Midcap mantra: Higher tea output to help Tata Global Beverages

Tata Global Beverages’ profitability has dropped significantly over the past few years due to a rise in raw material prices, especially, tea. The company is working towards changing its business model to ensure that it is far less vulnerable to these changes.

Tata Global Beverages, previously known as Tata Tea, has transformed into a global beverage company from a tea plantation company through a series of acquisitions over the past few years. Now, the company plans to diversify into the high margin business, in order to mitigate the impact of volatile raw material prices. The company is moving up the value chain from a plantation company to abranded products company.

Category-wise, tea products represent more than 70% of the company’s total revenue, while the remaining is mainly from coffee and plantations. Due to the increase in tea prices, the company’s operating margin decreased by 500 basis points in the past three years to 8.9 in FY11. 70% of sales of the company is from international markets, for which it sources raw materials, mainly from Africa.

Tea prices in Africa have more than doubled in the past three years. The company did not benefit from its tea plantations in India as tea prices here have remained almost flat during the same period. It is gradually hiving off its tea plantation business, which will reduce labour costs and other manufacturing costs. In 2011, plantation business was only 8% of the total sales, significantly lower than the previous years.

Besides, higher expected tea production in 2011, according to Tea Board of India, will help the company easily source raw material for its domestic tea business. Also, higher production will result in softening of tea prices, which will improve operating margin.