The storm in Tatas' teacup

Tata Global Beverages' profits may have more than tripled but rising commodity prices and competition will continue to challenge the tea major.

Percy Siganporia, Managing Director, Tata Global Beverages, would do well to take a strong swig of the tea his company brews to brace himself for some turbulent times ahead for the company. After a dip in net profits last quarter, Tata Global recovered with a more than three-fold increase in profits in the first quarter of this fiscal. However, the tough times will continue for the tea major as tea prices increase in most markets along with competition in both the international and domestic markets.

While net sales for the quarter increased by 6 per cent from Rs 1,373.89 crore to Rs 1,455.92 crore, the increase in net profit for the June quarter was backed by an infusion of Rs 88 crore of exceptional items along with lower interest costs whereby consolidated net profit jumped from Rs 45 crore to Rs 161 crore. As Siganporia explains, “While there has been volume growth during the quarter, the increase in profits has been due primarily to the increase in exceptional items.” Exceptional items comprise the sale of non-core assets in terms of shareholding in group company Tata Chemicals.

Maintaining volume leadership in the tea category for the world's second largest tea company with an 18.6 per cent share, Tata Global continued to take slight price increases during the quarter for its brands such as Tata Tea Premium Gold brand.

However, commodity costs have continued to be high and this has affected its margins. “Tea prices at the auctions have been dearer by nearly Rs 10 per kilo and it is only early this month that we found prices dipping,” says Siganporia. However, there is likely to be to no immediate respite from the increasing coffee prices and recovery from commodity costs may take a while, he adds.

RISING INPUT COSTS

Sagarika Mukherjee, research analyst at SBI Cap Securities, says the rising prices of tea and coffee will impact the company. “Profitability is likely to decline from these levels as tea and coffee prices are both going to rise again after a short span of easing in the month of June. Coffee production from Brazil (main source of coffee for Tata's Eight O'Clock) will see an ‘off-year' due to which the prices will remain firm this year. Coffee prices have risen from $1.5/pound to $3/pound in one year and are likely to settle around $2.7/pound, hence there will be continued raw material pressure for Eight O' Clock Coffee,'' she elaborates.

Besides, Kenya (the world's largest exporter of tea) will see a production loss of 50 million kg of tea this year due to which tea prices will remain high. Indian tea, especially from North Indian tea gardens, will continue seeing higher prices (above Rs 150/kg from Rs 136/kg last year) due to shortfall in production worldwide. Inventory levels are low for both coffee and tea worldwide which will exacerbate the situation.


MIXED PERFORMANCE

The company's performance in the international markets continues to be mixed. It has integrated its global business in three regions (Canada, South Asia and Great Britain) to strengthen the distribution channel, streamline costs and improve margins.

While in Canada it continues to have market leadership in the black and speciality tea segment, in the US lower volumes and commodity costs have led to its trailing behind its competitors. Its UK performance has also been affected due to phased promotions and competitive intensity while in Russia its coffee performance has been good, according to the company.

LESS OF TEA, LOCALLY

Even in the domestic markets competitive intensity is increasing and this is leading the company to explore new categories which do not use tea as an ingredient.

According to Parag Desai, Director, Gujarat Tea Processors & Packers Ltd, which makes Wagh Bakri, “Tata Tea has become a global company now and it is trying to move away from tea into more value-added beverages.''

In fact, in the past quarter when its profits had dipped, the company claimed it was planning to move away from the pure tea category. It has been looking at value-added products such as infusions and powders which use less of tea as a commodity and reduce its dependence on commodity-dependent formats in the tea segment.

“We want higher margins per serving of tea and believe that categories like infusions are going to give us those better margins. We want people to get addicted to categories such as infusions and powders but execution of such value-added categories has to be different,'' explains Siganporia.

Even in the UK market, the company has taken a strong position in speciality categories such as decaf and red bush in spite of having a presence in the black tea segment (which is de-growing).

Considering that the competitive intensity has increased in the UK, Tata Global has decided to focus on the antioxidants-led non-caffeine-based Red Bush category of teas. “While we trail behind in black tea, we have taken significant positions in the red bush and decaf category and intend to promote it,” says Siganporia.

However, the challenges will remain for the tea company. According to analysts, the main challenge will be to maintain margins in a high commodity inflation environment. Besides, Eight O'Clock Coffee has been de-growing since 2008 due to the slowdown in the US and hence passing on the costs to the end user without their downtrading will be a big challenge.

However, there are going to be positive factors affecting the business as well. As Mukherjee of SBI Caps says, “One positive is that the company has reduced its interest expenses significantly; hence that lower cost pushes up the profit after tax. Besides, the underlying 2 per cent volume growth with respect to the 6 per cent increase in net sales is decent given that the company grew by 13 per cent, most of which was volume-driven.''

Siganporia is also looking forward to better times considering the 12 per cent top line growth in the branded business in the domestic market driven by both volume and value (due to the price increases in the last two quarters of last fiscal). In the international markets too, he expects the coffee business to get on track with improved coffee performance in Russia. In the non-branded operations, Siganporia expects improved performance and realisations from the instant coffee units and coffee plantations in India aided by the commodity boom.

In spite of the tough times, Tata Global is bracing itself for the future. “Despite rising commodity costs, intense competitive activity and a challenging trading environment, we will continue to invest in our brands and focus on category development. Strong organic growth together with strategic alliances will help us achieve our vision of being a leader in ‘good for you' beverages,'' signs off Siganporia.

Source: Business Line