Tata Global Beverages (TATTEA) - ICICI Direct

Initiating Coverage August 13, 2013 Rating Matrix

Tata Global Beverages (TATTEA)

Rating

:

Buy

Target

:

| 182

Target Period

:

12-15 months

Potential Upside

:

25%

Brewing it up the ‘star’ry way….

YoY Growth (%) (YoY Growth) Net Sales EBITDA Net Profit EPS (Rs)

FY13 10.7 23.3 4.7 16.1

FY14E 15.6 22.6 28.6 21.8

FY15E 10.6 12.7 14.5 14.5

FY16E 9.5 11.8 13.1 13.1

FY13 24.2 28.7 1.2 11.7 7.7 10.5

FY14E 18.8 22.3 1.1 9.9 9.3 12.2

FY15E 16.5 19.5 1.0 8.7 9.9 12.6

FY16E 14.5 17.2 0.9 7.6 10.4 12.9

Valuation Summary P/E (x) Target P/E Mkt Cap/Sales (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Stock Data Market Capitalization Total Debt (FY13) Cash and Investments (FY13) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%)

| 9028.6 Crore | 672.7 Crore | 693 Crore | 9008.3 Crore 179 / 124 | 61.8 Crore |1 18.5 17.9

Comparative return matrix (%) Return % Tata Global Beverage HUL Nestle

1M 4.5 4.8 4.9

3M (1.7) 7.7 10.0

6M (0.3) 32.5 14.7

12M 12.6 31.5 23.1

Price movement 6,400

200

6,000

150

5,600

100

5,200

50

4,800 4,400 Aug-12

0 Nov-12

Feb-13

Price (R.H.S)

May-13

| 146

Aug-13

Nifty (L.H.S)

Analyst’s name Sanjay Manyal [email protected] Parineeta Poddar [email protected]

ICICI Securities Ltd | Retail Equity Research

Tata Global Beverages (TGBL) is the second largest branded tea player in the world and the market leader in the domestic tea market with its flagship brands, Tetley and Tata Tea, respectively. Apart from tea, TGBL’s increasing presence in the coffee and water businesses through acquisition of dominant brands (Eight O’ Clock Coffee, Grand Coffee, Himalayan water) has transformed the tea company into a ‘good-for-youbeverages’ company. Further, we believe TGBL’s JV with Starbucks Inc US, to establish Starbucks stores across the country, and PepsiCo Ltd, to handle distribution of its water products, are key positives for revenue and earnings growth, going ahead. Accordingly, we expect revenues, earnings (adjusted PAT) to grow at a higher CAGR (FY13-16E) of 12%, 15.7%, respectively. We initiate coverage on TGBL with a BUY rating. Brand strength in tea to drive revenues across geographies TGBL derives ~70% of its revenues (FY13) from tea. Tea revenues have grown at a healthy CAGR of 9.2% in FY08-13. The growth has been aided by its leadership position in Canada (Tetley), India (22.2% value share of Tata Tea), UK (27% value share of Tetley), acquisition of leading brands across the globe, Good Earth in US (20.6% volume share), Joekels in South Africa (third largest player), Jemca in Czech Republic (market leader) and Vitax in Poland (16% share of fruit tea market). Further, capitalising on Tetley’s brand strength TGBL has successfully ventured into Australia and the Middle East. Therefore, we believe with a strong portfolio of tea brands across geographies, TGBL would continue to grow its tea revenues at reasonable CAGR of 7.6% in FY13-16E. Strengthening coffee business to aid earnings The coffee business contributes 35.8% (6.1% in FY06) to PBIT and 26.2% (4.3% in FY06) to revenues (FY13). The increasing contribution of the business has aided PBIT margins as earnings from the coffee business are higher (15.2% in FY13) compared to tea (10.2% FY13). We expect coffee’s contribution in revenues to increase to 29% by FY16E, consequently driving margins (PBIT) growth, going ahead. Earnings growth to gain traction, attractively valued We expect TGBL’s earnings (adjusted PAT) to witness a higher CAGR of 15.7% in FY13-16E led by changing sales mix, premiumisation across the portfolio and Starbucks JV contributing positively to EBITDA from FY16E onwards. We believe the stock is trading at an attractive P/E of 18.8x and 16.5x FY15E and FY16E EPS of | 8.9 and | 10, respectively. We have valued the stock on an SOTP basis assigning it a target price of | 182. Exhibit 1: Financial Performance (Year-end March) Total Operating Income EBITDA PAT (Adjusted) EPS Adjusted (|) EV/EBITDA (x) Debt/Equity (x) RoNW (%) RoCE (%)

| crore FY12 6,640.0 623.1 339.2 5.5 14.5 0.2 7.8 8.3

Source: Company, ICICIdirect.com Research

FY13 7,351.0 768.5 393.7 6.4 11.7 0.1 7.7 10.5

FY14E 8,498.4 942.4 479.3 7.8 9.9 0.2 9.3 12.2

FY15E 9,402.7 1,062.4 548.7 8.9 8.6 0.2 9.9 12.6

FY16E 10,292.0 1,187.4 620.7 10.0 7.5 0.2 10.4 12.9

Shareholding pattern (Q1FY14) Shareholder

Company Background

Holding (%)

Promoters

35.2

Institutional Investors

36.4

Public

28.4

Tata Global Beverages (TGBL), formerly known as Tata Tea, was established in 1983. The company is the market leader in the domestic branded tea market (FY13) and a dominating player in the branded tea and coffee in the markets of UK, US and Canada.

FII & DII holding trend (%) 30 25 20 15 10 5 0

25.2 15.4

23.2 16.5

TGBL entered the branded tea business in 1991 and has grown over the years through acquisitions and joint ventures. Till date, the largest acquisition for the company has been the European tea brand Tetley in 2000 for $450 million. The other major acquisitions by TGBL include tea company Good Earth in the US (2005), Eight O’ Clock (EOC) coffee brand in the US (2006) and coffee brand Grand in Russia (2009). Apart from tea and coffee, the company has expanded its beverage offerings to the mineral water business by investing in Mount Everest Mineral Water Company (2007) that owns the Himalayan brand. With the diversification in the product basket of Tata Tea, the company changed its name to Tata Global Beverages in 2010 with the aim of establishing itself as a global beverage company from a branded tea marketing company.

