TATA GLOBAL BEVERAGES LTD “Bright days ahead with Starbucks alliance” February 10, 2012 BSE Code: 500800 NSE Code: TATAGLOBAL Reuters Code: TAGL.NS Bloomberg Code: TGBL:IN Tata Global Beverages Limited (TGBL) is an emerging player in the global Market Data beverage market. Established in 1983, the company has made a strategic shift Rating BUY from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants like PepsiCo CMP (`) 119 Target (`) and Starbucks, thereby strengthening its position among the top 10 global 140 companies in the beverage Industry. TGBL today owns a vast portfolio of Potential Upside ~18% leading global brands like Tetley, Eight O’ Clock and local brands like Tata Tea. Duration Long Term 52 week H/L (`) 126.4/80 Investor’s Rationale All time High (`) 132.9 Decline from 52WH (%) 5.9 Rise from 52WL (%) 48.8 Under TGBL’s strategy to grow inorganically through strategic alliances Beta 1.05 beside organic growth, TGBL is all to set to mark its entry into the fast growing Mkt. Cap (` bn) 73.8 café retail market of India with its alliance with the iconic international coffee Enterprise Value (` bn) 85.2 brand, Starbucks Coffee Company under the name TATA Starbucks Limited (TSL). Fiscal Year Ended With the proposed $80 million investment in TSL, TGBL has only entered the FY10A FY11A FY12E FY13E quick-service restaurant business in India but has also made a significant move in Revenue (`bn) 57.8 59.8 65.2 71.0 enriching its portfolio of branded beverage with the inclusion of an international Net Profit(`bn) 3.9 2.5 3.3 4.2 brand like the ‘Starbucks’. Share Capital 0.6 0.6 0.6 0.6 The Starbucks Corp’s deal with Tata Coffee Limited (TCL), a subsidiary of EPS (`) 6.3 4.0 5.3 6.8 TGBL, is likely to energize TSL’s growth not only In terms of regulatory needs for P/E (x) 18.9 29.5 22.4 17.6 Starbucks entry into India but will also provide supply and cost advantage to TSL P/BV (x) 2.0 1.9 1.8 1.8 over its peers. Beside, coffee beans picked from the homeland will help TGBL to EV/EBITDA (x) 16.3 16.7 13.9 11.6 offer a perfect blend of Indianised taste and Specialty of Starbucks Coffee. ROE (%) 10.4 5.4 8.4 10.2 Two decades after reaping the benefits of the liberalization policies, ROCE (%) 5.9 4.1 5.4 6.8 educated Indians now present the most lucrative consumer market for the world One year Price Chart with growing per capita income and the confidence to spend more money. So 120 evidently, TGBL has chosen the perfect timing to bank on the café retail market 20,000 110 through a global brand like the Starbucks in the exotic land of India. 18,000 100 16,000 90 TGBL’s café retail venture is likely confront major competition from 80 14,000 70 existing players like Cafe Coffee Day, which runs the largest chain of coffee retail 12,000 60 stores in India, as well as other players such as the Luigi Lavazza-run Barista 11 11 11 11 11 11 12 11 11 11 11 11 - - - - - - - - - - - - Lavazza and Whitbread-operated Costa Coffee. However, we expect TGBL Jul Jan Jun Oct Feb Apr Sep Dec Aug Nov Mar May strategic approach to launch Starbucks not in just the café format but also in SENSEX TGBL premium hotels will work to its advantage. Shareholding Pattern Dec’11 Sep’11 Diff. Through TSL, TGBL will also be working with Starbucks to develop co- Promoters 35.2% 25.6% - branded premium tea for the global market apart from placing its products-like FII 9.9% 9.2% 0.7 the Himalayan packaged water-in Starbucks’ global portfolio. DII 30.4% 31.4% (1.0) Others 24.5% 24.2% 0.3 Starbucks Coffee “A Tata Alliance”, to enrich Brand portfolio of TGBL TGBL’s branded beverage portfolio Brands Category Country TGBL has recently signed an equal joint venture deal with iconic Black tea, herbal tea, international coffee brand, Starbucks Coffee Company under the Tetley UK and Canada fruit tea name TATA Starbucks Limited (TSL), in line with its strategy of growing through inorganic growth focused on strategic alliances in Vitax Fruit tea Poland addition to organic growth. Marking the entry of the Tata Group Black tea, green tea, into the quick-service restaurant business in India, especially in the Jemca Czech herbal tea, fruit tea fastest growing coffee retail segment within food retail, TSL intends to own and operate Starbucks cafés in the country, under Phendula Tea South Africa the brand, Starbucks Coffee “A Tata Alliance”. The alliance is working for a speedy roll out its first Starbucks café, either Delhi or Tata Tea Tea India Mumbai, the two largest cities in the country as early as August- Eight O’Clock Coffee USA September 2012 followed