Tata Global's restructuring initiatives could unlock value for investors

At the consolidated level, the company posted sales de-growth of -2 percent, wherein underlying constant currency growth was at 1 percent driven by improved performance of its Indian operations. Branded business (Excluding EMEA region) posted sales growth of 5 percent. EMEA (Europe Middle East and Africa) region was impacted by currency volatility post Brexit. However, a major drag on sales was the weak performance of non-branded operations (-10 percent).

Earnings before exceptional item and tax improved 9 percent on account of nearly flattish growth in prices of raw materials, cost management initiatives (lower employee and finance cost) that were partially offset by higher promotional costs.

Positive volume growth in Indian operations

India operations (53 percent of Q1 2018 sales) witnessed sales growth of 9 percent YoY aided by new launches and improved tea volume, although muted volume growth for coffee was a drag. Operating margins benefitted from lower cost of goods sold partially offset by higher advertising cost.

Restructuring on the way

The management stated that company is closely reviewing business verticals and geographies that are not adding value to shareholders. Consequently, the company has made changes in its Russia and China businesses.

In case of Russian operations, Tata Global has decided to transfer ownership and operational responsibility to Skodnya Grand LLC.  Post this transaction, a 5-year renewable licence agreement for its Russian brands would be granted to Tea Trade LLC. While the transaction amount is yet to be disclosed, Tata Global Beverage would receive royalties for the use of its existing brands by the new owner.

What drove this transaction was the muted performance of its Russian entity, difficult macro-economic context and the currency devaluation. It is noteworthy that the Russian business generated sales of Rs 266 crore in the FY17 and a loss after tax of Rs 29 crore.

The company has also sold its stake in its Chinese joint venture Zhejiang Tata Tea Extraction Company Limited. Gains from the disposal on the standalone books would be to the tune of Rs 19 crore.

Investment in greenfield plant in Vietnam

In the post result conference call, management gave an update about a mega project in Vietnam for Tata coffee. The company has invested USD 6 million for the freeze dry instant coffee facility.

The management reiterated its focus on building core brands, premiumisation and the non-black tea segment.

Overall, we find the results positive, particularly on the cost management and restructuring front. Tata Global trades at 24 x (12m trailing earnings) which seems reasonable in the context of the ongoing business restructuring and the dynamic new leadership at the group level hinting at maximizing shareholders value.

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