19.2 18.5 19.1 17.8 17.9 18.5

Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 FII DII

In November, 2010, TGBL entered into a 50:50 joint venture with PepsiCo Ltd to develop, manufacture, sell and distribute hydration beverages under the JV, NourishCo Beverages. Further, in 2012, TGBL entered into a 50:50 JV with Starbucks Coffee International Inc, US to set up Starbucks coffee stores in India. With successful acquisitions over the years, net revenues and earnings (adjusted PAT) have grown at a CAGR (FY09-13) of 10.5% to | 7232.4 crore and 9.3% to | 400.9 crore, respectively. Gross revenues (| 7270.3 crore in FY13) consist of ~73% from tea, ~26% from coffee, ~1% from water and other businesses. Geographically gross revenues (FY13) are comprised of 31.8% from India, 21.3% from the UK, 27.4% from the US and Canada and 19.5% from other countries (Poland, South Africa, Australia, Czech Republic). With the company’s leading position across geographies and a strong portfolio of brands, we expect revenues and earnings to post a CAGR of 12% and 15.7%, respectively, in FY13-16E. Exhibit 2: TGBL's timeline Tata enters into alliance with James Finlay to form Tata Tata Tea enters Finlay brand business

1964 1988

Tata Tea is born, James Finlay is bought out

1991

1993

Tata Tea acquires the Tetley Group Ltd

2000

JV with Allied Lysons Plc, Tata Tetley is established

Group acquires EOC, US & energy water brand ‘Glaceau’; Tetley group acquires Jemca in Czech Republic & 33% in Joekels Tea, South Africa

2005

Tetley Group acquires Good Earth, US

2006

Integration of beverages brands announced; Group acquires Grand Coffee, Russia

2007

2009

Investments in Mount Everest Mineral Water, which owns Himalayan Water brand; Tetley group acquires Polish tea brand Vitax; Sells ‘Glaceau’ to Coca Cola

Tata Global Beverages corporate brand announced

2010

JV with Starbucks; Eight O' Clock signs agreement with Green Mountain Coffee Roasters Inc

2011

2012

Acquires stake in The Rising Beverage Co. LLC, which owns Activate Brand; JV with PepsiCo named NourishCo; Increases stake in Joekels Tea



Page 2

Exhibit 3: TGBL structure

Tata Global Beverages (Holding Company) Subsidiaries Name Tata Global Beverages (Standalone) - 100% stake

Brands Segment Tata Tea (Premium, Gold. Gold Darjelling) Tea

Tata Global Beverages Group Ltd. - 88.7% stake

Tata Coffee Ltd (57.48% stake)

Mount Everest Mineral Water Ltd. (50.1% stake) Joint Ventures Name NourishCo Beverages (50:50) with PepsiCo Tata Starbucks Ltd (50:50) with Starbucks Coffee Inc US

Tata Tea Agni

Tea

Tata Tea Chakra

Tea

Geography India

Kanan Devan

Tea

Tetley

Tea

Joekels

Tea

South Africa

Good Earth

Tea

USA

Across the world

Jemca

Tea

Czech Republic

Vitax

Tea

Poland

Grand

Tea & Coffee

Russia

Tata Coffee

Plantation

India & Exports

Eight O' Clock Coffee

Coffee

USA

Activate

Functional Water

USA

Himalaya

Water

India

Brands Tata Water Plus Tata Gluco Plus Starbucks (Coffee Retail)

Segment Functional Water Functional Water Coffee

Country India India India


Exhibit 4: Gross revenue (| 7270.3 crore in FY13) break-up by segment

Exhibit 5: Total operating revenue (| 7351 crore in FY13) by brands

Others 1%

Others 13%

Coffee 26%

Eight O' Clock Coffee 17%

Tea 73%



Tetley 38%

India Tea Brands 32%


Page 3

Investment Rationale Revenue mix: Increasing contribution of coffee to aid revenue, PBIT growth FY13 revenues (gross revenues of | 7270.3 crore) are comprised of 72.8% from tea, 26.2% from coffee and 1% from other businesses (water and joint ventures). Going ahead, by FY16E, we expect the contribution of tea to decline to 64.8%, coffee to increase to 29% and others to increase to 6.2%. The higher contribution of coffee to revenues would be driven by 15.7% growth (CAGR in FY13-16E) in coffee revenues compared to 7.6% growth (CAGR in FY13-16E) in tea revenues. The significant increase in contribution of others to 6.2% by FY16E from 1% (FY13) would be aided by revenues from joint ventures (largely Starbucks). Exhibit 6: Revenue break-up: Contribution of coffee slated to increase from ~26% in FY13 to ~29% by FY16E 100%

134.4

157.5

664.8

(| crore)

895.4

1012.5

1299.3

1423.3

1706.4

1903.3

2503.5

2719.2

2944.9

3317.4

3407.0

3767.6

4381.8

4476.7

4766.8

5291.4

5639.7

6117.7

6588.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

80% 60% 40%

2844.4

2930.0

20% 0% FY05

FY06

Tea

Coffee

Others


The largest share in profitability (FY13 PBIT of | 807.8 crore) is accounted by the tea segment at 67.4% with the share of coffee being 35.8%. The others segments continue to remain under losses as they are in the investment phase. With margins from the coffee business being higher at ~15% (FY13) compared to tea at ~10% (FY13) we believe the increasing contribution of coffee to revenues would drive margins at a higher rate, going ahead. Further, with the water business (Himalayan brand) turning profitable in FY13 and JV businesses to achieve breakeven by FY16E, we expect earnings (PBIT) to grow at a higher rate of 14.4% CAGR (FY13-16E) against 6.6% CAGR (FY08-13).

The coffee segment’s increase in contribution to revenues from 5.2% in FY05 to 26.2% in FY13 was aided largely by the acquisition of the two large brands, Eight O’ Clock Coffee in the US (2006) and Grand in Russia (2009)

Exhibit 7: Segment wise contribution to PBIT (| crore) 100% 80%

148.8

Exhibit 8: PBIT margins from tea & coffee (%) 20

146.6

239.7

240.6

196.1

289.2

621.1

560.3

799.6

651.2

683.4

807.8

0% FY08

FY09

FY10 Tea

Coffee

FY11

FY12

Others



FY13

16.9

10

15.2

14.5 11.5

13.9

11.8

13.1 9.4

5

20%

-20%

18.4

15

60% 40%

16.6

10.6

10.3

FY12

FY13

0 FY08

FY09

FY10 Tea

FY11 Coffee


Page 4

Tea: Growth to be supported by premiumisation and innovation Revenues from tea stood at | 5291.4 crore (FY13) recording a CAGR of 9.2% in FY08-13. Going ahead, we expect tea revenues to grow at 7.6% CAGR in FY13-16E driven by premiumisation in the domestic tea market (12.6% CAGR FY13-16E), higher innovations driving growth in the UK (4.1% CAGR in FY13-16E), capture of the evolving tea market of the US (5.4% CAGR FY13-16E) and consolidation of market share in Poland, South Africa, Czech Republic and Australia. Hence, we expect tea revenues across geographies to be driven largely by prices (premiumisation, innovations and change in sales mix) with volume growth remaining modest. Exhibit 9: Tea revenues (| crore) & growth trend 7000 6000 5000 4000 3000 2000 1000 0

