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Tata Global Beverages (TGBL IN) Summary

Core Content

Tata Global Beverages (TGBL IN) is a leading player in the consumer staples sector, with a current share price of INR166 and a target price of INR193 (+16%). The company's market capitalization is USD1.7B, and it has a 52-week high of INR175 and a low of INR129. The 3-month average turnover is USD1.4M, and the free float is 48.7%. The major shareholders include the Tata Group (49.0%), Life Insurance Corporation of India (4.1%), and Norges Bank (0.9%).

Main Points

• Business Transformation: TGBL is on track with its business transformation. The company has revised its FY15-16F EPS forecasts down to INR6.9 (-19%) and INR8.9 (-25%), due to the impact of one-time expenses and the underperformance of the Tetley business. However, the target price of INR193 is maintained due to the adoption of a sum-of-the-parts valuation method, which is considered more accurate for TGBL.

• Investment in Marketing and New Products: TGBL's FY14 performance was highlighted by its investment in marketing and new product launches, particularly in India and the UK. The company launched campaigns like "Jaago Re" and "Power of 49," and expanded its presence in ground coffee, coffee pods, and coffee machines in Australia through the acquisition of Map Coffee. It also plans to launch Tata Water Plus nationally in India and extend the Eight O'clock brand to Canada.

• Sum-of-the-Parts Valuation: TGBL is best valued using sum-of-the-parts valuation due to its diverse business segments across multiple geographies. The valuation includes separate assessments of the India tea business, investments, joint ventures (JVs), and Tetley. The target price of INR193 is derived from this approach.

• India Tea Business: The India tea business has shown strong performance, growing at a 14% CAGR in revenue and pre-tax earnings over the past five years. It generates an ROCE of 18% and is expected to grow at a 15% CAGR over the next three years with improved profitability. It is valued at 3x revenue and 3x book value.

• Coffee Business: TGBL holds a 59% stake in Tata Coffee, which is a highly profitable coffee plantation business in India. The company is also a major supplier to Starbucks in India, and the Eight O'clock brand is performing well in the US, with a focus on the coffee pod market. The recent acquisition of Map Coffee in Australia is expected to enhance the coffee business.

• Tetley Performance: Despite being a major brand in the UK and Europe, Tetley has underperformed due to a high proportion of declining black tea sales, losses in some European markets, and increased advertising expenses. It accounts for 42% of TGBL's revenue but contributes minimally to profit. The valuation for Tetley is based on a 0.5x revenue multiple.

• Starbucks JV: The Tata Starbucks JV is already profitable and has expanded rapidly, with 45 stores as of FY14. It is expected to continue growing, and the company's strong vendor base of 1000 is seen as a positive factor. The business is projected to be valued at INR5B, translating to a per share value of INR5 for TGBL's 50% stake.

• Nourishco and Water Business: The Nourishco JV and water business are in an investment phase and are not yet profitable. However, the company plans to expand the Tata Water Plus brand and shift focus to retail sales for Himalayan natural mineral water, which could lead to margin improvements.

• Financial Performance: TGBL's core net profit has been growing, with forecasts of INR4.2 for FY15 and INR5.4 for FY16. The core P/E ratio is expected to decrease from 25.6 in FY14 to 19.6 in FY16, indicating potential value unlocking. The company's net debt/equity ratio has decreased to net cash in FY15 and FY16.

• Key Financial Metrics: TGBL's core net profit has shown a steady growth, with a core P/E ratio of 26.1 in FY14 and a projected 19.6 in FY16. The P/BV ratio has decreased from 2.2 to 1.6 over the same period. The company has a net dividend yield of 1.3% in FY14, expected to rise to 1.9% in FY16.

• Free Cash Flow (FCF): The FCF yield is expected to increase from 4.5% in FY15 to 3.0% in FY16, indicating better cash flow generation. The company is expected to have positive free cash flow in FY15 and FY16.

• Valuation Breakdown: The sum-of-the-parts valuation includes the following:

  • Tata Tea India: 3x sales and 3x P/B, valued at INR132.8
  • Investment in Tata Coffee: 20% discount to MCAP, valued at INR13.6
  • Investment in Tetley: 0.5x revenue, valued at INR26.2
  • Investment in Mount Everest Mineral Waters: cost of acquisition, valued at INR4.3
  • Market value of investments in Tata Group companies: INR15.4
  • Investment in Starbucks, Pepsi JV: book value, valued at INR1.1
  • Total: INR193.4

Key Information

• Valuation Method: TGBL is best valued using sum-of-the-parts valuation, which separates the value of its various business segments.
• Growth Expectations: The India tea business is expected to grow at a 15% CAGR, and the coffee business is projected to improve with the expansion of the Tata Starbucks JV.
• Profitability: The company's core net profit is expected to grow from INR3.2 in FY14 to INR5.4 in FY16.
• Dividend Yield: The net dividend yield is expected to increase from 1.3% in FY14 to 1.9% in FY16.
• Market Position: Tetley remains a major brand in the UK and Europe, but its performance has been affected by declining black tea sales and increased expenses.
• Future Outlook: The company is optimistic about the potential of its coffee and water businesses, with plans for new launches and market expansion.

Conclusion

TGBL is currently undervalued, and the sum-of-the-parts valuation method suggests a target price of INR193, reflecting the potential for growth in its India tea business and the improving performance of its coffee and water segments. The company's strategic investments and expansion plans are expected to unlock significant value over the next few years.