Tata Global Beverages (TATTEA)

Transcription

1 Initiating Coverage Rating Matrix Rating : Buy Target : 182 Target Period : months Potential Upside : 25% YoY Growth (%) (YoY Growth) FY13 FY14E FY15E FY16E Net Sales EBITDA Net Profit EPS (Rs) Valuation Summary FY13 FY14E FY15E FY16E P/E (x) Target P/E Mkt Cap/Sales (x) EV/EBITDA (x) RoNW (%) RoCE (%) Stock Data Market Capitalization Crore Total Debt (FY13) Crore Cash and Investments (FY13) 693 Crore EV 98.3 Crore 52 week H/L 179 / 124 Equity capital 61.8 Crore Face value 1 MF Holding (%) 18.5 FII Holding (%) 17.9 Comparative return matrix (%) Return % 1M 3M 6M 12M Tata Global Beverage 4.5 (1.7) (.3) 12.6 HUL Nestle Price movement 6,4 6, 5,6 5,2 4,8 4,4 Aug-12 Analyst s name Nov-12 Price (R.H.S) Feb-13 Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com May-13 Nifty (L.H.S) Aug-13 Brewing it up the star ry way. August 13, 213 Tata Global Beverages (TATTEA) 146 Tata Global Beverages (TGBL) is the second largest branded tea player in the world and the market leader in the domestic tea market with its flagship brands, Tetley and Tata Tea, respectively. Apart from tea, TGBL s increasing presence in the coffee and water businesses through acquisition of dominant brands (Eight O Clock Coffee, Grand Coffee, Himalayan water) has transformed the tea company into a good-for-youbeverages company. Further, we believe TGBL s JV with Starbucks Inc US, to establish Starbucks stores across the country, and PepsiCo Ltd, to handle distribution of its water products, are key positives for revenue and earnings growth, going ahead. Accordingly, we expect revenues, earnings (adjusted PAT) to grow at a higher CAGR (FY13-16E) of 12%, 15.7%, respectively. We initiate coverage on TGBL with a BUY rating. Brand strength in tea to drive revenues across geographies TGBL derives ~7% of its revenues (FY13) from tea. Tea revenues have grown at a healthy CAGR of 9.2% in FY8-13. The growth has been aided by its leadership position in Canada (Tetley), India (22.2% value share of Tata Tea), UK (27% value share of Tetley), acquisition of leading brands across the globe, Good Earth in US (2.6% volume share), Joekels in South Africa (third largest player), Jemca in Czech Republic (market leader) and Vitax in Poland (16% share of fruit tea market). Further, capitalising on Tetley s brand strength TGBL has successfully ventured into Australia and the Middle East. Therefore, we believe with a strong portfolio of tea brands across geographies, TGBL would continue to grow its tea revenues at reasonable CAGR of 7.6% in FY13-16E. Strengthening coffee business to aid earnings The coffee business contributes 35.8% (6.1% in FY6) to PBIT and 26.2% (4.3% in FY6) to revenues (FY13). The increasing contribution of the business has aided PBIT margins as earnings from the coffee business are higher (15.2% in FY13) compared to tea (1.2% FY13). We expect coffee s contribution in revenues to increase to 29% by FY16E, consequently driving margins (PBIT) growth, going ahead. Earnings growth to gain traction, attractively valued We expect TGBL s earnings (adjusted PAT) to witness a higher CAGR of 15.7% in FY13-16E led by changing sales mix, premiumisation across the portfolio and Starbucks JV contributing positively to EBITDA from FY16E onwards. We believe the stock is trading at an attractive P/E of 18.8x and 16.5x FY15E and FY16E EPS of 8.9 and 1, respectively. We have valued the stock on an SOTP basis assigning it a target price of 182. Exhibit 1: Financial Performance crore (Year-end March) FY12 FY13 FY14E FY15E FY16E Total Operating Income 6,64. 7,351. 8, ,42.7 1,292. EBITDA ,62.4 1,187.4 PAT (Adjusted) EPS Adjusted ( ) EV/EBITDA (x) Debt/Equity (x) RoNW (%) RoCE (%)

2 Shareholding pattern (Q1FY14) Shareholder Holding (%) Promoters 35.2 Institutional Investors 36.4 Public 28.4 FII & DII holding trend (%) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 FII DII Company Background Tata Global Beverages (TGBL), formerly known as Tata Tea, was established in The company is the market leader in the domestic branded tea market (FY13) and a dominating player in the branded tea and coffee in the markets of UK, US and Canada. TGBL entered the branded tea business in 1991 and has grown over the years through acquisitions and joint ventures. Till date, the largest acquisition for the company has been the European tea brand Tetley in 2 for $45 million. The other major acquisitions by TGBL include tea company Good Earth in the US (25), Eight O Clock (EOC) coffee brand in the US (26) and coffee brand Grand in Russia (29). Apart from tea and coffee, the company has expanded its beverage offerings to the mineral water business by investing in Mount Everest Mineral Water Company (27) that owns the Himalayan brand. With the diversification in the product basket of Tata Tea, the company changed its name to Tata Global Beverages in 21 with the aim of establishing itself as a global beverage company from a branded tea marketing company. In November, 21, TGBL entered into a 5:5 joint venture with PepsiCo Ltd to develop, manufacture, sell and distribute hydration beverages under the JV, NourishCo Beverages. Further, in 212, TGBL entered into a 5:5 JV with Starbucks Coffee International Inc, US to set up Starbucks coffee stores in India. With successful acquisitions over the years, net revenues and earnings (adjusted PAT) have grown at a CAGR (FY9-13) of 1.5% to crore and 9.3% to 4.9 crore, respectively. Gross revenues ( crore in FY13) consist of ~73% from tea, ~26% from coffee, ~1% from water and other businesses. Geographically gross revenues (FY13) are comprised of 31.8% from India, 21.3% from the UK, 27.4% from the US and Canada and 19.5% from other countries (Poland, South Africa, Australia, Czech Republic). With the company s leading position across geographies and a strong portfolio of brands, we expect revenues and earnings to post a CAGR of 12% and 15.7%, respectively, in FY13-16E. Exhibit 2: TGBL's timeline Tata enters into alliance with James Finlay to form Tata Finlay Tata Tea enters brand business Tata Tea acquires the Tetley Group Ltd Group acquires EOC, US & energy water brand Glaceau ; Tetley group acquires Jemca in Czech Republic & 33% in Joekels Tea, South Africa Integration of beverages brands announced; Group acquires Grand Coffee, Russia Tata Global Beverages corporate brand announced JV with Starbucks; Eight O' Clock signs agreement with Green Mountain Coffee Roasters Inc Tata Tea is born, James Finlay is bought out JV with Allied Lysons Plc, Tata Tetley is established Tetley Group acquires Good Earth, US Investments in Mount Everest Mineral Water, which owns Himalayan Water brand; Tetley group acquires Polish tea brand Vitax; Sells Glaceau to Coca Cola Acquires stake in The Rising Beverage Co. LLC, which owns Activate Brand; JV with PepsiCo named NourishCo; Increases stake in Joekels Tea Page 2