3407.0

3767.6

4381.8

4476.7

4766.8

5291.4

5639.7

6117.7

6588.0

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

Tea revenues


Exhibit 10: Tea portfolio Brand Good Earth

Acquired/Owned Acquired

Year October, 2005

Country US

Value $32 million

Remarks 20.6% volume market share; strong presence in West Coast

Joekels Tea

Acquired

October, 2006

South Africa

NA

Third largest player in South Africa; Its main brands are: Laager, Tea Time Range, Tea4Kidz, San Aqua & Rooibos Ice Tea

Jemca Tata Tea

Acquired Owned

May, 2006 1988

Czech Republic India

NA -

Market leader in Czech Republic Market leader in India (volume and value); completed 25 years in FY13; Main brands include: Tata Tea Premium, Agni, Chakra, Gemini, Kanan Devan

Tetley

Acquired

Feburary, 2000

UK, Canada, Australia, US, etc

$450 million

Vitax

Acquired

2007

Poland

NA

Second largest tea brand globally; market leader in Canada; brand leader in decaffinated tea in UK 16% share of the fruit tea market of Poland


Among the basket of TGBL’s tea brands, we believe ~54% of tea revenues and ~38% of TGBL’s consolidated revenues are constituted by Tetley (Tetley revenues in FY13 estimated at ~| 2800 crore). We believe with the global presence of Tetley, it would continue to be the dominant contributor to revenues.


Page 5

Exhibit 11: Share in revenues by brands

The largest brand in the company’s consolidated revenues (FY13) has been ‘Tetley’ contributing ~38% followed by the Indian tea brands (Tata Tea) contributing ~32%. This, we believe, is supported by the global presence of ‘Tetley’

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

24.0%

22.5%

26.0%

29.0%

29.0%

30.0%

20.6%

27.8%

30.0%

29.0%

30.0%

32.0%

51.6%

45.9%

40.0%

39.0%

40.0%

38.0%

FY08

FY09

FY10

FY11

FY12

FY13

Tetley

Indian Tea Brands

Others

Source: Company, ICICIdirect.com Research *Others in FY12 & FY13 contain contribution of Jemca, Vitax, Coffee and water brands Others (FY08-11) depicts contribution of coffee and water brands

According to geographic break-up of tea revenues (FY13), we estimate that currently India is the highest contributor with ~44% (| 2273.3 crore), followed by the UK at ~27% (~| 1400 crore), US & Canada at ~15% (~| 800 crore) and ~14% (~| 700 crore) from Australia, Czech Republic, Poland, Russia and South Africa. With highest growth in tea revenues expected from India we expect India’s dominance in TGBL’s tea revenues to increase to 49.3% by FY16E. We expect the share of the UK to decline to 24% by FY16E due to the deceleration in the black tea market in the UK and specialty tea driving UK’s tea revenue growth. The share of the US and Canada would also fall to 14% by FY16E as we believe the shift of coffee drinking consumers to tea would remain slower compared to the higher rate of change in sales mix in India. India: Market leadership, premiumisation to drive growth!

TGBL’s Volume market Share 22 20

18.5

19.2 18.9 18.9

18 16.7

19.7 19.5

19.6 19.6 19.9

20.3 20.5

18.6 Achieved mkt leadership and has maintained it since then

16

Q4FY13

Q3FY13

Q2FY13

FY12

Q1FY13

Q3FY12

Q2FY12

Q1FY12

FY10

Q2FY11

FY07

Q1FY08

FY06

14

Source: Company, ICICIdirect.com Research TGBL is the market leader of the Indian branded tea market (~450 million kg by volume) with a share of 20.5% by volume and 22.2% by value (FY13).

Tea revenues in India have grown at a CAGR of 15% in FY08-13 posting sales of | 2273.3 crore in FY13. Going ahead, we believe that with TGBL’s market leadership in the domestic branded tea market, strong marketing strategies (Jaago Re! campaigns) in the country and increasing sales of green and specialty teas (Tetley offerings), tea revenues would grow at a healthy CAGR of 12.6% (FY13-16E) to | 3246 crore by FY16E. Our assumption is based on the premise that TGBL would maintain its current volume leadership in the domestic tea market until FY16E. Therefore, any incremental gains would further aid the company’s revenues. We estimate that currently (FY13), black tea constitutes ~94% (| 2131.2 crore) of TGBL’s Indian tea revenues, green tea constitutes ~5% (| 102.3 crore) and specialty tea constitutes ~1% (| 39.8 crore). With the growing demand for green and specialty tea in the country, we expect black tea’s contribution in the country’s tea revenues to fall to ~91% (| 2970.1 crore clocking ~12% CAGR in FY13-16E), green tea’s contribution to increase to ~6% (| 194.8 crore growing at ~24% CAGR in FY13-16E) and specialty tea’s contribution to increase to ~3% (| 81.2 crore at ~27% CAGR in FY13-16E). Further, the higher contribution of specialty teas would also drive higher realisation/kg and increase the contribution of tea bag sales in the sales mix, supporting realisations.


Page 6

Exhibit 12: Growth in domestic tea revenues driven by price increases, marketing campaigns & TGBL’s market leadership position 3500 3000

Launched Jaago Re! campaign

Strong growth in Premium, Gold & Agni post Jaago Re!

