Stock Review: Tata Global Beverages

 

High Commodity Prices, Currency Volatility Remain Key Concerns For Co

 

SHARE of Tata Global Beverages (TGB) hit an all-time high of 127.70 on Tuesday with a gain of 3.6% on BSE. The scrip has outperformed the broader market over the past four months after a prolonged under-performance.

   Against the year-ago level, the scrip is up 37% against Sensex's 16% gain during the same period.

   More than 70% of the company's revenues come from the tea segment. As the company hardly owns any tea plantations, the increase in the tea prices has been hurting its operating margins. In the June quarter, the company posted an 8% sales growth but recorded a 16% fall in operating profits.

   However, the global tea prices have softened of late on the back of healthy monsoon across most tea producing regions. This is set to improve the operating margins of the company in the coming quarters.

   Adverse currency movement (£/$) proved to be the other key factor in eroding the company's margins by increasing the costs for Tetley — an important subsidiary contributing nearly one-third of TGB's revenues.

   Currently TGB is in talks with PepsiCo to set up a joint venture, although the details are not known. Since Hindustan Unilever already has a JV with PepsiCo for tea products, TGB's alliance is likely to be for its non-tea products. Success of this venture could mean TGB getting access to PepsiCo's global distribution networks.

   Over the past few years, TGB has transformed itself from a tea plantation company to a marketing company. This is visible from the introduction of a number of new products and acquisitions it has made while disposing its plantation estates over a period of time.

   TGB, which has made some acquisitions such as Tetley in the past, had cash pile of around 1,900 crore at the end of FY10. How the company chooses to deploy these funds — whether to pay off its debt or for funding some inorganic growth venture — will be critical for its stock's performance.

   The company had also invested and continues to invest a significant amount in product development, advertising and branding. Though this will benefit in the long term, it will curb its short-term profitability. However, coffee prices still remain high. This and the volatility in the currency markets remain key concerns.