3 Exhibit 3: TGBL structure Subsidiaries Name Brands Segment Geography Tata Global Beverages (Standalone) - 1% stake Tata Tea (Premium, Gold. Gold Darjelling) Tea India Tata Tea Agni Tea Tata Tea Chakra Tea Kanan Devan Tea Tata Global Beverages Group Ltd % stake Tetley Tea Across the world Joekels Tea South Africa Good Earth Tea USA Jemca Tea Czech Republic Vitax Tea Poland Grand Tea & Coffee Russia Tata Coffee Ltd (57.48% stake) Tata Coffee Plantation India & Exports Eight O' Clock Coffee Coffee USA Activate Functional Water USA Mount Everest Mineral Water Ltd. (5.1% stake) Himalaya Water India Joint Ventures Name Brands Segment Country NourishCo Beverages (5:5) with PepsiCo Tata Water Plus Functional Water India Tata Gluco Plus Functional Water India Tata Starbucks Ltd (5:5) with Starbucks Coffee Inc US Starbucks (Coffee Retail) Coffee India Tata Global Beverages (Holding Company) Exhibit 4: Gross revenue ( crore in FY13) break-up by segment Others 1% Coffee 26% Exhibit 5: Total operating revenue ( 7351 crore in FY13) by brands Eight O' Clock Coffee 17% Others 13% Tetley 38% Tea 73% India Tea Brands 32% Page 3

4 Investment Rationale Revenue mix: Increasing contribution of coffee to aid revenue, PBIT growth FY13 revenues (gross revenues of crore) are comprised of 72.8% from tea, 26.2% from coffee and 1% from other businesses (water and joint ventures). Going ahead, by FY16E, we expect the contribution of tea to decline to 64.8%, coffee to increase to 29% and others to increase to 6.2%. The higher contribution of coffee to revenues would be driven by 15.7% growth (CAGR in FY13-16E) in coffee revenues compared to 7.6% growth (CAGR in FY13-16E) in tea revenues. The significant increase in contribution of others to 6.2% by FY16E from 1% (FY13) would be aided by revenues from joint ventures (largely Starbucks). Exhibit 6: Revenue break-up: Contribution of coffee slated to increase from ~26% in FY13 to ~29% by FY16E ( crore) 1% 8% % 4% % % FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Tea Coffee Others The coffee segment s increase in contribution to revenues from 5.2% in FY5 to 26.2% in FY13 was aided largely by the acquisition of the two large brands, Eight O Clock Coffee in the US (26) and Grand in Russia (29) The largest share in profitability (FY13 PBIT of 87.8 crore) is accounted by the tea segment at 67.4% with the share of coffee being 35.8%. The others segments continue to remain under losses as they are in the investment phase. With margins from the coffee business being higher at ~15% (FY13) compared to tea at ~1% (FY13) we believe the increasing contribution of coffee to revenues would drive margins at a higher rate, going ahead. Further, with the water business (Himalayan brand) turning profitable in FY13 and JV businesses to achieve breakeven by FY16E, we expect earnings (PBIT) to grow at a higher rate of 14.4% CAGR (FY13-16E) against 6.6% CAGR (FY8-13). Exhibit 7: Segment wise contribution to PBIT ( crore) Exhibit 8: PBIT margins from tea & coffee (%) 1% 8% 6% 4% 2% % -2% FY8 FY9 FY1 FY11 FY12 FY13 FY8 FY9 FY1 FY11 FY12 FY13 Tea Coffee Others Tea Coffee Page 4

5 Tea: Growth to be supported by premiumisation and innovation Revenues from tea stood at crore (FY13) recording a CAGR of 9.2% in FY8-13. Going ahead, we expect tea revenues to grow at 7.6% CAGR in FY13-16E driven by premiumisation in the domestic tea market (12.6% CAGR FY13-16E), higher innovations driving growth in the UK (4.1% CAGR in FY13-16E), capture of the evolving tea market of the US (5.4% CAGR FY13-16E) and consolidation of market share in Poland, South Africa, Czech Republic and Australia. Hence, we expect tea revenues across geographies to be driven largely by prices (premiumisation, innovations and change in sales mix) with volume growth remaining modest. Exhibit 9: Tea revenues ( crore) & growth trend FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Tea revenues Exhibit 1: Tea portfolio Brand Acquired/Owned Year Country Value Remarks Good Earth Acquired October, 25 US $32 million 2.6% volume market share; strong presence in West Coast Joekels Tea Acquired October, 26 South Africa NA Third largest player in South Africa; Its main brands are: Laager, Tea Time Range, Tea4Kidz, San Aqua & Rooibos Ice Tea Jemca Acquired May, 26 Czech Republic NA Market leader in Czech Republic Tata Tea Owned 1988 India - Market leader in India (volume and value); completed 25 years in FY13; Main brands include: Tata Tea Premium, Agni, Chakra, Gemini, Kanan Devan Tetley Acquired Feburary, 2 UK, Canada, Australia, US, etc $45 million Second largest tea brand globally; market leader in Canada; brand leader in decaffinated tea in UK Vitax Acquired 27 Poland NA 16% share of the fruit tea market of Poland Among the basket of TGBL s tea brands, we believe ~54% of tea revenues and ~38% of TGBL s consolidated revenues are constituted by Tetley (Tetley revenues in FY13 estimated at ~ 28 crore). We believe with the global presence of Tetley, it would continue to be the dominant contributor to revenues. Page 5

6 Exhibit 11: Share in revenues by brands The largest brand in the company s consolidated revenues (FY13) has been Tetley contributing ~38% followed by the Indian tea brands (Tata Tea) contributing ~32%. This, we believe, is supported by the global presence of Tetley 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 24.% 22.5% 26.% 29.% 29.% 3.% 2.6% 27.8% 3.% 29.% 3.% 32.% 51.6% 45.9% 4.% 39.% 4.% 38.% FY8 FY9 FY1 FY11 FY12 FY13 Tetley Indian Tea Brands Others *Others in FY12 & FY13 contain contribution of Jemca, Vitax, Coffee and water brands Others (FY8-11) depicts contribution of coffee and water brands According to geographic break-up of tea revenues (FY13), we estimate that currently India is the highest contributor with ~44% ( crore), followed by the UK at ~27% (~ 14 crore), US & Canada at ~15% (~ 8 crore) and ~14% (~ 7 crore) from Australia, Czech Republic, Poland, Russia and South Africa. With highest growth in tea revenues expected from India we expect India s dominance in TGBL s tea revenues to increase to 49.3% by FY16E. We expect the share of the UK to decline to 24% by FY16E due to the deceleration in the black tea market in the UK and specialty tea driving UK s tea revenue growth. The share of the US and Canada would also fall to 14% by FY16E as we believe the shift of coffee drinking consumers to tea would remain slower compared to the higher rate of change in sales mix in India. TGBL s Volume market Share Achieved mkt leadership and has maintained it since then FY6 FY7 Q1FY8 FY1 Q2FY11 Q1FY12 Q2FY12 Q3FY12 FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 TGBL is the market leader of the Indian branded tea market (~45 million kg by volume) with a share of 2.5% by volume and 22.2% by value (FY13). India: Market leadership, premiumisation to drive growth! Tea revenues in India have grown at a CAGR of 15% in FY8-13 posting sales of crore in FY13. Going ahead, we believe that with TGBL s market leadership in the domestic branded tea market, strong marketing strategies (Jaago Re! campaigns) in the country and increasing sales of green and specialty teas (Tetley offerings), tea revenues would grow at a healthy CAGR of 12.6% (FY13-16E) to 3246 crore by FY16E. Our assumption is based on the premise that TGBL would maintain its current volume leadership in the domestic tea market until FY16E. Therefore, any incremental gains would further aid the company s revenues. We estimate that currently (FY13), black tea constitutes ~94% ( crore) of TGBL s Indian tea revenues, green tea constitutes ~5% ( 12.3 crore) and specialty tea constitutes ~1% ( 39.8 crore). With the growing demand for green and specialty tea in the country, we expect black tea s contribution in the country s tea revenues to fall to ~91% ( crore clocking ~12% CAGR in FY13-16E), green tea s contribution to increase to ~6% ( crore growing at ~24% CAGR in FY13-16E) and specialty tea s contribution to increase to ~3% ( 81.2 crore at ~27% CAGR in FY13-16E). Further, the higher contribution of specialty teas would also drive higher realisation/kg and increase the contribution of tea bag sales in the sales mix, supporting realisations. Page 6