19.9%

2000 1132.2

1686.8

Second Jaago Re! campaign

3246.0

30%

2908.6

25%

2602.5

2273.3

20%

1991.5

1777.6

15%

1357.9 12.0%

5.4%

1000 500

Significant price increases taken in FY09 & FY10 impact growth

24.2%

2500

1500

Price increases taken in FY09 support growth

(| crore)

14.5%

14.1%

11.8%

10%

11.6%

5%

7.6%

0

0% FY08

FY09

FY10

FY11

FY12 Sales (| core)

FY13

FY14E

FY15E

FY16E

% Increase


Exhibit 13: Domestic tea brands portfolio TGBL’s India portfolio has brands across the value pyramid The share of domestic tea brands in consolidated revenues has increased from 20.6% in FY08 to 32% in FY13

TGBL has recently launched the Tetley brands in India largely in the tea bags format. The company has guided that it is witnessing ~50% YoY growth in Tetley’s offerings

The growth expected in the tea industry in India at ~15% per annum would have a higher contribution of prices (led largely by premiumisation) than volumes. We believe the

Brand Tata Tea Premium Tata Tea Gold Tata Tea Gold Darjelling* Chakra Gold Tata Tea Life Tata Tea Agni Gemini Kanan Devan

Segment Premium Premium Premium Premium Popular Economy Economy Economy

Price (|/kg) 336 396 90 420 348 250 NA 213

Tetley Variants Black Green Flavoured

higher growth of 20.9% CAGR expected in tea bags consumption would significantly aid margins of tea companies

Comparison of revenues from loose tea vs. tea bags (Brand: Tata Tea Premium) Loose Tea Tea Bags (2 gms/pag)

Price 335 95

Grams 1000 200

Hence, revenues from sale of 1000 gm of tea bags would be | 475 crore, ~42% higher from the sale of same amount of loose tea. Hence, an increase in the sales of tea bags would aid margins significantly, going ahead

Remarks Flaghip brand; Volume leader in India Fastest growing brand in the portfolio Premium tea launched as tea bags Leading brand in Andhra Pradesh Nearest competitor of unbranded players Market Leader in Andhra Pradesh Leading brand in Kerala

Flavors Assam Tea Plain, Long Leaf, Ginger Mint & Lemon, Lemon & Honey Masala, Lemon, Ginger, Elaichi, Tulsi & Lemon, Earl Grey

Source: Company, ICICIdirect.com Research *It is the price of tea bags, 25 nos (~50 grams)

Indian tea market: A snapshot India is currently a tea drinking nation (black tea) with ~870 million kg of annual consumption (CY12, Source: Tea Board of India). The market is equally dominated by branded (~50% of the consumption demand) as well as unbranded players. The penetration of the commodity is very high (~95%). Hence, demand growth for branded players is largely led by capturing the share of unbranded players and growth in varieties (specialty tea, green tea) other than black tea. Exhibit 14: Facts about domestic tea industry Tea Industry Size (| crore)-2011 Tea Industry Size (| crore)-2015E Growth (p.a.) Tea Bag Consumption In India in 2011 (tonnes/year) Tea Bag Consumption In India in 2015E (tonnes/year) Growth in the flavored tea market (p.a.)

19500 33000 15% 7000 15000 25%

Source: Assocham, ICICIdirect.com Research


Page 7

United Kingdom: Innovation key to growth…

Tea drinkers comprise ~88% of the population above 65 years of age and 73% among 15-34 year olds in the UK

Revenues from the UK are dominated by its largest tea brand Tetley. Tetley is the market leader having ~27% share by value (CY12). We estimate that tea revenues from the UK in FY13 stood at ~| 1400 crore (~90% of total UK revenues in FY13) growing at 5.6% in FY08-13E. We expect tea revenues from the UK to grow at a CAGR of 4.1% in FY13-16E to | 1577.9 crore (FY16E). We believe growth in UK tea revenues will be driven by a change in the product mix and increasing contribution of premium offerings (Kenyan Tea, Red Bush, Specialty Tea and Herbal Infusions). Further, the constant innovation and new offerings by TGBL in the UK through increased marketing initiatives would be key in keeping growth intact in UK markets in spite of a slowing black tea market. Hence, we estimate sales growth in UK’s tea revenues will be supported by highest growth in green tea (~25% CAGR FY13-16E) and a moderate growth in fruit & herbal tea and instant tea at ~5% CAGR in FY13-16E. The growth in black tea would remain subdued at ~3% CAGR in FY13-16E. Exhibit 15: Estimated UK sales (Tetley)

TGBL entered the UK market with the acquisition of the world’s

1500

(| crore)

Slowdown in black tea sales, Premium & Specialty tea to support sales growth CAGR 4.1%

second largest and UK’s largest tea brand Tetley in February,

CAGR 5.6%

2000. TGBL had acquired the brand for $420 million. Due to the global presence of the brand, the acquisition had actually provided

1000

TGBL an entry into 70 countries across the globe

500 952

1018

1164

1059

1166

1252

1286

1365

1441

FY08E

FY09E

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

0

Source: Company, ICICIdirect.com Research We have assumed that ~80% of TGBL’s UK revenues are generated by Tetley Sales

Exhibit 16: Tetley's offerings in UK market Tea Variant Black

Green

The number of tea variants along with the equally higher number of flavours shows that TGBL has identified the opportunity in the specialty tea segment in UK. We believe the TGBL’s continued innovation in the fruit & herbal tea segment would keep the company’s leadership position intact in the UK market, going ahead

Green & Black Kenyan Tea Redbush Speciality Herbal Infusions

Flavors Original & Decaf Extra Strong Easy Squeeze Pure & Decag Lemon Green Honey Green Blueberry Green Blend of both Estate Selection Pure Vanilla Earl Grey Peppermint Camomile

Remarks Black tea is sourced from Africa and India (Assam) and blended together; Black tea consumption is witnessing slowdown in consumption Green tea acquired from Asia and Africa is blended together. Green tea market in UK is growing faster than the specialty tea and black tea. Higher contribution of green tea is also aiding the margin improvement. Unique blend of black tea from Africa and India (Assam) with green tea from Asia. Launched in Q4FY13 it is a premium Kenyan tea Redbush from South Africa is available originally as well as with vanilla It is present in original and with vanilla flavour Herbal infusions are tea infused with herbal benefits



Page 8

UK tea market: An overview Similar to India, the UK is largely a tea consuming nation having high penetration (~87% as in 2011) of the beverage. However, unlike India the UK market is largely branded with unbranded and private players having only 5% share. Majority of the tea consumed in the UK is black tea (~80% of total tea consumed in 2011). Specialty tea, green tea and fruit & herbal tea form a smaller share in the overall tea consumption but are growing at a higher rate than the black tea market. Therefore, the key to grow and consolidate market share in the UK is through innovation and new launches. TGBL has successfully capitalised on this opportunity by launching a number of variants within existing varieties year after year. Further, TGBL has also launched products in the super premium categories to aid its revenue and profitability growth in the UK. US & Canada: Strength of TGBL in Canada yet to spread to US Tea revenues in the US are accounted by Tetley and Good Earth Tea (acquired in 2007) and in Canada by Tetley. We estimate that out of the total revenues of | 1993.7 crore (FY13) from the US & Canada, ~45% is constituted by tea sales (| 788.3 crore). Tea revenues from the US & Canada have grown at a CAGR of 3.5% in FY08-13E, which we expect to increase at a higher rate of 5.4% CAGR in FY13-16E. The higher rate of increase from tea sales is expected on the back of new premium launches (Pure Ceylon tea, premium variant, launched in Canada in FY13) and higher demand for specialty tea. Exhibit 17: Tea sales in CAA 1000 900 800 700 600 500 400 300 200 100 0

