Kolkata: Tata Global Beverages Ltd (TGB) is looking to enter the foods business to tap opportunities arising from the need to “address nutritional and lifestyle challenges”, Ratan Tata, chairman of the Tata group, told shareholders of the company, formerly Tata Tea Ltd, at its annual general meeting on Monday.
TGB, which began life as a plantations firm and evolved into a beverage maker, recently signed an agreement with PepsiCo Inc. to form a joint venture that will make health beverages and could use its partner’s distribution channel to sell food, Tata added.
The foods business is competitive and vulnerable to fluctuations in prices of raw materials, but analysts still see it as among the most profitable businesses in the consumer products area.
For an established brand, gross operating margin from foods could be 35-55% though the business demands a lot of investment upfront, said Anand Ramanathan, advisory services manager at audit and consulting firm KPMG. “For the Tatas, it is a natural extension of their existing businesses.”
The potential inherent in the business is evident from a recent statement by ITC Ltd’s chairman Y.C. Deveshwar that the company’s foods business could soon turn profitable.
Shares of TGB closed 5% higher at Rs116.85 apiece on the Bombay Stock Exchange (BSE) on Monday, while the bourse’s benchmark Sensex ended flat at 18,409.35 points.
PepsiCo’s distribution channel will also be used to sell mineral water produced by TGB-controlled Mount Everest Mineral Water Ltd. PepsiCo itself produces and sells bottled drinking water under the Aquafina brand. Its bottled water, however, is much cheaper than Mount Everest’s Himalayan brand of mineral water.
“This (new arrangement) will help turn around the loss-making Himalayan brand,” Tata said.
Mount Everest, in which the Tata group holds 41.1%, posted a net loss of Rs14.1 crore on revenue of Rs24.35 crore in 2009-10.
Following the announcement of the new distribution arrangement, Mount Everest’s shares jumped 10%, the maximum allowed for the stock in a day, to Rs.89.25 each on BSE.
Even as it enters new businesses and markets, TGB appears to have cut its revenue expansion target for the next five years by more than half to $5 billion (Rs.23,300 crore).
TGB’s chief executive officer Peter Unsworth said on Monday that his firm’s revenue from beverages should be around $5 billion by 2015, whereas at the 2009 annual general meeting, the company had said it was aiming for revenue of $10 billion in five years, or by 2014. In the year till 31 March, TGB’s consolidated revenue was at Rs5,820 crore.
For the next five years, TGB expects operating profit to grow at 15% year-on-year, Unsworth said, adding that TGB would double its geographical presence to 100 countries over the next few years.
Russia and the US will be key markets for TGB, Tata said. Also on the company’s radar are markets in South America, TGB’s vice-chairman R.K. Krishna Kumar said.
In the current year, the company could face pressure on profit margin because of an increase in the price of key raw materials, Tata said, adding that this could be mitigated to some extent by launching new categories of beverages that offer higher margins.