7 Exhibit 12: Growth in domestic tea revenues driven by price increases, marketing campaigns & TGBL s market leadership position ( crore) Launched Jaago Re! campaign Strong growth in Premium, Gold & Agni post Jaago Re! 19.9% % Price increases taken in FY9 support growth % Significant price increases taken in FY9 & FY1 impact growth 12.% % Second Jaago Re! campaign 14.5% % % 3% 25% 2% 15% 1% 5 7.6% 5% FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Sales ( core) % Increase % Exhibit 13: Domestic tea brands portfolio TGBL s India portfolio has brands across the value pyramid The share of domestic tea brands in consolidated revenues has increased from 2.6% in FY8 to 32% in FY13 TGBL has recently launched the Tetley brands in India largely in the tea bags format. The company has guided that it is witnessing ~5% YoY growth in Tetley s offerings Brand Segment Price ( /kg) Remarks Tata Tea Premium Premium 336 Flaghip brand; Volume leader in India Tata Tea Gold Premium 396 Fastest growing brand in the portfolio Tata Tea Gold Darjelling* Premium 9 Premium tea launched as tea bags Chakra Gold Premium 42 Leading brand in Andhra Pradesh Tata Tea Life Popular 348 Tata Tea Agni Economy 25 Nearest competitor of unbranded players Gemini Economy NA Market Leader in Andhra Pradesh Kanan Devan Economy 213 Leading brand in Kerala The growth expected in the tea industry in India at ~15% per annum would have a higher contribution of prices (led largely by premiumisation) than volumes. We believe the higher growth of 2.9% CAGR expected in tea bags consumption would significantly aid margins of tea companies Tetley Variants Black Green Flavoured *It is the price of tea bags, 25 nos (~5 grams) Flavors Assam Tea Plain, Long Leaf, Ginger Mint & Lemon, Lemon & Honey Masala, Lemon, Ginger, Elaichi, Tulsi & Lemon, Earl Grey Comparison of revenues from loose tea vs. tea bags (Brand: Tata Tea Premium) Price Grams Loose Tea Tea Bags (2 gms/pag) 95 2 Hence, revenues from sale of 1 gm of tea bags would be 475 crore, ~42% higher from the sale of same amount of loose tea. Hence, an increase in the sales of tea bags would aid margins significantly, going ahead Indian tea market: A snapshot India is currently a tea drinking nation (black tea) with ~87 million kg of annual consumption (CY12, Source: Tea Board of India). The market is equally dominated by branded (~5% of the consumption demand) as well as unbranded players. The penetration of the commodity is very high (~95%). Hence, demand growth for branded players is largely led by capturing the share of unbranded players and growth in varieties (specialty tea, green tea) other than black tea. Exhibit 14: Facts about domestic tea industry Tea Industry Size ( crore) Tea Industry Size ( crore)-215e 33 Growth (p.a.) 15% Tea Bag Consumption In India in 211 (tonnes/year) 7 Tea Bag Consumption In India in 215E (tonnes/year) 15 Growth in the flavored tea market (p.a.) 25% Source: Assocham, ICICIdirect.com Research Page 7

8 Tea drinkers comprise ~88% of the population above 65 years of age and 73% among year olds in the UK United Kingdom: Innovation key to growth Revenues from the UK are dominated by its largest tea brand Tetley. Tetley is the market leader having ~27% share by value (CY12). We estimate that tea revenues from the UK in FY13 stood at ~ 14 crore (~9% of total UK revenues in FY13) growing at 5.6% in FY8-13E. We expect tea revenues from the UK to grow at a CAGR of 4.1% in FY13-16E to crore (FY16E). We believe growth in UK tea revenues will be driven by a change in the product mix and increasing contribution of premium offerings (Kenyan Tea, Red Bush, Specialty Tea and Herbal Infusions). Further, the constant innovation and new offerings by TGBL in the UK through increased marketing initiatives would be key in keeping growth intact in UK markets in spite of a slowing black tea market. Hence, we estimate sales growth in UK s tea revenues will be supported by highest growth in green tea (~25% CAGR FY13-16E) and a moderate growth in fruit & herbal tea and instant tea at ~5% CAGR in FY13-16E. The growth in black tea would remain subdued at ~3% CAGR in FY13-16E. Exhibit 15: Estimated UK sales (Tetley) ( crore) TGBL entered the UK market with the acquisition of the world s second largest and UK s largest tea brand Tetley in February, 2. TGBL had acquired the brand for $42 million. Due to the global presence of the brand, the acquisition had actually provided TGBL an entry into 7 countries across the globe 15 1 Slowdown in black tea sales, Premium & Specialty tea to support sales growth CAGR 5.6% CAGR 4.1% FY8E FY9E FY1E FY11E FY12E FY13E FY14E FY15E FY16E We have assumed that ~8% of TGBL s UK revenues are generated by Tetley Sales Exhibit 16: Tetley's offerings in UK market The number of tea variants along with the equally higher number of flavours shows that TGBL has identified the opportunity in the specialty tea segment in UK. We believe the TGBL s continued innovation in the fruit & herbal tea segment would keep the company s leadership position intact in the UK market, going ahead Tea Variant Flavors Remarks Black Original & Decaf Extra Strong Easy Squeeze Black tea is sourced from Africa and India (Assam) and blended together; Black tea consumption is witnessing slowdown in consumption Green Pure & Decag Lemon Green Honey Green Blueberry Green Green tea acquired from Asia and Africa is blended together. Green tea market in UK is growing faster than the specialty tea and black tea. Higher contribution of green tea is also aiding the margin improvement. Green & Black Blend of both Unique blend of black tea from Africa and India (Assam) with green tea from Asia. Kenyan Tea Estate Selection Launched in Q4FY13 it is a premium Kenyan tea Redbush Pure Vanilla Redbush from South Africa is available originally as well as with vanilla Speciality Earl Grey It is present in original and with vanilla flavour Herbal Infusions Peppermint Camomile Herbal infusions are tea infused with herbal benefits Page 8