(| crore) Premium launches in Canada and Australia

Significant increase led by launch of liquid infusions & additional flavours in Canada

749.5

679.9

652.9

718.2

772.1

818.4

843.0

601.3

572.0

61.1

72.7

57.8

59.8

65.5

70.1

74.3

78.0

80.4

FY08E

FY09E

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

Good Earth Sales

Tetley Sales


US The US is largely a coffee consuming nation (coffee consumption in the US is 9.39 lb/person compared to tea consumption of 0.9 lb/person in 2011). However, the consumption rate of coffee is declining (by volumes) with tea sales catching up at a fast rate. According to the Tea Association of America, the tea market in the US has grown from $1.8 billion in 1991 to $8.2 billion in 2011 (CAGR of ~7.9%). It is expected to grow at a higher rate from here on with the sharpest growth expected in green tea. Therefore, specialty tea driving tea demand in the US, TGBL’s presence in the segment through ‘Good Earth‘ (a speciality tea brand largely present in the West Coast) and increasing foray through Tetley would drive revenues to grow at 4.7% CAGR in FY13-16E against 2.8% CAGR in FY0813E.


Page 9

Exhibit 18: TGBL's offerings in US

Drivers of the US tea market are refrigerated tea and ready to drink tea. Total ~85% of the tea consumed in the US is iced tea

Tetley Variants Classic Blend British Blend Pure Green Iced Tea

Flavors Original & Decaf Premium Black & Decaf Original& Decaf Original & Decaf

Good Earth Variants Original Tea Super Fruit White Tea Green Tea

Flavors Sweet & Spicy Mangosteen & Mango Lemon Grass Plain & Decaf, Matcha, Sencha & Orange, Jasmine, Gingseng Citrus, Mango Peach & Pineapple Plain, Decaf, Vanilla, Cocoa & Seven Spice Sweetly twisted, Cocoa Tango, Tropical Peach, English Breakfast, Earl Grey & Apricot Ginger Vanilla, Vanilla decaf, Citrus For Cold, Sleep & Slimming

Chai Teas Black Tea White Tea Medicinal Teas


Canada: Tetley is the volume leader in Canada with ~39% share by volume and ~31% share by value (Euromonitor). The tea market in Canada was estimated to be $415 million in 2011 and is estimated to increase to $541 million by 2017 (CAGR 4.5%). The Canadian market is largely dominated by black tea consumption by volume (76.6% volume market share in 2012) and specialty tea consumption by value (~60% of value market share in FY12). With the black tea market attaining saturation in Canada, specialty tea is the growth driver fuelled by more consumption of specialty black (up 27% YoY in 2012) and fruit & herbal (up 11% YoY in 2012) teas. Hence, led by Tetley’s market leadership in Canada, innovation in the black tea category (orange pekoe along with flavours introduced in the portfolio, offering alternatives to black tea consumers) and strengthening green, fruit and herbal tea portfolio, (Tetley Green Tea Plus and Herbal Cocktail-Inspired Teas launched in 2012), we expect tea revenues from Canada to grow at 5.5% CAGR in FY13-16E against 3.6% CAGR in FY0813E. The higher contribution of specialty teas would drive the higher revenue growth while we expect volume growth to remain modest. Further, TGBL’s launch of its domestic tea brand Tata Tea in Canada in H1CY13 to meet the demands of the large Indian population residing there would further aid black tea revenues from Canada. Exhibit 19: TGBL's offerings in Canada Tea Variant Black/Orange Pekoe Green

Green tea plus Herbal

Flavoured Black Rooibos

Flavors Original, Decaf, Bold & Ceylon Pure, Decaf, Earl Grey,Honey Lemon/Mint/Pomegranate, Jasmine, Lyshee Pear, Passion Fruit Acai, Blueberry Green Aware, Glow, Figure Cammomile Mint - Calm, Blueberry Ginseng - Clarity,lemon balm & honey - Cleanse,Cammomile Lemon - Dream, Mint Lime - Mojito, Pure Peppermint Chai, Dark Chocolate, Vanilla, Earl Grey, Camommile Plain, Vanilla, Red Berry, Spice Plum



Page 10

Other geographies: Strengthening regional presence TGBL has ventured into geographies across the world by acquiring tea brands in the respective geography and introducing Tetley brands and flavours in these tea drinking nations. Exhibit 20: TGBL’s brands in other geographies Geography Poland South Africa Russia Czech Republic

Brand Vitax Joekels Grand Tea Jemca

Remarks Vitax has ~16% share of the fruit & herbal tea market in Poland Offers products under the name 'Laager", 2nd largest brand in South Africa Offers flavoured, green and iced tea variants. Market Leader with 20.6% volume share, Available in Black, Green and Fruit & Herbal teas


Tea revenues from these geographies are estimated to be | 711.9 crore (FY13) accounting for ~14% of tea revenues. Going ahead, we expect the contribution to tea revenues from these brands to remain at ~13% until FY16E, supported by a CAGR of 5.7% (FY13-16E) clocking revenues of ~| 840 crore by FY16E. Therefore, tea revenue growth of 7.6% CAGR in FY13-16E would be driven by higher growth in specialty tea across all geographies driving revenues primarily through prices. Riding on Tetley’s brand strength and ability to blend new flavours across all categories of tea (black, green and fruit & herbal tea) we believe innovation and premium offerings would further support the growth in tea revenues. Exhibit 21: Snapshot of tea revenues across geographies Tea revenues % Increase India Contribution % UK Contribution % USA & Canada Contribution % Others Contribution %

