Tata Global Beverages: Falling costs brew strong margins
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Tata Global Beverages Ltd has benefited from lower commodity prices, boosting margins even as the company cut prices to pass on benefits to consumers. In volume terms, the company’s sales rose, but in value terms, its consolidated sales declined by 2.2% over a year ago to Rs1,604 crore. Since material costs fell by 9.4%, and advertising and other expenses declined, its operating profit rose by 34.8%.
The largest contributor to Tata Global’s branded business is tea, where sales declined by 0.3% but profit rose by 18.7%. Apart from lower commodity costs, the depreciation of the British pound also affected reported sales growth in rupee terms. In a conference call, the company management said its performance in the UK has improved and that it has gained share.
In India, volume growth was modest. In coffee, under its listed subsidiary Tata Coffee Ltd, the gains were more on profitability than sales, which declined. The gains in profitability flowed down to its net profit, which rose by 48.2%.
Tata Global did say that there are some parts of the business that have not been doing so well, particularly in Eastern Europe, which are under review. If it can restructure or exit some of these markets/products, profitability could get a boost. In developed markets, it has reported benefiting from its newer non-black tea variants, which helps it partially overcome the decline in black tea consumption. But its share of this declining market has increased in fiscal year 2017, said the company.
Tea prices have been low as output has increased in major growing markets of Kenya and northern India, although southern India has seen output decline. Coffee prices too had remained low. The risk is that these price trends can change. Coffee prices have begun to increase sharply, due to fears of lower Robusta output. All eyes should be on tea output in FY18. If tea prices increase, that can mean higher costs.
In India, the currency switch could see consumption get hit in the near term. Barring this one-off impact, if Tata Global continues to report good volume growth, investors will gain confidence. The company’s stock has lost a fifth of its value since end-October, when the tussle between Ratan Tata and Cyrus Mistry emerged. It pepped up a bit after the results were announced. The company has replaced Mistry as chairman. While its operating performance should please investors, the changes at the top may result in questions on what alterations may take place in its long-term strategy.