9 UK tea market: An overview Similar to India, the UK is largely a tea consuming nation having high penetration (~87% as in 211) of the beverage. However, unlike India the UK market is largely branded with unbranded and private players having only 5% share. Majority of the tea consumed in the UK is black tea (~8% of total tea consumed in 211). Specialty tea, green tea and fruit & herbal tea form a smaller share in the overall tea consumption but are growing at a higher rate than the black tea market. Therefore, the key to grow and consolidate market share in the UK is through innovation and new launches. TGBL has successfully capitalised on this opportunity by launching a number of variants within existing varieties year after year. Further, TGBL has also launched products in the super premium categories to aid its revenue and profitability growth in the UK. US & Canada: Strength of TGBL in Canada yet to spread to US Tea revenues in the US are accounted by Tetley and Good Earth Tea (acquired in 27) and in Canada by Tetley. We estimate that out of the total revenues of crore (FY13) from the US & Canada, ~45% is constituted by tea sales ( crore). Tea revenues from the US & Canada have grown at a CAGR of 3.5% in FY8-13E, which we expect to increase at a higher rate of 5.4% CAGR in FY13-16E. The higher rate of increase from tea sales is expected on the back of new premium launches (Pure Ceylon tea, premium variant, launched in Canada in FY13) and higher demand for specialty tea. Exhibit 17: Tea sales in CAA ( crore) Significant increase led by launch of liquid infusions & additional flavours in Canada Premium launches in Canada and Australia FY8E FY9E FY1E FY11E FY12E FY13E FY14E FY15E FY16E Good Earth Sales Tetley Sales US The US is largely a coffee consuming nation (coffee consumption in the US is 9.39 lb/person compared to tea consumption of.9 lb/person in 211). However, the consumption rate of coffee is declining (by volumes) with tea sales catching up at a fast rate. According to the Tea Association of America, the tea market in the US has grown from $1.8 billion in 1991 to $8.2 billion in 211 (CAGR of ~7.9%). It is expected to grow at a higher rate from here on with the sharpest growth expected in green tea. Therefore, specialty tea driving tea demand in the US, TGBL s presence in the segment through Good Earth (a speciality tea brand largely present in the West Coast) and increasing foray through Tetley would drive revenues to grow at 4.7% CAGR in FY13-16E against 2.8% CAGR in FY8-13E. Page 9

10 Exhibit 18: TGBL's offerings in US Drivers of the US tea market are refrigerated tea and ready to drink tea. Total ~85% of the tea consumed in the US is iced tea Tetley Variants Classic Blend British Blend Pure Green Iced Tea Good Earth Variants Original Tea Super Fruit White Tea Green Tea Chai Teas Black Tea White Tea Medicinal Teas Flavors Original & Decaf Premium Black & Decaf Original& Decaf Original & Decaf Flavors Sweet & Spicy Mangosteen & Mango Lemon Grass Plain & Decaf, Matcha, Sencha & Orange, Jasmine, Gingseng Citrus, Mango Peach & Pineapple Plain, Decaf, Vanilla, Cocoa & Seven Spice Sweetly twisted, Cocoa Tango, Tropical Peach, English Breakfast, Earl Grey & Apricot Ginger Vanilla, Vanilla decaf, Citrus For Cold, Sleep & Slimming Canada: Tetley is the volume leader in Canada with ~39% share by volume and ~31% share by value (Euromonitor). The tea market in Canada was estimated to be $415 million in 211 and is estimated to increase to $541 million by 217 (CAGR 4.5%). The Canadian market is largely dominated by black tea consumption by volume (76.6% volume market share in 212) and specialty tea consumption by value (~6% of value market share in FY12). With the black tea market attaining saturation in Canada, specialty tea is the growth driver fuelled by more consumption of specialty black (up 27% YoY in 212) and fruit & herbal (up 11% YoY in 212) teas. Hence, led by Tetley s market leadership in Canada, innovation in the black tea category (orange pekoe along with flavours introduced in the portfolio, offering alternatives to black tea consumers) and strengthening green, fruit and herbal tea portfolio, (Tetley Green Tea Plus and Herbal Cocktail-Inspired Teas launched in 212), we expect tea revenues from Canada to grow at 5.5% CAGR in FY13-16E against 3.6% CAGR in FY8-13E. The higher contribution of specialty teas would drive the higher revenue growth while we expect volume growth to remain modest. Further, TGBL s launch of its domestic tea brand Tata Tea in Canada in H1CY13 to meet the demands of the large Indian population residing there would further aid black tea revenues from Canada. Exhibit 19: TGBL's offerings in Canada Tea Variant Flavors Black/Orange Pekoe Original, Decaf, Bold & Ceylon Green Pure, Decaf, Earl Grey,Honey Lemon/Mint/Pomegranate, Jasmine, Lyshee Pear, Passion Fruit Acai, Blueberry Green Green tea plus Aware, Glow, Figure Herbal Cammomile Mint - Calm, Blueberry Ginseng - Clarity,lemon balm & honey - Cleanse,Cammomile Lemon - Dream, Mint Lime - Mojito, Pure Peppermint Flavoured Black Chai, Dark Chocolate, Vanilla, Earl Grey, Camommile Rooibos Plain, Vanilla, Red Berry, Spice Plum Page 1

11 Other geographies: Strengthening regional presence TGBL has ventured into geographies across the world by acquiring tea brands in the respective geography and introducing Tetley brands and flavours in these tea drinking nations. Exhibit 2: TGBL s brands in other geographies Geography Brand Remarks Poland Vitax Vitax has ~16% share of the fruit & herbal tea market in Poland South Africa Joekels Offers products under the name 'Laager", 2nd largest brand in South Africa Russia Grand Tea Offers flavoured, green and iced tea variants. Czech Republic Jemca Market Leader with 2.6% volume share, Available in Black, Green and Fruit & Herbal teas Tea revenues from these geographies are estimated to be crore (FY13) accounting for ~14% of tea revenues. Going ahead, we expect the contribution to tea revenues from these brands to remain at ~13% until FY16E, supported by a CAGR of 5.7% (FY13-16E) clocking revenues of ~ 84 crore by FY16E. Therefore, tea revenue growth of 7.6% CAGR in FY13-16E would be driven by higher growth in specialty tea across all geographies driving revenues primarily through prices. Riding on Tetley s brand strength and ability to blend new flavours across all categories of tea (black, green and fruit & herbal tea) we believe innovation and premium offerings would further support the growth in tea revenues. Exhibit 21: Snapshot of tea revenues across geographies ( crore) FY13E FY14E FY15E FY16E CAGR FY13-16E Tea revenues % % Increase 11.% 6.6% 8.5% 7.7% India % Contribution % 43.% 46.1% 47.5% 49.3% UK % Contribution % 26.5% 25.3% 24.6% 24.% USA & Canada % Contribution % 14.9% 15.% 14.7% 14.% Others % Contribution % 13.5% 13.5% 13.2% 12.8% Page 11