FY13E 5291.4 11.0% 2273.3 43.0% 1399.7 26.5% 788.3 14.9% 711.9 13.5%

FY14E 5639.7 6.6% 2602.5 46.1% 1427.7 25.3% 846.4 15.0% 763.2 13.5%

FY15E 6117.7 8.5% 2908.6 47.5% 1505.2 24.6% 896.4 14.7% 807.4 13.2%

(| crore) FY16E 6588.0 7.7% 3246.0 49.3% 1577.9 24.0% 923.3 14.0% 840.7 12.8%

CAGR FY13-16E 7.6% 12.6% 4.1% 5.4% 5.7%



Page 11

Coffee: Increasing share in portfolio to aid earnings TGBL’s coffee business revenues include plantation revenues and sale of branded coffee. Coffee revenues have grown at 16.3% CAGR in FY08-13 to | 1903.3 crore (FY13). Consequently, the segment’s contribution has increased from 20.5% (| 895.4 crore) of consolidated sales in FY08 to 26.2% (| 1903.3 crore) in FY13. Going ahead, we expect the segment to grow at 15.7% CAGR (FY13-16E) to | 2944.9 crore (FY16E) and its share in overall revenues to increase to 29%. We expect the higher growth rate to be contributed by the premiumisation in the coffee markets in the US, consolidating market share in Russia and higher realisations from supplying to Starbucks stores in India (currently) and international markets, going ahead. TGBL is scouting for international acquisitions for its coffee business and planning to increase its Indian capacity further. We believe these would account for incremental contribution to revenues from the segment, going ahead. Exhibit 22: Coffee revenues (| crore) trend 2000 1600 1200 800 400

Tie up witn K-cups

Grand relaunched

Acquired Grand in Russia

1299.3 Acquired EOC in USA

1903.3 1706.4

895.4

1423.3

1012.5

664.8

157.5

134.4

FY05

FY06

0 FY07

FY08

FY09

FY10

FY11

FY12

FY13


Exhibit 23: Coffee portfolio Brand Grand Eight O' Clock Mr Bean Coorg Pure Coorg Filter Coffee Mysore Gold Tata Café Tata Kaapi

Acquired/Owned Acquired

Year Sept, 2009

Country Russia

Acquired Owned Owned Owned

July, 2006 NA NA NA

USA India, Russia and Middle East India India (South)

Owned Owned Owned

NA NA NA

India, Russia & Ukraine India India

Value NA $220 million NA NA NA NA NA NA

Remarks Market Leader in Russia with Grand Prado, Grand Gold & Grand Cocoa Third largest coffee brand by volume in the US The brand is largely exported to Middle East countries 100% pure filter coffee Chain of 35 outlets offering consumers in Tamil Nadu & other states fresh, roast and ground coffee It is a popular brand sold largely in South India Pure instant coffee India's No. 3 Coffee Chicory Brand



Page 12

Exhibit 24: Coffee revenues by brands (| crore) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

675.9

802.0

139.1

237.9

307.9

375.9

961.2

914.5

1040.5

1099.3

218.1

210.5

199.1

270.8

358.1

428.0

FY08

FY09

FY10

FY11

FY12

FY13

Tata Coffee Std

EOC

Others


Tata Coffee Tata Coffee (TCL) is a 58% subsidiary of Tata Global Beverages. TCL is the largest integrated coffee player in India and the third largest exporter of instant coffee. The company produces ~10000 MT of both Arabica as well as Robusta coffee through its 19 coffee estates (~8000 hectares) in South India. TCL’s revenues by FY13 (| 428 crore) have witnessed a CAGR of 14.4% in FY08-13. We expect this to increase to | 770.8 crore by FY16E with growth at 21.7% CAGR in FY13-16E. The higher revenues would be supported by higher curing operations as well as supply to Starbucks stores across India (currently) and Starbucks stores across Asia (in future). Apart from coffee, TCL is also engaged in the plantation of tea and other agricultural products (cardamom and pepper). Revenues from these stood at | 146.7 crore (25.5% of FY13 revenues). Going ahead, we expect revenues from these products to grow at a modest CAGR of 7.4% (FY1316E) against 11.7% (FY08-13) as the company’s focus would remain on its dominant business, coffee. Exhibit 25: TCL’s revenues from coffee (LHS) and standalone revenues (LHS) in | crore 1000 800

~60% increase in instant coffee volumes

914 777

600 400 200

301 218

312 211

327 199

401 271

489 358

574 428

653

771

638

521

0 FY08 -200 Dip in sales volumes

FY09

FY10

FY11

Coffee Revenues-Std

FY12

FY13

TCL Standalone

FY14E

FY15E

FY16E

40 35 30 25 20 15 10 5 0 -5 -10

% Increase in coffee revenues



Page 13

Following the holding company’s JV with Starbucks Inc, US, TCL has set up a special roasting facility in Kushalnagar (~2000 MT operational since FY13) to cater exclusively to the requirements of the Tata Starbucks stores setup across the country and South East Asia. The roastery would be utilising the beans produced in TCL’s estates. We believe this pact would provide incremental sales volume as well as better realisation, going ahead. TCL is also expanding its Theni facility in Tamil Nadu for instant coffee to meet the higher export demand. Further, TCL expanded its portfolio outside India and entered the US market through the acquisition of Eight O’ Clock Coffee in July, 2006. Eight O’ Clock Coffee Eight O’ Clock Coffee (EOC) was acquired by TGBL, though its subsidiary TCL in July, 2006 extending the company’s coffee portfolio to the international branded coffee market. EOC is the fourth largest coffee brand by volume in the US with sales of | 1099.3 crore (FY13). Revenues have grown at a CAGR of 10.2% in FY0813 led largely by prices. Volume growth has remained grim on the back of slowing coffee consumption in the US. Going ahead, we expect revenue growth in EOC to moderate to 4.2% CAGR in FY13-16E as we believe further increase in prices would be tough and could impact volume growth. In FY11, sales were impacted significantly by a substantial increase in prices by the company, which impacted volume growth. The price increase was on the back of an increase in Arabica coffee prices (~36% YoY), the key raw material. As coffee prices started declining from FY12 onwards, sales growth has revived for EOC. Exhibit 26: EOC sales (| crore) 1500

Sales growth was led by prices and positive impact of forex translation.

