare with Tata Global but in general if one looks at other FMCG players like Hindustan Unilever (HUL), ITC, Nestle and even the Indian FMCG companies like Dabur India, Emami, Asian Paints most of these companies are available at between 4 to 7 times their sales. The market cap-to-sales is 4 to 7 times, whereas in case of Tata Global market cap is just about Rs 9,000 crore, sales is about Rs 7,500 crore and it is available at a market cap-to-sales of roughly 1.2 times. So, I think a rerating is imminent in this stock.

However, I don’t know what is going to drive that rerating but maybe when we see more Starbucks stores a year or two years down the line, then maybe analysts start benchmarking it to something like Jubilant Foodworks.

Whether that happens or not, it is available at extremely reasonable valuation and it is a value pick in the large cap space.

Disclosure: Me or my family do not hold stocks in any of these two companies.