by a total of 50 cafes in the country by Grand Coffee and tea Russia the year end. The initial investment of the proposed venture is Good Earth Tea USA likely to be $80 million. Himalayan Mineral water India Seattle based Starbucks Corporation is the largest coffeehouse T4 KIDZ Hot flavored drink UK company in the world, with more than 17,000 stores in 55 Laager Tea South Africa countries, including over 12,500 in the United States, over 1,200 in Activate Flavored water USA Canada and over 700 in the United Kingdom, 54 in Russia. The Non carbonated RTD India & International company’s business in the Asian Pacific region accounts for only Nourishco beverage markets 5% of its global sales but the coffee giant’s overall revenue from the region has seen good numbers for the December quarter, with its aggressive expansion in South Korea, Hong Kong, Taiwan, the Sukk Drinkable jelly snack UK Philippines, Singapore, Indonesia, Malaysia and Thailand. On the other hand, TGBL over the years has shifted its focus from Brand-wise sales breakup FY11 tea plantation activities to branded beverages, to emerge as a global beverage player through various acquisitions in many geographical regions. The company has put immense amount of Tetley weight behind building its brands and emphasized on maintaining its existing ones, specially the legendary brands Tetley and Tata 39% Indian Tea Brands Tea. Today, with leadership position in the branded tea and coffee 29% markets in several countries, over 90% of TGBL’s sales comes from branded products. Good Earth The coffee shop retail’s recent partnership with the second largest tea manufacturer of India is likely to help the former in capitalizing Jemca on the rising coffee consumption in the world’s fastest growing 12% 1% major economy after China. However, for the later, the 1% Eight O'Clock partnership will not only help to experience unique retail expertise 17% 1% and a shared sense of business values with Starbucks Corps but Vitax will also enrich TGBL’s strong branded beverage portfolio while offering new beverage experiences to Indian consumers through a leverage of the global in-home expertise of TGBL and the global Others out-of-home expertise of Starbucks. TGBL- first to bank on 100 per cent FDI in single brand retail opportunity Strict limits on foreign ownership across a wide range of industries have long kept foreign competitors at bay in India. Even if foreign brands like Starbucks have been a catalyst for homegrown industries in India, the country hasn’t allowed them to actually open stores in the past. Though Indian government’s most recent attempt to loosen restrictions on the likes of big global retailers like Walmart met with popular disapproval and political outrage, Single-brand retailers like Starbucks however had an easier time after the recent Government’s notification to raise foreign direct investment (FDI) limit single-brand retail to 100% from its prior 50%. With the recently declared TGBL partnership with the largest coffeehouse company in the world, the owner of the Tata Tea brand has emerged to be the first mover to capitalize on the liberalized initiative of the Indian Government in the retail space, boosting the retail potential of Starbucks brand as the first foreign single brand retailer to enter India. As per the provisions suggested by the Department of Industrial Policy & Promotion, for allowing FDI up to 100% in single brand product retail trading, the proposals involving FDI beyond 51% would need to ensure mandatory sourcing of at least 30% of the value of products sold, to be done from Indian ‘small industries/village and cottage industries, artisans and craftsmen. Starbucks early 2011 deal with Tata Coffee ltd, a unit of TGBL, to source and roast premium coffee beans from India completely meets the above regulatory requirements and hence will also work to the advantage of TGBL. TGBL to reap cost benefit from Tata Coffee- TGBL’s product-wise revenue contribution in FY11 Starbuck partnership TCL, a coffee subsidiary of TGBL is likely to materialize it’s an year old discussion with Starbucks Corp. to supply premium coffee beans, as the later paces up for its much-awaited entry into India. As per the arrangement between the duo, TCL, the owner of the 65% US based Eight O' Clock Coffee Co, will be roasting coffee produced in the company’s estates using Starbucks know-how and technology and packaging, sale and distribution thereof to Starbucks Cafes to be set up by TGBL as well as Starbucks Corp’s business operations in the overseas markets.