Tata Global Beverages India business performed well Viewpoint Tata Global Beverages posted a mixed performance in Q3FY2020 with Sector: Consumer Goods revenue growing by ~3% and operating margins (OPM) expanding by Result Update ~200BPS to 12.2%. India business revenues grew by 6% with volume growth standing at 7%, while Tata Coffee (including Vietnam) revenue Change grew by 25%. US coffee and UK segments saw a decline in the revenues View: Positive in line with a sluggish market in various regions. Raw materials prices ( for coffee and tea) remained benign resulting in strong expansion in CMP: Rs. 380 margins and aiding a 16% growth in adjusted PAT. Strategies are place to improve the growth of Eight O’ Clock and other key businesses. Upside potential: 22-24% With the integration of Tata Chemical Limited’s (TCL’s) India consumer á Upgrade No change â Downgrade business, TGBL will be one of the strongest consumer goods brands in the domestic market with a strong presence in branded tea, salt, water Company details and other staples. Market cap: Rs. 23,983 cr Key positives India business continues to perform well with a 7% volume growth and 52-week high/low: Rs. 399/178 margin expansion of 90 bps to 13.7%. NSE volume: (No of Canada registered a 5% growth and gained market share (volume 38.3 lakh shares) market share stands at ~40%). Tata Starbucks registered 27% growth and continues to be EBIDTA BSE code: 500800 positive. NSE code: TATAGLOBAL Key negatives US coffee business registered a decline of 3% on back of 2% volume Sharekhan code: TATAGLOBAL decline. Free float: (No of Tata GLuco Plus registered volume decline of 4% mainly on account of 41.4 cr shares) adverse weather in states of Andhra Pradesh and Odisha. Our Call Shareholding (%) Valuation - Retain Positive stance with 22-24% upside: We have broadly maintained our earnings estimates for FY2021 and FY2022. The India Promoters 34.5 business along with Canada, UK and the US, will be key focus markets for TGBL in the coming years. The integration of Tata Chemicals’ consumer FII 27.0 business with TGBL heightens sustainable revenue and PAT growth visibility owing to multiple growth levers. We expect consolidated revenue DII 14.9 and earnings to grow at a CAGR of 15.4% and 28.1% over FY2019-22. The stock is currently trading at 35x its FY2022E earnings. We maintain our Others 23.6 Positive view on the stock and expect an upside of 22-24% from the current levels. Price chart Key Risks 400 Sustained slowdown in the domestic consumption; heightened competition 350 from new players and spike in the key input prices would act as a key risk 300 to our earnings estimates in the near term. 250 200 Valuation Rs cr 150 Particulars FY18 FY19 FY20E FY21E* FY22E* 19 20 19 19 - - - - Revenue 6,815 7,252 7,594 10,296 11,140 Jun Oct Feb Feb OPM (%) 12.3 10.8 12.4 13.4 14.2 Adjusted PAT 571 479 560 865 1,035 Price performance % Y-o-Y growth 26.5 - 16.9 54.5 19.6 Adjusted EPS (Rs.) 9 7.6 8.9 9.4 11.2 (%) 1m 3m 6m 12m P/E (x) 43.5 51.7 44.3 41.9 35.0 P/B (x) 3.5 3.4 3.2 2.6 2.5 Absolute 19.1 24.2 42.6 87.6 EV/EBIDTA (x) 27.9 30.1 24.6 25 21.5 Relative to RoNW (%) 8.7 6.9 7.7 8.2 7.3 23.8 25.1 32.5 69.7 Sensex RoCE (%) 9.5 8.8 8.9 10.1 9.4 Sharekhan Research, Bloomberg Source: Company, Sharekhan estimates *FY2021E and FY2022E includes the consumer business of TCL February 04, 2020 13 Viewpoint Consolidated revenue grew by 3%; benign input prices and efficiencies aided margin expansion: Consolidated revenue grew by 2.6% y-o-y to Rs. 1,961.9 crore in Q3FY2020 as against Rs. 1,912.6 crore in Q3FY2019 driven by 1.7% growth in the tea business and a 20% growth in the unbranded business. Revenue of the branded and unbranded business stood at Rs. 1,733 crore and Rs. 238.5 crore, respectively. Overall, consolidated volume growth came in at 5% in Q3FY2020 and 6% in the first nine months of FY2020. Revenue growth stood at 4% in constant currency terms. Gross margins expanded by 142 bps to 46.2%, largely driven by lower commodity costs. Operating efficiencies drove up OPM by 195 bps to 12.2%. Operating profit grew by 22.1% y-o-y to Rs. 239.6 crore. Higher depreciation and finance charges resulted in profit before tax to grow by 12% y-o-y. Improvement in performance of associates and a lower tax rate aided adjusted PAT to grow by 25% y-o-y to Rs. 136.4 crore in Q3FY2020 from Rs. 108.9 crore in Q3FY2019. India business performed well: The domestic branded tea business (India business) performed well