Anubhav Sahu Moneycontrol Research
Tata Global Beverages Ltd (TGBL), a relative laggard in the FMCG sector, is likely to catch the attention of serious investors thanks to its various restructuring initiatives. This stock could benefit from Tata Sons’ initiative of unwinding cross-holdings in group companies, which would help TGBL raise funds. There is also a market buzz (news coverage from CNBC-TV18) that the company plans to sell the non-branded products business.
TGBL has a 4.39 percent stake in Tata Chemicals valued at Rs 720 crore, and minor stakes in Indian Hotels and Tata Investment Corporation. The amount realised can be used for expanding the company’s product portfolio.
The sale of non-branded businesses could involve plantation and extraction verticals. Going by company’s annual report, Amalgamated Plantations Private Limited and Kanan Devan Hills Plantation Company Private Limited are the key subsidiaries contributing Rs 829 crore in revenue (FY16). This makes non-branded business at least 12 percent of the sales. Incidentally, both these entities are loss-making as per FY16 annual report.
Reportedly, a part of the plan is to merge Tata Coffee (58 percent owned by TGBL) into TGBL. The plantation business that constitutes about 18 percent of total sales in Tata Coffee also falls under the so-called unbranded category. Hence, this business of Tata Coffee is likely to be streamlined.
So, close to 20 percent of consolidated sales has a high probability of being hived off/sold and capital raised that can be used in portfolio enhancement.
Gains for TGBL?
Based on a back-of-the-envelope calculation, using a market cap-to-sales ratio of 1.85 (peer average), and keeping a 20 percent discount for the unbranded segments, proceeds from the sale could amount to Rs 2,000 crore. Add to this the stake sale of Tata Chemicals to Tata Sons, and TGBL could make a neat pie of about Rs 2700 crore, which could be employed in reducing debt and restructuring its products.
The company has been working on reducing leverage with the current long term debt of around Rs 450 crore (FY17 vs Rs 504 crore in FY16). So a business restructuring would be helpful in further improving the balance sheet and return ratios.
Going by recent management calls, it is evident that management of TGBL is focusing on expanding the packaged water and green tea segments. In Q4 2017, company launched “flavoured” and “sparkling” variants of packaged water. Additionally, the company is positioning a mineral-fortified variant of its water in the mass market. On the green tea segment, TGBL wants to benefit from the trend of growing health consciousness among Indian consumers.
On the stock performance front, TGBL has been a laggard in the recent bull cycle, particularly from the start of FY14. The impending business restructuring can help in rerating the company, driven by improved margins (focus on value added products) and efficient capital allocation. We are of the view that recent news flow and the change in Tata Group’s top brass are events that investors should not lose sight of. The much-needed restructuring can go a long way in unlocking shareholder value.
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