Tata Global Beverages: Falling rupee, commodities to boost growth

Tata Global Beverages, or TGB, which sells branded tea and coffee could deliver earnings growth higher than the industry average in the next few quarters, helped by the fall in commodity prices and the rupee.

While the growth in leading consumer companies with a India focus is declining, TGB could deliver earnings growth of over 20%, according to a recent report by Morgan Stanley. The market appears to have ignored this fact, which is evident from the company’s stock price which has fallen in tandem with the broader market over the past few days. But given the favourable macro scenario and cheap valuations, TGB’s stock could outperform the industry over the next one year.

Nearly two-thirds of the company’s sales are from its overseas business and the fall in the rupee compared to the US dollar, pound and euro will lead to a higher growth in reported sales, which is in rupees. A large part of the overseas revenues is in these currencies. 7% of the company’s 11% growth in FY13 was contributed by rupee depreciation. This year, the fall in the rupee has been more severe.

An earnings boost is likely to be even stronger as growth will not only be driven by the falling rupee but also by the decline in tea and coffee prices, which are the two main components of the company’s input cost.

Since the beginning of March, Kenya tea prices have fallen by 25% and Arabica coffee prices, too, have come down 10%, the impact of which will be visible entirely from the current quarter due to a three-month lag.