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Tata Global Beverages Ltd: Transforming into a Global FMCG Player

, February 27, 2013, 0 Comments

Tata Global Beverages Limited (TGBL) is part of Tata Group, One of India’s most respected business houses. The company has grown from largely a domestic Indian tea grower to a global corporation in less than 10 years with over 90% sales through branded products. It has a volume share of 19.6% and a value share of 21.3% of the Indian beverages market (as of March 2012) and derives around 65% of its revenue from overseas operations. The company expects to perform well in USA, UK, Canada and Australia while volumes in Europe are expected to be down.

In terms of product sales Tea constitutes 70%, Coffee 20%, Non-Branded 9% and Water/Others at 1%. Tetley is the largest brand dominating with a 40% contribution, Indian Tea Brands 30%, Eight O Clock 18% and others 12%. (March 2012 figures). This JV will attempt to bring the premium Starbucks experience to Indian Consumers with the reliability of the Tata Name. The company has also entered into a JV with PepsiCo India for introducing nutritious positive drinks in India.

Profit & Loss Account 
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*The figures for 2013 are for 9 months ending December 2012.

Liabilities [ws_table id=”6″]
Assets [ws_table id=”7″]

The topline growth has been at an average growth rate of around 5-6% in the past which is typical of an FMCG company though it is lower when compared to other industry players. The stock was trading at INR 132.40 on Feb 26 2013 which means a market capitalization of INR 8200 crores. This values the company at an EV/EBITA of 17 times indicating that the valuation is rich. The book value of the stock is 72 and the current valuation is at 2 times. At the current price of 132.40 the earnings per share of 5.4 is discounted at 26 times.

Return on Capital Employed (ROCE) has averaged around 7-8% over the last 3 years based on consolidated Financials which is not very high.

At this juncture, it might be appropriate to have a look at the technicals of the stock to check if the charts are in agreement with the fundamentals.

Key Technical comments

  • The stock is trading near the 200 day moving average (green) which means that though long term trend is bullish; there has been a good amount of profit taking over the last few weeks.
  • The stock is trading below the 50 day moving average (red) with a declining 50 DSMA indicating that the intermediate trend is down. The intermediate trend will turn positive only above 156.
  • The stock could consolidate in a narrow range in the coming quarter due to a neutral technical position.
  • A bullish triangle pattern breakout was completed in Aug 2012 near the 130 levels which will now act as support (blue line).
  • A review of our neutral technical stance will be warranted on a closing below Rs 130/135 zone where there is rising trend line support. The trend after such an event will change the trend to bearish.

What’s not so good?
A factor which can go against this investment is the fact that due to an economic downturn over the last 2-3 years there has been a flight to safety to major FMCG players according them rich valuations. If there are signs of economic growth, there would definitely be a money flow out of the FMCG industry and into the growth stocks. Also the growth rates in the past have been a tepid 6-7% range which will definitely not excite investors looking for significant capital appreciation.

The technical position is also indicating that the stock has seen quite a bit of profit taking from the highs near the 180 mark in December and is hovering near the 200 day moving average support level. The stock is looking oversold in the short term and can see a technical bounce to maybe 150/52 levels. It would be better to see a closing above the 50 day MA before investing.

To invest, or not to invest?
Though there are several growth triggers for the stock in the form of new JVs signed with major global players, it would be very difficult to pencil in a substantial fundamental change in the next 2 years as most of the JVs are in the investment phase. Also, the long term market value growth of the beverage industry in India has been in the order of 3-3.5% which is fairly low. We feel that this stock is suitable only for long term and risk averse investors with a definitive holding period of greater than 3 years and can be bought in the price range of 110/115 INR compared to current market price of 132.40.The stock is part of the BSE 100 with moderate liquidity.

We recommend a buy on falls to levels of 110/115 to a maximum of 2-3% of one’s portfolio and currently advise profit taking and re-enter at lower levels citing high fundamental valuations and Neutral technicals.

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