With tea volumes growing moderately in the domestic and international markets, Tata Tea is seeking opportunities to expand its domestic as well as international beverage portfolio beyond tea and coffee, which could be a future revenue driver for the company.
In line with its strategy, the company has launched T!ON, a tea and fruit based cold beverage in three variants—Mango Rush, Peach Punch and Apple Buzz—in a 400 ml pet bottle strategically priced at Rs22.
The launch is an attempt to capitalise on the emerging health and convenience food and beverages trend in India.
The demand for carbonated drinks in India is softening, as more and more consumers (especially the youth) are opting for healthier beverages such as fruit juices and fruit-based drinks.
Consequently, non-carbonated beverages are gaining good acceptance and the segment is growing at a healthy rate of 35-40% per year in the domestic market. We believe Tata Tea’s entry into this segment could be the much-needed revenue driver for the company.
The company’s profit margins have been under pressure in FY2009 and are likely to remain so with higher raw material prices, especially tea prices staying firm on account of tight demand-supply situation in the domestic and international markets.
However, with a portfolio of strong global brands, Tata Tea has the ability to take price increases to ease the pressure on the margins.
In the domestic market, the company has implemented price hikes in few of its popular brands in the range of 7-9% in the beginning of Q4FY2009 to counter the increase in the raw material prices. Thus, we believe the company will be able to sustain the margins in FY2010.
We believe the company’s focus on new geographies and new initiatives (such as green and herbal tea, fruit-based beverages and mineral water) augur well to sustain the growth at a consolidated level.
At Rs553, the stock trades at 8.7x its FY2010 earnings estimate and an enterprise value (EV) / earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.2x.
We believe these valuations are attractive, more so considering the net cash (cash minus debt) of Rs81 per share (as on December 31, 2008).
We maintain our BUY recommendation on the stock with the price target of Rs853.