earning revenue of Rs. 933 crore, registering a value growth of 6% and volume growth of 7% driven by good growth across both national and regional brands. India business volume growth stood at 8% for the first nine months of FY2020. National brands gained market share during the quarter. Tata Tea Agni and Spice Mix continue to grow in high double digits backed by campaigns and regional television commercials. EBITDA margin of the India business grew by ~90 bps to 13.7%. International business remained soft, focus on expanding margins Muted performance in the US business: The US coffee business declined by 3% y-o-y to Rs. 290 crore, with volumes declining by 2%. EOC K-cups and private labels coffee segments saw volumes grow in Q3, but there was some decline in bags coffee segment in the US. The company launched Good Earth Ayurveda in e-commerce in the US. EOC Coffee continued to face headwinds due to increased competitive intensity. UK business revenue stood flat: The UK, Canada and other businesses declined by 4% y-o-y to Rs. 529 crore, with volumes declining by 1%. However, the UK business reported market share gains, with value and volume market share standing at 17% and 23%, respectively. UK business revenue was almost flat, growth in discounted channel offset by decline in grocery channel. The green tea category faced some headwinds in the UK whereas Tetley gained market share in value and volume terms. The company intends to focus on margin expansion through cost optimisation. Decent growth in Canada business: The Canada business recorded a 5% revenue growth, driven by higher black tea sales. The value and volume market share stood at 29% and 40%, respectively. Super teas continue to grow in Canada achieving 3.2% market share in the specialty tea category. Continued improvement in profitability was witnessed led by innovations. The company launched three new flavours in the supers range. Other businesses: Good growth in Tata Starbucks, volumes for NourishCo decline Revenue growth for Tata Starbucks stood at 27% in Q3FY2020 driven by strong focus on a social media and loyalty program that continues to drive customer engagement and sales. Starbucks has broken even in FY2019 and will remain EBITDA positive in FY2020. The company opened 28 new Starbucks stores in the first nine months of FY2020 (one new store on Mumbai Nasik highway and added a new city, Vadodara) taking the total store count to 174 stores across 11 cities. Revenue growth for Himalayan stood at 5% in Q3FY2020 growing both in value and volume terms. Tata Water Plus (TWP) PET grew by 3% driven by distribution expansion. Overall volume growth (excluding TWP pouch) declined by 4%. The company expects to focus on better product mix and hence, is de- scaling the low-price pouch business. Tata Coffee Result Highlights Tata Coffee’s revenue (including Vietnam) grew by 25% y-o-y to Rs. 210 crore, driven by good Vietnam sales and volume growth of 14%. Domestic instant coffee business volumes came in at over 2,000 metric tonnes for fifth quarter straight, standing at 2,052 tonnes. February 04, 2020 14 Viewpoint EBITDA margin stood at 14.5%, largely due to higher volumes and a one-time credit, partly offset by lower realisations. The new facility in Vietnam, which became operational from June 2019 (Q1FY20) recorded robust sales and turned EBITDA/EBIT positive during the quarter. Margins were healthy as a result of cost advantages during the quarter earned due to local sourcing. The Vietnam facility has a total capacity of 5,000 tonnes with a full revenue potential of Rs. 300-400 crore. The capacity is currently operating at ~60-70% utilisation. Average utilisation stands at ~4,500 tonnes and the company expects to ramp up to ~80-90% by FY2021 and full utilisation by FY2022. The Eight O’ Clock clocked flat volumes and turnover and but reported a significant expansion in margins lower ad spends and tight cost control. The new launches under the brand have been accepted well and the company has a pipeline of new launches planned under the brand. Focus is on arresting the decline in Eight O’ Clock Coffee through innovation and cost optimisation. Arabica and Robusta coffee prices have been volatile during the quarter whereas pepper prices were volatile as the crop was affected by climatic vagaries. The Arabica variety’s prices have settled as on January and Robusta prices have some headroom for improvement, which is expected to settle down as soon as the demand picks up.