The Tata Tea stock has been playing catch up ever since news hit the markets that Coca-Cola was interested in buying out Glaceau. Since then, the stock has risen by 36% to Rs915. When the Tatas had purchased a 30% stake in Glaceau in August last year, the stock fell by over 12% in a month. The bearish sentiment continued till Coca- Cola came into the picture, by which time the stock was down over 20% to Rs674.
The markets were worried about the debt of over $400 million (Rs1,640 crore) Tata Tea’s UK arm, Tetley, had borrowed to fund the purchase, which added significantly to its existing debt. But what started as a negative development in the eyes of the markets has now turned around to be a blessing in disguise. The sale of Glaceau at $1.2 billion translates into a gain of $523 million, a 77% return in about a year’s time. Because of the way the deal was originally structured, 5% of the proceeds ($200 million) would go to Tata Sons, while Tata Tea will keep the rest. The company has already said the surplus would be used to retire the debt on Tetley’s books. This would improve its profitability considerably. The only hitch is that with the sale of Glaceau, Tata Tea has lost some high-growth brands from its portfolio. But analysts say that there’s no dearth of acquisition opportunities in the beverages space. They point to the global tea industry, where the market leader, Unilever, has a share of only 10%. In other words, the market is very fragmented, which provides ample buyout opportunities.
Risks at Bhel
After the excellent provisional results for FY 2007 declared at the beginning of April, the Bharat Heavy Electricals Ltd (Bhel) stock has moved up around 20%. The audited results, announced last Friday, are in fact slightly better than the provisional numbers. The March quarter saw a rise of 25% in net sales and 32.5% in net profits. Staff costs rose a huge 65%, because of increased provisioning for employee benefits, but that’s a one-time hit to the bottomline. Expenditure on raw materials as a proportion of sales is much lower than in the December quarter. Bhel is poised to reap the benefits of the enhanced targets for power generation, with the government aiming to increase the country’s installed capacity by 50% in five years. This has translated into heavy order flow for Bhel and it had an outstanding order book of Rs55,000 crore at the end of March. That’s 2.9 times the company’s sales for FY07.
With so much earnings visibility, where are the risks? One of them is the entry of Chinese manufacturers such as Dongfang Electric Corp., which is the equipment supplier for the controversial Sasan ultra mega power project. That could put some pressure on margins, going forward. As for the stock, it has already run up considerably and at its current price is trading at around 22.6 times consensus FY08 earnings, not leaving much room for an upside.
There is increasing evidence that the Reserve Bank of India’s tightening measures are having an impact. Non-food credit always falls at this time of the year, with the onset of the slack season, but data show that the fall this fiscal till 11 May was Rs33,015 crore, almost double the contraction over the same period last year.
The contraction is even more prominent if one includes the investments made by banks in corporate paper. Total accommodation provided by banks (which includes credit as well as investment in corporate bonds, equity and in commercial paper) shows a decline of Rs 39,220 crore till 11May this fiscal, compared with a decline of Rs17,320 crore over the same period last year. Clearly, higher interest rates have started to bite.
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