About the Industry: - Tea is one of the oldest beverages in India with a penetration level of more than 90%. The size of the tea market in India is estimated at ~INR250b (~USD3.5b). The branded tea category (i.e. sold in packages) represents ~65% of the total market. The share of branded tea has increased over the years (~3% in the past four years) due to increase in the availability, quality factors and awareness. Tata Tea and Hindustan Unilever are the two largest branded tea players in India with a ~45% value share in the branded tea market, broadly split equally between the two. But, the tail of competition is long, including brands like Wagh Bakri, Girnar, Society, Eveready, Duncan’s, Marvel, etc. India is primarily a black tea market, but the wellness/green tea market is growing relatively fast.
About the Company: -Tata Global Beverages (TGB) is a natural beverages company with interest in tea, coffee and water. It is the second largest branded tea player globally with operations spanning over 40 countries. Branded products represent ~90% of its consolidated sales, of this, tea accounts for ~80%.
Tata Tea is amongst the oldest branded tea players in India, in existence for more than 30 years. Besides HUL, it is the only brand with national reach. Tata Tea currently has eight brands, five national and three regional. The regional brands target local taste and flavor. It is present across price-points — various brands cater to a broad range of consumers — from the mass market to the premium segment.
Tata Tea reaches over ~1.9-2m outlets, having grown at CAGR of ~4% over the past decade; it is amongst the largest in the beverage category in India. It has ~20% value market share in the branded tea category in India, which it has maintained over the last decade. Tata Tea has been rated as the second most trusted hot beverage brand in India.
New growth avenues: TGB entered into JV with Starbucks and started its operations in India in 2012. This venture comprises ~15% of the overall revenue of TGB. The opportunity for growth in the premium coffee segment in India is huge. After witnessing some slowdown in FY16-17; Starbucks focus is now back on growth; it added 25 stores in FY18 and 30 stores in FY19. The sale per store stood at 3.3 crore in FY19.
Recent development: - TGB is primarily into beverages; however, post-merger with Tata Chemical’s consumer business, the company will enter the staples segment. Tata Salt and Tata Sampaan are the key brands it will add to its portfolio. The company introduced the premium Tetley Super Green tea range in early- 2018, roping in popular actress, Deepika Padukone, as the brand ambassador. It has also launched a pilot project in the ‘out-of-home’ retail tea format – Tata Cha. The first store was launched in 3QFY18 in Bengaluru; currently 6 stores are operational with the company targeting to add another 6 stores by end-FY20. Launched ready-to-drink beverage — Tata Tea Fruski, a combination of green tea with ayurvedic ingredients and available in mango and orange flavors. Launched Chakra Gold tea in Elaichi flavor targeted at consumers in Tamil Nadu and Andhra Pradesh.
TGB is part of the diversified Tata Group; Tata Sons, the group’s holding company, is the single major shareholder (and promoter) in TGB with ~34% stake. With the appointment of Mr. N. Chandrasekaran as the Chairman of Tata Sons, there is renewed focus on RoCE. Also, simplification and consolidation of Tata group companies is on the radar – evident by the merger of Tata Chemicals’ (TTCH) consumer business with TGB.
Results: TGB reported a year on year increase of 4% in sales and 41% jump in operating profit in Q2FY20.
Key highlights:
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Domestic business was 61% of the overall revenue & International stood at 39%.
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Domestic tea posted a revenue growth of 7.9% and was again entirely volume- led.
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Within International Tea, both UK and Canada posted volume growth of 2% but underlying revenue was down 2% since UK growth was led by discount channel.
Outlook: We believe that TGB operates in a perfect competition market (19% market share) where no player enjoys any major advantage over other player as they operate in fragmented manner. But because it is an asset light model, the company earns very high return on capital employed. In such markets, the brand recall plays a vital role which can be achieved by aggressive marketing. TGB spends 8% of its revenue on marketing which appears high compared to 4% by Britannia and 6% by Nestle, although not exact competitors but food products companies.
TGB prospects are likely to improve as it ventures into diversified FMCG company with Tata Chemical’s Tata Salt and Tata Sampann brands. In beverages, since the market is well penetrated, the major growth engine would be shifting of consumers to premium segments. We find stake in Starbucks JV very lucrative albeit impact on overall growth remains limited. We do not find margin of safety at current price as its already factoring high than expected growth rate in future.
Source- Investor Presentation of Company, Ace Equity
