Tata Tea is targeting a 10x increase in its turnover in the next five years. With this objective the company has designed its roadmap and strategies, which include the expansion of its product basket by entering into new categories, expansion of its reach by augmenting distribution capabilities and getting into newer geographies, and inorganic growth through acquisitions.
This roadmap would aid the company to achieve a strong growth going forward. While the long-term path looks exciting with the company working on aggressive growth targets, the pressures on the performance persist in the near term.
The relentless inflation in the cost of raw material (raw tea) resulted in a 300- basis-point year-on-year (y-o-y) decline in its margin in FY2009. This was despite the company hiking the prices of its products to prevent margin erosion.
In FY2010 tea prices are on an up-trend and this upward trend is expected to continue in the wake of a global deficit due to decline in tea production in the key tea exporting countries, such as Kenya, India and Sri Lanka. This will impose further pressure on the margins of the company in the coming quarters.
Thus, considering the aggressive growth plans, we believe that Tata Tea is a good investment proposition for the medium to long term. However, with the rising raw material prices we expect a moderate performance in the near term and believe that trading at 12.8x its FY2011E earnings the stock has limited upside in the near term.
We maintain our HOLD recommendation on the stock with a price target of Rs939.