Have a Hot Cuppa!

Tata Global Beverages is a different beast from what we generally perceive of it. It is no longer an Indian centric enterprise – 70 per cent of its consolidated revenues (FY11) came from outside India. Through its five international acquisitions completed since 2000, Tata Global is now the second largest global tea marketing company.

Why does Tata Global feature here? Inspite of 90 per cent of its sales coming from branded products, the company’s key raw materials tea and coffee are commodities that face their respective cyclical price movements. Cost per kg of tea, for example, has varied from Rs 81 per kg in 2002 to Rs 65 in 2008 to Rs 114 in 2010. This volatility in global tea prices will continue to impact Tata Global’s earnings.

While global tea prices play spoilsport, the company has to continuously ward off competition. Selling and distribution charges as a result have been high – at an average of 25 per cent (of sales) over the last 10 years (S&P expenses are the second highest expense category for the company just after raw materials).

Where does it go from here? The company has successfully branded a commodity item. Its Tetley (UK), Tata Tea (India), Eight O’Clock (US), and Good Earth (US) are established brands. The company has utilised the boom years seen in the last couple of years to pare down debt – from Rs 4,577 crores in FY07 to Rs 1, 041 crores in FY11. ROCE averaged at 11 per cent in the last three years. Margins are expected to improve going ahead as the company moves away from the plantation business and focuses more on its brands.

What should you do? Its tie up with Starbucks has the market enthused, but further details are awaited. Hold.

This article was originally published on June 18, 2012.