Coffee saved the day for Tata Global Beverages Ltd in the December quarter. That is unusual because it contributes barely a quarter of the company’s consolidated revenue, with tea bringing up the rest, and a minor portion coming from products such as mineral water.

In the December quarter, Tata Global’s consolidated revenue rose by just 4% to Rs1,608 crore, but by 8% after adjusting for the currency translation effect. A large part of the company’s sales of tea is in overseas markets—across the US, Europe and other markets—which makes it susceptible to foreign exchange volatility.

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But it was not just exchange volatility that affected performance. In the Indian market, stiff competition from Hindustan Unilever Ltd (HUL) appears to have affected other tea marketeers. Tata Global’s stand-alone sales rose by about 5%, while HUL’s beverage sales (with tea contributing to 80%) rose by about 9%.

Slower sales growth may have been acceptable if tea procurement prices were lower. But rising tea prices have hit international marketeers, especially those with a large share in developed markets. Since they sell through large retailers, passing on price hikes is difficult, especially due to depressed consumer sentiment. Tata Global’s material costs rose by 6.5%, much lower compared to sales growth. Its operating profit fell by 6% and margin fell by over a percentage point to 11.4%.

Among its segments, tea sales were flat but profit fell by 14%, while coffee sales were up by 15% and segment profit was up by 45%. Rising coffee prices help Tata Global, since its subsidiary Tata Coffee Ltd owns coffee plantations, allowing it to benefit from rising commodity prices. Lower other income, higher interest costs, and a higher tax incidence combined to contribute to a 22% drop in its consolidated profit, much higher than the fall in its operating profit.

Looking ahead, in the domestic market, food inflation and competition will continue to be concerns, with one affecting growth and the other lowering margins. In the developed markets, the US appears to be showing some signs of a recovery in consumption, and if it continues, could see some positive impact. A moderation or fall in global tea prices in 2011-12 would make a big difference to the company’s performance. But if they remain steady or rise further, its performance will continue to be under pressure.

Graphic by Ahmed Raza Khan/Mint

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