Lower prices, FMCG play to boost Tata Tea valuation

Tata Tea posted a strong growth in the fourth quarter ended March 2010. Consolidated revenues grew by 23% and the net profit increased by nearly 3 times. But 40% y-o-y jump in raw material prices impacted the operating profit margins which fell by 130 bps to 11.3%.

Tea prices have risen by around 25% in the past one year. The company has been able to varyingly pass on this high input cost to consumers across various geographies. In India, it increased prices of its products at higher proportion compared to hikes in the UK and Canada. The company, which earns around 65% of its total revenues from overseas markets, has performed well in the US — thanks to the Eight O’Clock Coffee brand — and in Russia, on account of the recently acquired beverage company. In India, the company has achieved value as well as volume leadership in tea.

While most FMCG players are keen on pushing volumes over value in the current competitive market condition, Tata Tea prefers value growth over volume growth. This has, however, not prevented it from gaining higher share in most of its markets. Due to the strong brand equity of its products and increased investments in its brands, the company has been able to pass on the increased input cost to the consumers.

Being a global player, managing the volatility in commodity prices and currencies remains key challenge for the company. Going forward, the company expects softening of tea prices which could help it enhance the margins. Besides, the company is also working towards broadening its product portfolio and expanding to non-tea and non-coffee products. For this, it is open to inorganic expansion. The company is valued at a market cap of Rs 6,500 crore — little above its annual consolidated revenues of Rs 5,700 crore. FMCG companies are typically valued at over twice their revenues. For Tata Tea, which is transitioning from being a pure commodity player to a FMCG company, the current valuations indicate room for further appreciation.