12 Coffee: Increasing share in portfolio to aid earnings TGBL s coffee business revenues include plantation revenues and sale of branded coffee. Coffee revenues have grown at 16.3% CAGR in FY8-13 to crore (FY13). Consequently, the segment s contribution has increased from 2.5% ( crore) of consolidated sales in FY8 to 26.2% ( crore) in FY13. Going ahead, we expect the segment to grow at 15.7% CAGR (FY13-16E) to crore (FY16E) and its share in overall revenues to increase to 29%. We expect the higher growth rate to be contributed by the premiumisation in the coffee markets in the US, consolidating market share in Russia and higher realisations from supplying to Starbucks stores in India (currently) and international markets, going ahead. TGBL is scouting for international acquisitions for its coffee business and planning to increase its Indian capacity further. We believe these would account for incremental contribution to revenues from the segment, going ahead. Exhibit 22: Coffee revenues ( crore) trend 2 16 Acquired Grand in Russia Grand relaunched Tie up witn K-cups Acquired EOC in USA FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 Exhibit 23: Coffee portfolio Brand Acquired/Owned Year Country Value Remarks Grand Acquired Sept, 29 Russia NA Market Leader in Russia with Grand Prado, Grand Gold & Grand Cocoa Eight O' Clock Acquired July, 26 USA $22 million Third largest coffee brand by volume in the US Mr Bean Owned NA India, Russia and Middle East NA The brand is largely exported to Middle East countries Coorg Pure Owned NA India NA 1% pure filter coffee Coorg Filter Coffee Owned NA India (South) NA Chain of 35 outlets offering consumers in Tamil Nadu & other states fresh, roast and ground coffee Mysore Gold Owned NA India, Russia & Ukraine NA It is a popular brand sold largely in South India Tata Café Owned NA India NA Pure instant coffee Tata Kaapi Owned NA India NA India's No. 3 Coffee Chicory Brand Page 12

13 Exhibit 24: Coffee revenues by brands ( crore) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FY8 FY9 FY1 FY11 FY12 FY13 Tata Coffee Std EOC Others Tata Coffee Tata Coffee (TCL) is a 58% subsidiary of Tata Global Beverages. TCL is the largest integrated coffee player in India and the third largest exporter of instant coffee. The company produces ~1 MT of both Arabica as well as Robusta coffee through its 19 coffee estates (~8 hectares) in South India. TCL s revenues by FY13 ( 428 crore) have witnessed a CAGR of 14.4% in FY8-13. We expect this to increase to 77.8 crore by FY16E with growth at 21.7% CAGR in FY13-16E. The higher revenues would be supported by higher curing operations as well as supply to Starbucks stores across India (currently) and Starbucks stores across Asia (in future). Apart from coffee, TCL is also engaged in the plantation of tea and other agricultural products (cardamom and pepper). Revenues from these stood at crore (25.5% of FY13 revenues). Going ahead, we expect revenues from these products to grow at a modest CAGR of 7.4% (FY13-16E) against 11.7% (FY8-13) as the company s focus would remain on its dominant business, coffee. Exhibit 25: TCL s revenues from coffee (LHS) and standalone revenues (LHS) in crore ~6% increase in instant coffee volumes FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E -2-1 Dip in sales volumes Coffee Revenues-Std TCL Standalone % Increase in coffee revenues Page 13

14 Following the holding company s JV with Starbucks Inc, US, TCL has set up a special roasting facility in Kushalnagar (~2 MT operational since FY13) to cater exclusively to the requirements of the Tata Starbucks stores setup across the country and South East Asia. The roastery would be utilising the beans produced in TCL s estates. We believe this pact would provide incremental sales volume as well as better realisation, going ahead. TCL is also expanding its Theni facility in Tamil Nadu for instant coffee to meet the higher export demand. Further, TCL expanded its portfolio outside India and entered the US market through the acquisition of Eight O Clock Coffee in July, 26. Eight O Clock Coffee Eight O Clock Coffee (EOC) was acquired by TGBL, though its subsidiary TCL in July, 26 extending the company s coffee portfolio to the international branded coffee market. EOC is the fourth largest coffee brand by volume in the US with sales of crore (FY13). Revenues have grown at a CAGR of 1.2% in FY8-13 led largely by prices. Volume growth has remained grim on the back of slowing coffee consumption in the US. Going ahead, we expect revenue growth in EOC to moderate to 4.2% CAGR in FY13-16E as we believe further increase in prices would be tough and could impact volume growth. In FY11, sales were impacted significantly by a substantial increase in prices by the company, which impacted volume growth. The price increase was on the back of an increase in Arabica coffee prices (~36% YoY), the key raw material. As coffee prices started declining from FY12 onwards, sales growth has revived for EOC. Exhibit 26: EOC sales ( crore) Coffee prices (Brazilian Real/6 kg) Mar-8 Mar-9 Mar-1 Mar-11 Mar Sales growth was led by prices and positive impact of forex translation FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Source: Bloomberg EOC % Increase 1 USD = Brazilian Real; 1 USD = 61.1 INR Page 14

15 Exhibit 27: EOC's product portfolio in US Coffee type Formats Flavours Medium to Dark Roast Original, Colombian, French Roast, Italian Dark Roast Hazel Nut, French Vanilla & Mocha Reduced Caffeine Decaf Original, 5% decaf EOC Metabolism Boost Metabolism Boost Coffee pods are pre-packaged ground coffee beans in their own filter. K-Cup portion packs are used with Keurig or other single cup brewing systems to brew a cup of coffee, tea, or hot chocolate. Each K-Cup is a plastic container with a coffee filter inside. Ground coffee beans are packed in the K-Cup and sealed air-tight with a combination plastic and foil lid. When the K-Cup is placed in a Keurig brewer, the brewer punctures the foil lid and the bottom of the K-Cup and forces hot water under pressure through the K-Cup and into a mug. (Source: Wikipedia) With the US coffee market moving towards the single serve PODS consumption (~18% of US coffee market is constituted by PODS), EOC tied up with Keurig in FY12 and launched EOC K-cups version. In spite of K-cups contributing positively to the brand s growth, EOC has been witnessing an overall stress in volume growth (adjusting with our without PODS sales) keeping the revenue growth lower at 5.7% in FY13. Going ahead, though the company plans to invest significantly behind its brands and launch more variants in the coffee segment, we estimate moderate sales growth of 4.2% CAGR FY13-16E, as we believe EOC does not have pricing power in the US coffee market. Further, with any uptick in coffee prices, passing on the higher input cost through prices impacts EOC s volume growth. Therefore, driven by the high vulnerability to coffee prices we remain wary of EOC s growth. Exhibit 28: Facts about US coffee consumption Highest specialty coffee drinkers are the years old citizens Total US coffee sales (212) $59 billion Sales by food services 87% Retail Sales 13% Speciality coffee sales (% of retail sales) 3% Growth of Speciality coffee sales (YoY) 2% Per Capita Coffee consumption (211) in kg 6.22 Source: Euromonitor ; ICICIdirect.com Research Exhibit 29: Slowing coffee consumption volumes in US (in bags) With the US coffee market being saturated and traditional coffee consumption taking a back seat, similar to India s tea market, we believe the growth would largely come from higher gourmet coffee consumption Source: ICICIdirect.com Research The US is the largest coffee consuming nation with ~83% of the adults drinking coffee (CY12). Though the overall consumption in the US remains high, growth in consumption is being driven by gourmet coffee beverages. Traditional coffee consumption has declined from 56% (CY11) to 49% (CY12). Hence, with EOC s portfolio largely consisting of premium coffee, we believe value growth would remain at ~4% CAGR in FY13-16E. However, a revival in volume growth could only come through market share gains, which would involve huge expenditure behind the brands keeping the company s margins from EOC under stress. Page 15

