Tata Global gets a boost from prices and exchange rates

Tata Global Beverages Ltd was helped by good sales growth in most major markets, and a sharp increase in coffee prices, while its Indian tea operations have helped boost profitability. A positive exchange rate effect, as the dollar and pound strengthened against most currencies, also helped its performance.

The company’s net sales rose by 10.7% year-on-year to Rs 1724.1 crore in the March quarter, while cost of goods sold as a proportion of sales fell by 64 basis points. Apart from a favourable exchange rate effect, better price realisations and an improved product mix appear to have helped it overcome rising commodity prices.

Tata Global sells packaged tea and coffee, under different brands, in various markets. In the March quarter, its tea business’ sales rose by 7.4% y-o-y, while that of coffee rose by 19.7%. The company hiked coffee prices, passing on higher coffee bean prices, which helped sales growth. But its inability to pass this on in full in the US market (major portion of coffee sales) affected profitability.

Thus, the tea segment saw profits increase by 33.4%, but the coffee business saw an 8.4% drop in profits. That and losses in some of its nascent businesses restricted the y-o-y increase in its operating profit margin to 73 basis points. Tata Global’s standalone business (Indian tea operations) nearly doubled its operating profit, and was a key contributor to the higher profitability.

Geographically, USA reported the highest growth reflecting higher coffee prices, while a cluster comprising Canada, South America, and Australia reported the highest sales growth among its regions. Europe and the Middle East under-performed, not surprisingly, while South Asia (mainly India) reported an 8.6% growth in sales. Tata Global’s debt has fallen by 12% in 2011-12, improving its balance-sheet profile and lowering interest costs.

While volatility in currency markets has helped the company in this quarter, an unfavourable movement could well hurt performance in 2012-13. That is one key risk for the company. A weak global environment also poses a risk to its business, though an improvement in USA’s economic prospects is a consolation. On the commodity price front, coffee prices have come off their highs and are relatively stable, while tea prices continue to remain firm.

Tata Global’s financial profile has benefited from a restructuring of its operations and its debt burden. This is part of the reason why its share trades at about 24 times its 2011-12 earnings per share, with the other part being euphoria surrounding its alliance with Starbucks. The alliance is some way from having a significant impact on performance. In the near to medium term, investors should keep a watch on exchange rate volatility, commodity price fluctuations, and for bad news on the economic front in its key markets.

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