1200

Coffee prices (Brazilian Real/60 kg)

900

600

961.2 802.0

25 1040.5

1099.3

1154.2

1200.4

1242.4 20

914.5

15

675.9

600

10

300

5

500 400 300

0 Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

200

0 FY08

FY09

FY10


FY12

FY13

-300

FY14E

FY15E

FY16E -5

EOC

Source: Bloomberg 1 USD = 2.2991 Brazilian Real; 1 USD = 61.1 INR

FY11

% Increase


Page 14

Exhibit 27: EOC's product portfolio in US Coffee type Medium to Dark Roast

Formats Original, Colombian, French Roast, Italian Dark Roast

Reduced Caffeine EOC Metabolism Boost

Decaf Original, 50% decaf Metabolism Boost

Flavours Hazel Nut, French Vanilla & Mocha


Coffee pods are pre-packaged ground coffee beans in their own filter. K-Cup portion packs are used with Keurig or other single cup brewing systems to brew a cup of coffee, tea, or hot chocolate. Each K-Cup is a plastic container with a coffee filter inside. Ground coffee beans are packed in the K-Cup and sealed air-tight with a combination plastic and foil lid. When the K-Cup is placed in a Keurig brewer, the brewer punctures the foil lid and the bottom of the K-Cup and forces hot water under pressure through the K-Cup and into a mug. (Source: Wikipedia)

With the US coffee market moving towards the single serve PODS consumption (~18% of US coffee market is constituted by PODS), EOC tied up with Keurig in FY12 and launched EOC K-cups version. In spite of K-cups contributing positively to the brand’s growth, EOC has been witnessing an overall stress in volume growth (adjusting with our without PODS sales) keeping the revenue growth lower at 5.7% in FY13. Going ahead, though the company plans to invest significantly behind its brands and launch more variants in the coffee segment, we estimate moderate sales growth of 4.2% CAGR FY13-16E, as we believe EOC does not have pricing power in the US coffee market. Further, with any uptick in coffee prices, passing on the higher input cost through prices impacts EOC’s volume growth. Therefore, driven by the high vulnerability to coffee prices we remain wary of EOC’s growth. Exhibit 28: Facts about US coffee consumption

Highest specialty coffee drinkers are the 25-45 years old citizens

Total US coffee sales (2012) Sales by food services Retail Sales Speciality coffee sales (% of retail sales) Growth of Speciality coffee sales (YoY) Per Capita Coffee consumption (2011) in kg

$59 billion 87% 13% 30% 20% 6.22

Source: http://www.ncausa.org/i4a/pages/Index.cfm?pageID=731; Euromonitor ; ICICIdirect.com Research

Exhibit 29: Slowing coffee consumption volumes in US (in ‘000 bags) 22500 With the US coffee market being saturated and traditional

22044

22000

coffee consumption taking a back seat, similar to India’s tea

21500

market, we believe the growth would largely come from higher gourmet coffee consumption

21000

21652

21783 21436

21033

20998 20667

20500 20000 19500 2005

2006

2007

2008

2009

2010

2011

Source: http://blog.euromonitor.com/2012/06/us-pod-coffee-market-poised-for-further-expansion.html, ICICIdirect.com Research

The US is the largest coffee consuming nation with ~83% of the adults drinking coffee (CY12). Though the overall consumption in the US remains high, growth in consumption is being driven by gourmet coffee beverages. Traditional coffee consumption has declined from 56% (CY11) to 49% (CY12). Hence, with EOC’s portfolio largely consisting of premium coffee, we believe value growth would remain at ~4% CAGR in FY13-16E. However, a revival in volume growth could only come through market share gains, which would involve huge expenditure behind the brands keeping the company’s margins from EOC under stress.


Page 15

Grand Grand is the fourth largest player in the Russian instant coffee market. It was acquired by TGBL in September, 2008. Grand coffee was re-launched in 2010 by introducing large amount of flavours and varieties. Russia is relatively a smaller market for TGBL (I-direct estimate: ~| 230 crore coffee revenues in FY13) currently. The annual per capita coffee consumption in Russia is very low at 0.7 kg compared to ~6 kg in Germany and ~7 kg in the US. However, coffee consumption in Russia is gaining strength albeit slowly. We believe that in order to establish itself in the under penetrated Russian market, TGBL needs to improve its presence in Russia and achieve greater market share to accelerate its revenues. Hence, we believe TGBL’s coffee revenue growth of 15.7% CAGR in FY1316E would be driven mostly by higher sales volume and realisation from India’s plantation revenues (21.6% CAGR from FY13-16E). The growth in the US coffee market, however, would remain modest at 4.2% CAGR in FY13-16E and would be largely driven by increasing specialty coffee sales growth in traditional coffee remaining strained. Exhibit 30: TGBL's coffee revenues (| crore) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

237.9

307.9

375.9

914.5

1040.5

1099.3

270.8

358.1

FY11

FY12

828.3

880.8

931.7

1154.2

1200.4

1242.4

428.0

521.0

638.0

770.8

FY13

FY14E

FY15E

FY16E

Coffee Revenues-Std

EOC

Others



Page 16

Water: Building strength in under penetrated category Water accounts for less than 1% of TGBL’s revenues, currently. Revenues from water are accounted by Himalayan, Tata Water Plus, Tata Gluco Plus and Activate. The sales and marketing of TGBL’s water brands are carried out through NourishCo Beverages (50:50 joint venture between PepsiCo and TGBL), which helps the company to capitalise on PepsiCo’s distribution channel. Mineral water segment in India (| crore) 4000 3000

Brand Himalaya

Type of Water Mineral Water

Geography India

Remarks TGBL has acquired the brand by acquiring 50.07% stake in Mount Everest Mineral Water Limited

Tata Water Plus

Fortified Water

India

Brand was introduced in FY13 and is marketed in Tamil Nadu and Andhra Pradesh

Tata Gluco Plus

Glucose Water

India

Activate

Vitamin Water

USA

Launched in FY13. Available in 3 flavours Lemon, Orange & Mango TGBL has acquired this brand by investing in a small start up company in USA in FY13.

CAGR 19%

2000 1000

Exhibit 31: Water portfolio

1500

1800

FY08

FY09

2200

2400

FY10

FY11

3000

0 FY12

Source: MEMW, Annual Report


Revenues from Mount Everest Mineral Water (MEMW), (Himalayan brand) stood at | 22 crore in FY13. TGBL also supplies Himalayan to Starbucks coffee outlets in India. We believe that though the branded mineral water segment in India (~| 1200 crore in FY12 with penetration of ~10%, Source: MEMW Annual Report) remains small currently, the segment has huge potential led by the growing out of home dining culture. Further, TGBL’s JV with Starbucks provides further volume growth opportunity as the JV provides for supply of Himalayan mineral water to Starbucks stores globally. Hence, we estimate the sales CAGR (FY13-16E) of 18.2% for MEMW to | 36.4 crore by FY16E. Exhibit 32: MEMW revenues (| crore) trend 40 We expect the sales growth to accelerate as supplies to Starbucks stores increase

35

CAGR 18.2%

30 25

36.4

20 15

22.8

22.0

20.1

21.2

18.9

FY08

FY09

FY10

FY11

FY12

22.0

24.8

30.0

10 FY13

FY14E

FY15E

FY16E


Apart from the mineral water segment, TGBL has entered the fortified water segment in FY13 through the launch of Tata Water Plus and Tata Gluco Plus. The company has launched these only in South Indian markets (Tamil Nadu and Andhra Pradesh) currently and is yet to launch it nationally. We believe the entry of TGBL into the functional water segment would yield results at a very slow pace as the segment is a niche concept and very small in India currently.