16 Grand Grand is the fourth largest player in the Russian instant coffee market. It was acquired by TGBL in September, 28. Grand coffee was re-launched in 21 by introducing large amount of flavours and varieties. Russia is relatively a smaller market for TGBL (I-direct estimate: ~ 23 crore coffee revenues in FY13) currently. The annual per capita coffee consumption in Russia is very low at.7 kg compared to ~6 kg in Germany and ~7 kg in the US. However, coffee consumption in Russia is gaining strength albeit slowly. We believe that in order to establish itself in the under penetrated Russian market, TGBL needs to improve its presence in Russia and achieve greater market share to accelerate its revenues. Hence, we believe TGBL s coffee revenue growth of 15.7% CAGR in FY13-16E would be driven mostly by higher sales volume and realisation from India s plantation revenues (21.6% CAGR from FY13-16E). The growth in the US coffee market, however, would remain modest at 4.2% CAGR in FY13-16E and would be largely driven by increasing specialty coffee sales growth in traditional coffee remaining strained. Exhibit 3: TGBL's coffee revenues ( crore) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FY11 FY12 FY13 FY14E FY15E FY16E Coffee Revenues-Std EOC Others Page 16

17 Water: Building strength in under penetrated category Water accounts for less than 1% of TGBL s revenues, currently. Revenues from water are accounted by Himalayan, Tata Water Plus, Tata Gluco Plus and Activate. The sales and marketing of TGBL s water brands are carried out through NourishCo Beverages (5:5 joint venture between PepsiCo and TGBL), which helps the company to capitalise on PepsiCo s distribution channel. Mineral water segment in India ( crore) FY8 FY9 FY1 FY11 FY12 Source: MEMW, Annual Report CAGR 19% Exhibit 31: Water portfolio Brand Type of Water Geography Remarks Himalaya Mineral Water India TGBL has acquired the brand by acquiring 5.7% stake in Mount Everest Mineral Water Limited Tata Water Plus Fortified Water India Brand was introduced in FY13 and is marketed in Tamil Nadu and Andhra Pradesh Tata Gluco Plus Glucose Water India Launched in FY13. Available in 3 flavours - Lemon, Orange & Mango Activate Vitamin Water USA TGBL has acquired this brand by investing in a small start up company in USA in FY13. Revenues from Mount Everest Mineral Water (MEMW), (Himalayan brand) stood at 22 crore in FY13. TGBL also supplies Himalayan to Starbucks coffee outlets in India. We believe that though the branded mineral water segment in India (~ 12 crore in FY12 with penetration of ~1%, Source: MEMW Annual Report) remains small currently, the segment has huge potential led by the growing out of home dining culture. Further, TGBL s JV with Starbucks provides further volume growth opportunity as the JV provides for supply of Himalayan mineral water to Starbucks stores globally. Hence, we estimate the sales CAGR (FY13-16E) of 18.2% for MEMW to 36.4 crore by FY16E. Exhibit 32: MEMW revenues ( crore) trend 4 We expect the sales growth to accelerate as supplies to Starbucks stores increase FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E 22. CAGR 18.2% Apart from the mineral water segment, TGBL has entered the fortified water segment in FY13 through the launch of Tata Water Plus and Tata Gluco Plus. The company has launched these only in South Indian markets (Tamil Nadu and Andhra Pradesh) currently and is yet to launch it nationally. We believe the entry of TGBL into the functional water segment would yield results at a very slow pace as the segment is a niche concept and very small in India currently. Page 17

18 Joint ventures to yield long term benefits Starbucks JV: Ma Star stroke by TGBL! TGBL entered into a 5:5 joint venture with Starbucks Coffee International Inc US, in FY12, to set up, own and operate Starbucks café s across the country. The café s will be branded as Starbucks Coffee A Tata Alliance. The JV has also provided that all Starbucks stores in India would source the coffee from Tata Coffee Ltd (TCL, subsidiary of TGBL). TCL would also be supplying coffee to Starbucks stores in South East Asia, going ahead. Starbucks currently (Q1FY14) owns and operates 18 stores, nine in Mumbai and nine in Delhi. The stores are located in prime locations of the country and are spread over an area of 15-4 sq ft. With the company expanding its presence at a rapid pace, we expect TGBL to open ~42 stores by FY14E and ~92 stores by FY16E. Led by the brand strength of Starbucks across the globe and evolving café culture in the country, we expect the JV to achieve breakeven (EBITDA level) by FY16E. Exhibit 33: Starbucks store in Mumbai Exhibit 34: Starbucks store in Delhi NourishCo JV: Establishing itself in segments of tomorrow TGBL has formed a 5:5 JV with PepsiCo Inc US, to handle the sales, marketing and distribution of Himalayan Natural mineral water and other water products capitalising on PepsiCo s distribution network. We believe that though the fortified water segment is a niche and small category in India currently, it is one of the highest growing beverage categories in the US and other international markets. Hence, with TGBL s early entry into the segment and partnering with giants like PepsiCo to benefit from their distribution network, the company would reap long term benefits. NourishCo s portfolio comprises Himalayan, Tata Water Plus (pet/pouch packets) and Tata Gluco Plus as in FY13. Page 18

19 Significant innovation to drive slowing growth With black tea being a highly penetrated beverage in India (~95%) and UK (~8%) and traditional coffee witnessing deceleration in growth in the US, we believe it is innovation (more variants and flavours) within these segments that would be the key revenue drivers for TGBL. Apart from aiding revenue growth, these innovations would provide support to margins also as they fall into the premium category of the value chain. The ease of innovation for TGBL would be helped by the company s strong brand equity across geographies where it is present (Tetley second largest tea brand globally, Tata Tea market leader in India, Jemca - market leader in Czech Republic, EOC- strong presence in the US) and cross-selling of its brands and variants across geographies. For example, Tata Tea has successfully launched Tetley in India under the specialty and green tea segment and is witnessing ~5% YoY growth in these brands. Further, with a large Indian population in Canada, TGBL has launched the Tata Tea brand in Canada, which would further aid its revenues from the country. Hence, we believe that with TGBL s vast portfolio of brands, ability to innovate and blend new flavours across beverages and launch them across the world markets, revenues would register 12.% CAGR in FY13-16E against 1.6% CAGR in FY8-13. Moreover, the shifting consumption towards specialty and gourmet tea and coffee would also improve margins from 1.5% in FY13 to 11.5% by FY16E. Exhibit 35: Innovations in TGBL s portfolio in FY12 & FY13 alone The company is launching around four variants and flavours across geographies every six months, garnering every bit of the evolving market opportunity across tea and coffee Brand New Launchs Geography Year Tetley Blend of both Uk FY13 Estate Selection UK FY13 Green Tea Plus Canada FY13 Herbal mocktails Canada FY13 Tetley Tassimo single serve discs Canada FY13 Chai Latte Australia FY13 Specialty Tea Australia FY13 Tata Tea Gold Pakistan FY13 Green Tea Mango and Passion Fruit Across the globe FY13 EOC k-cups USA FY13 Chocolate mint USA FY13 Grand Grand Melange Russia FY13 Grand Extra Russia FY12 Tata Tea Veda India FY12 Tata Waters Tata Water Plus India FY12 Tata Gluco Plus India FY12 Page 19

