Recommendation: Buy
Current price: Rs 545 (at the time of publishing this tip)
Price target: Rs 850
Key points:
- With tea volumes growing moderately in the domestic and international markets, Tata Tea (a strong player in the branded tea markets, both domestic and international) is expanding its domestic as well as international beverage portfolio beyond tea and coffee, which could be a future revenue driver for the company. In line with its strategy, Tata Tea has launched T!ON, a tea and fruit based cold beverage in three variants in a 400 ml pet bottle strategically priced at Rs 22. The launch is an attempt to capitalise on the emerging health and convenience food and beverages trend in India.
- The demand for carbonated drinks in India is softening, as more and more consumers (especially the youth) are opting for healthier beverages such as fruit juices and fruit-based drinks. Consequently, non-carbonated beverages are gaining good acceptance and the segment is growing at a healthy rate of 35-40% per year in the domestic market. Tata Tea’s entry into this segment could be the much-needed revenue driver for the company.
- The company’s profit margins have been under pressure in FY2009 and are likely to remain so with higher raw material prices, especially tea prices staying firm on account of tight demand-supply situation in the domestic and international markets. However, I believe it will be able to sustain the margins in FY2010. Its focus on new geographies and new initiatives (such as green and herbal tea, fruit-based beverages and mineral water) augur well to sustain the growth at a consolidated level.
- At the current market price of Rs 545, the stock trades at 8.7x its FY2010 earnings estimate and an EV / EBITDA of 3.2x.
- I would recommend a Buy call with a price target of Rs 850 over next 8-9 months.