20 Financials Revenues to grow at higher CAGR of 12.% in FY13-16E Revenues have grown at a CAGR of 1.6% in FY8-13. We expect this to increase to 12.% in FY13-16E. The increase would be driven by changing sales mix of tea (higher contribution of tea bags in domestic tea revenues, increasing contribution of specialty teas in Canada & UK markets), increasing innovations and launches in the premium tea categories, higher coffee revenues from TCL and increasing revenues from joint ventures. We estimate the tea revenues will grow at 7.6% CAGR in FY13-16E compared to 9.2% in FY8-13. Coffee revenues are expected to maintain a high growth rate of 15.7% CAGR (FY13-16E) compared to 16.3% CAGR (FY8-13). Exhibit 36: Revenues ( crore) and revenue growth (YoY in %) FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Revenues % increase Margins to improve to 11.5% by FY16E EBITDA growth has remained strained at 1.5% CAGR in FY8-13 with margins falling from 16.2% in FY8 to 1.5% in FY13. The fall in margins was led by the significant increase in tea prices, which has increased the raw material cost to sales ratio from 32.4% in FY8 to 49.3% in FY13. We believe that though tea prices would continue to remain high, the change in sales mix and higher coffee revenues (higher margins segment) would mitigate the impact, improving margins to 11.5% by FY16E. We believe the JV business would start contributing to margins positively from FY16E onwards. Exhibit 37: EBITDA ( crore) and margins (% to sales) FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E EBITDA ( crore) EBITDA Margins (%) Page 2

21 Reduction in interest cost, healthy margins to aid PAT growth TGBL witnessed a loss in FY8 and FY9 on the back of higher interest cost and tax expense. In FY1, the company reduced its debt through the sale of Glaceau to Coca Cola (at a profit of $523 million), which reduced its interest cost and improved its profitability from thereon. We believe that with margins expected to improve from FY13 onwards and net debt on books being nil, TGBL s earnings (adjusted PAT) would increase at an impressive rate of 15.7% CAGR in FY13-16E. Exhibit 38: Profit before tax (PBT), adjusted PAT and interest cost ( crore) trend FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E PBIT Adjusted PAT Interest Cost Strong balance sheet Debt in FY13 stood at crore against cash of 693 crore on the books. Hence, the net debt of the company is ( 2.3) crore. The debt to equity ratio (FY13) is at a comfortable level of.1x compared to.8x in FY8. The company has not paid its debt as it is seeking acquisitions. Hence, we believe the strong balance sheet of the company would provide it with greater flexibility to grow through the inorganic route, without straining its balance sheet and maintaining a comfortable debt to equity ratio, going ahead. Exhibit 39: Debt-equity ratio trend FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E Page 21

22 Return ratios to improve with healthy earnings growth TGBL s return ratios (on adjusted PAT) have improved over the years aided by improvement in earnings and reduction in debt. FY8 and FY9 reported net adjusted loss due to higher interest cost and consequent increase in debt, straining the RoE. In FY1, with the reduction in debt and improvement in earnings, the company witnessed a comeback in its RoE to 1%. With earnings set to witness higher growth (PBIT at 15.5% and adjusted PAT at 15.7% CAGR FY13-16E), going ahead, and no significant increase in debt, we expect the RoE (adjusted) and RoCE to improve to 11.2% and 13.4%, respectively by FY16E. Exhibit 4: Return on equity and return on capital employed (%) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E FY16E RoE (adjusted) RoCE Exhibit 41: Return on capital employed from tea & coffee (%) FY8 FY9 FY1 FY11 FY12 FY13 Tea Coffee Page 22

23 Risks & Concerns Slowdown in black tea market across geographies Black tea is witnessing a slowdown in consumption across key consumption geographies (India, UK). Though consumption is shifting towards specialty black tea and green tea, the rate of shift could be lower. Further, due to the premium pricing in specialty tea, we believe volume growth could remain lower. Input costs susceptible to higher commodity prices With TGBL s business largely being marketing of branded tea and coffee, the company is susceptible to price fluctuations in tea and coffee. The significant increase in domestic tea prices in FY13 (~24% increase YoY) increased TGBL s (standalone) RM cost to 66.4% (higher by ~2 bps), consequently pulling down margins by 11 bps to 1.3%. Similarly, in FY11, EOC sales de-grew ~5% YoY due to price increases taken by TGBL in order to pass on the increase in coffee prices (higher by ~36% YoY in FY11). Therefore, led by the due nature of TGBL s business, commodity price concerns would continue to haunt TGBL s revenues and margins. Higher brand building expenses may keep margins strained TGBL has been witnessing increasing competition across geographies, which has kept the company s marketing expenses higher over the years. Marketing expenses have witnessed an increase of 7.9% CAGR in FY8-13 ranging between 18% and 21% of net sales. We believe that with TGBL increasing brand building expenditure in the US (EOC), Russia (Grand) and Poland (Vitax) to increase market share and in India (water business) and UK (Tetley s premium launches) to drive market growth, its marketing spends would increase at a higher CAGR of 9.3% from FY13-16E (18-19% of net sales). Though we expect margins to improve ~1 bps to 11.5% by FY16E in spite of higher marketing expense, we remain wary of the fact that any further increase in competition could drive marketing expenses higher, pulling down margins. Goodwill in balance sheet TGBL has a goodwill of crore (FY13) on its books. The goodwill has been accumulated on account of the various acquisitions by the company over the years. We believe a possible impairment of this goodwill remains a key risk if the acquired brands fail to generate the expected growth. Slowdown in Starbucks store addition to impact sales growth We have estimated the higher revenue growth in TCL s coffee business to be supported by higher supplies to Starbucks stores in India. Further, the growth in revenues of the others segment (12.8% FY13-16) of TGBL would constitute 8-9% revenues from sales through Starbucks stores. We have estimated that the company would open ~95 stores by FY16E. Hence, any slowdown or a significant downtrend in stores addition would adversely impact the revenue growth estimate for TCL and TGBL. Page 23

24 Valuation We have valued TGBL on a sum of parts (SOTP) valuation methodology and arrived at a fair value of 182/share. We have divided the overall business into four sub parts, TGBL (standalone), Tata Coffee (consolidated), Mount Everest Mineral Water and Tata Global (other subsidiaries). With Tata Coffee and MEMW being listed subsidiaries in India, we have valued them individually and assigned the contribution of each proportionately to TGBL s share price. Exhibit 42: SOTP Valuation TGBL (Standalone) Sales FY15E Multiple 2. Mcap Propotionate Mcap No. of Shares 61.8 Value/share 94.3 Tata Coffee (Consolidated) EBITDA FY15E EBITDA Multiple 5. EV Debt (FY15E) Cash (FY15E) 15.4 Target Mcap Propotionate Mcap (57.5% Stake) No. of Shares 61.8 Value/share 16.4 MEMW Current Market Cap Discount (%) 25% Mcap (FY15E) TGBL's propotionate No. of shares 61.8 Value/share 2.8 TGBL (other subsidiaries) Sales FY15E Multiple 1 Mcap Propotionate Mcap No. of Shares 61.8 Value/share 68.8 Target Price Page 24

25 EV/EBITDA Valuation Over the past eight years, TGBL has traded in the average range of 8-1x two year forward EV/EBITDA multiple. At the CMP, it is trading at lower band of its historic range at 8.6x FY15E EBITDA/share. At the target price of 182, the two-year forward multiple would be 1.2x FY15E EBITDA/share. We believe the increase in multiple would be on account of improving margins led by change in product mix in both tea and coffee and reduction in the losses from the JV businesses. Exhibit 43: Two-year forward EV/EBITDA 14, 12, 1, 8, 6, 4, 2, Apr-5 Aug-5 Dec-5 Apr-6 Aug-6 Dec-6 Apr-7 Aug-7 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 EV (Rs Cr) EV 1x 8x 6x 4x Price to sales valuation At the CMP of 146, the stock is trading at 1x its FY15E and.9x its FY16E sales per share of 15 and 164.4, respectively. At our target price of 182, the two-year forward multiple would be 1.1x its FY15E price/sales. The increase in multiple would be supported by the increasing contribution of specialty and premium tea in the company s portfolio and higher revenues from the coffee segment. Exhibit 44: Market capitalisation to sales ratio (two years forward) Apr-5 Oct-5 Apr-6 Oct-6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Close ( ).8x 1x 1.2x 1.4x Page 25

26 Price/earnings valuation At the CMP of 146, the stock is trading at 16.4x its FY15E and 14.6x its FY16E EPS of 8.9 and 1, respectively. Historically, the stock has traded in the range of 12-18x its two-year forward earnings. At the assigned target price of 182, the two year forward P/E multiple would be 18.2x FY15E EPS. Exhibit 45: Price/earnings ratio (two years forward) Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Close ( ) 12x 14x 16x 18x Page 26

27 Tables Exhibit 46: Profit & Loss Account (Consolidated) ( Crore) (Year-end March) FY12 FY13 FY14E FY15E FY16E Net Sales 6, , , , ,163.4 Other Operating Income Total Operating Income 6,64. 7,351. 8, ,42.7 1,292. Raw Material Expenses 3, ,567. 4,5.8 4, ,927.4 Power & Fuel Manufacturing Expenses Employee Expenses ,41.7 Marketing Expenses 1, , ,68.1 1, ,89.1 Administrative Expenses Miscellaneous Expenses Total Operating Expenditure 6,17. 6, ,556. 8,34.3 9,14.6 EBITDA ,62.4 1,187.4 Interest Other Income PBDT ,59.1 1,18.4 Depreciation Less: Exceptional Items (22.5) PBT ,24. Total Tax PAT before MI Minority Interest PAT after MI Adjusted PAT EPS (Adjusted) Page 27

28 Exhibit 47: Balance Sheet (Consolidated) ( Crore) (Year-end March) FY12 FY13 FY14E FY15E FY16E Equity Capital Reserve and Surplus 4,53.9 4, ,7.1 5, ,924.4 Total Shareholders funds 4, ,81.2 5, , ,986.3 LT Borrowings Total Debt Deferred Tax Liability Minority Interest 1, ,3.8 Other Non Current Liabilities LT Provisions Total Liabilities 6, , ,14.4 7,73.8 8,339.3 Total Gross Block 5, ,58.1 5, ,58.1 6,258.1 Less Total Accumulated Depreciation ,69. 1, , ,478.9 Net Block 4,246. 4, , , ,779.1 Total CWIP Total Fixed Assets 4, , , , ,879.3 Other Investments Inventory 1,16.7 1, , ,72.8 1,893.5 Debtors ,2.4 Loans and Advances Other Current Assets Cash ,16.6 Current Investments Total Current Assets 3, ,64.5 3,61.4 4,238. 4, Creditors ,2.4 Provisions ST Borrowings Other CL Total Current Liabilities 1, , , , ,278.1 Net Current Assets 1, , ,68.5 2,99.3 2,632.4 LT Loans & Advances Other Non CA Total Assets 6, , ,14.4 7,73.8 8,339.3 Page 28

29 Exhibit 48: Cash Flow Statement (Consolidated) ( Crore) (Year-end March) FY12 FY13 FY14E FY15E FY16E Profit after Tax Add: Depreciation Add: Interest Paid CF before WC changes Changes in inventory (91.1) (222.2) (145.3) (174.6) (19.6) Changes in debtors (78.6) (61.1) (18.6) (93.5) (87.5) Changes in loans & advances (18.) (58.1) (3.3) (85.6) (84.2) Changes in other CA (3.6) (4.2) (3.8) (2.7) (2.7) Changes in Current Investments (.2) (.2) Net Increase in CA (267.7) (254.5) (26.7) (356.5) (365.2) Change in creditors (24.8) (1.9) Change in provisions Change in ST borrowings (149.6) Changes in other CL (355.1) Net Increase in CL (148.1) (154.7) Net CF from operations Change in LT loans & advances (.1) (9.) (8.9) Change in Non CA (29.1) Change in other investments 6.4 (12.5) (5.) (5.) (5.) Change in FA (588.7) (339.7) (49.5) (15.) (2.) Change in deferred tax liability 2. (11.8) Change in minority interest (42.2) (252.) Change in other non CL (8.2) (63.4) Change in LT provisions Net CF from Investing activities (571.3) (72.2) (387.3) (136.7) (186.6) Proceeds from Equity Capital Proceeds from LT borrowings 16.5 (66.6) Payment of dividends (157.) (157.5) (157.6) (157.6) (157.6) Interest Paid (7.4) (84.4) (85.) (91.6) (97.3) Adj in General Reserve Adj in Revaluation reserve (2.3) Adj in Statutory Reserve - (.3) Acturial Gain/(Loss) Reserve (7.7) (27.) Exchange Rate Fluctuation Contingency Reserve Net CF from Financing activities (279.5) (142.6) (149.2) (154.8) Net Cash Flow (265.7) (38.6) (263.8) Opening Cash Closing Cash ,16.6 Page 29

30 Exhibit 49: Ratio Analysis (Year-end March) FY12 FY13 FY14E FY15E FY16E Per Share Data EPS Cash EPS Cash per Share Revenue per Share Operating profit per share DPS Operating Ratios EBITDA / Total Operating Income PAT / Net Sales Return Ratios RoE RoCE RoIC RoA Valuation Ratios P/E Target P/E Market Cap / Sales Target Market Cap / Sales EV / EBITDA EV / Net Sales Dividend yield Solvency Ratios Debt / Equity Interest coverage Current Ratio Quick Ratio Turnover Ratios Asset turnover Debtors Turnover Ratio Creditors Turnover Ratio Inventory Turnover Page 3

31 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: > 1%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ANALYST CERTIFICATION We /I, Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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It is confirmed that Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report. 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