Page 17

Joint ventures to yield long term benefits… Starbucks JV: Ma’Star’ stroke by TGBL! TGBL entered into a 50:50 joint venture with Starbucks Coffee International Inc US, in FY12, to set up, own and operate Starbucks café’s across the country. The café’s will be branded as ‘Starbucks Coffee “A Tata Alliance”. The JV has also provided that all Starbucks stores in India would source the coffee from Tata Coffee Ltd (TCL, subsidiary of TGBL). TCL would also be supplying coffee to Starbucks stores in South East Asia, going ahead. Starbucks currently (Q1FY14) owns and operates 18 stores, nine in Mumbai and nine in Delhi. The stores are located in prime locations of the country and are spread over an area of 1500-4000 sq ft. With the company expanding its presence at a rapid pace, we expect TGBL to open ~42 stores by FY14E and ~92 stores by FY16E. Led by the brand strength of Starbucks across the globe and evolving café culture in the country, we expect the JV to achieve breakeven (EBITDA level) by FY16E. Exhibit 33: Starbucks store in Mumbai

Exhibit 34: Starbucks store in Delhi



NourishCo JV: Establishing itself in segments of tomorrow… TGBL has formed a 50:50 JV with PepsiCo Inc US, to handle the sales, marketing and distribution of Himalayan Natural mineral water and other water products capitalising on PepsiCo’s distribution network. We believe that though the fortified water segment is a niche and small category in India currently, it is one of the highest growing beverage categories in the US and other international markets. Hence, with TGBL’s early entry into the segment and partnering with giants like PepsiCo to benefit from their distribution network, the company would reap long term benefits. NourishCo’s portfolio comprises Himalayan, Tata Water Plus (pet/pouch packets) and Tata Gluco Plus as in FY13.


Page 18

Significant innovation to drive slowing growth With black tea being a highly penetrated beverage in India (~95%) and UK (~80%) and traditional coffee witnessing deceleration in growth in the US, we believe it is innovation (more variants and flavours) within these segments that would be the key revenue drivers for TGBL. Apart from aiding revenue growth, these innovations would provide support to margins also as they fall into the premium category of the value chain. The ease of innovation for TGBL would be helped by the company’s strong brand equity across geographies where it is present (Tetley – second largest tea brand globally, Tata Tea – market leader in India, Jemca - market leader in Czech Republic, EOC- strong presence in the US) and cross-selling of its brands and variants across geographies. For example, Tata Tea has successfully launched Tetley in India under the specialty and green tea segment and is witnessing ~50% YoY growth in these brands. Further, with a large Indian population in Canada, TGBL has launched the Tata Tea brand in Canada, which would further aid its revenues from the country. Hence, we believe that with TGBL’s vast portfolio of brands, ability to innovate and blend new flavours across beverages and launch them across the world markets, revenues would register 12.0% CAGR in FY1316E against 10.6% CAGR in FY08-13. Moreover, the shifting consumption towards specialty and gourmet tea and coffee would also improve margins from 10.5% in FY13 to 11.5% by FY16E. Exhibit 35: Innovations in TGBL’s portfolio in FY12 & FY13 alone Brand Tetley

The company is launching around four variants and flavours across geographies every six months, garnering every bit of the evolving market opportunity across tea and coffee

EOC Grand Tata Tea Tata Waters

New Launchs Blend of both Estate Selection Green Tea Plus Herbal mocktails Tetley Tassimo single serve discs Chai Latte Specialty Tea Tata Tea Gold Green Tea Mango and Passion Fruit k-cups Chocolate mint Grand Melange Grand Extra Veda Tata Water Plus Tata Gluco Plus

Geography Uk UK Canada Canada Canada Australia Australia Pakistan Across the globe USA USA Russia Russia India India India

Year FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY13 FY12 FY12 FY12 FY12



Page 19

Financials Revenues to grow at higher CAGR of 12.0% in FY13-16E Revenues have grown at a CAGR of 10.6% in FY08-13. We expect this to increase to 12.0% in FY13-16E. The increase would be driven by changing sales mix of tea (higher contribution of tea bags in domestic tea revenues, increasing contribution of specialty teas in Canada & UK markets), increasing innovations and launches in the premium tea categories, higher coffee revenues from TCL and increasing revenues from joint ventures. We estimate the tea revenues will grow at 7.6% CAGR in FY1316E compared to 9.2% in FY08-13. Coffee revenues are expected to maintain a high growth rate of 15.7% CAGR (FY13-16E) compared to 16.3% CAGR (FY08-13). Exhibit 36: Revenues (| crore) and revenue growth (YoY in %) 12000 10000 8000 6000

4367.1

4848.9

5783.9

5983.9

6552.8

7233.3

8624.0

9690.9

10808.1

25 20 15 10

4000

5

2000 0

0 FY08

FY09

FY10

FY11

FY12

Revenues

FY13

FY14E

FY15E

FY16E

% increase


Margins to improve to 11.5% by FY16E EBITDA growth has remained strained at 1.5% CAGR in FY08-13 with margins falling from 16.2% in FY08 to 10.5% in FY13. The fall in margins was led by the significant increase in tea prices, which has increased the raw material cost to sales ratio from 32.4% in FY08 to 49.3% in FY13. We believe that though tea prices would continue to remain high, the change in sales mix and higher coffee revenues (higher margins segment) would mitigate the impact, improving margins to 11.5% by FY16E. We believe the JV business would start contributing to margins positively from FY16E onwards. Exhibit 37: EBITDA (| crore) and margins (% to sales) 1289.0

1400

1118.1

1200 1000 800

945.9 712.7

648.5

724.4

610.6

623.1

FY11

FY12

768.5

600 400 200 0 FY08

FY09

FY10

EBITDA (| crore)

FY13

FY14E

FY15E

18 16 14 12 10 8 6 4 2 0

FY16E

EBITDA Margins (%)



Page 20

Reduction in interest cost, healthy margins to aid PAT growth TGBL witnessed a loss in FY08 and FY09 on the back of higher interest cost and tax expense. In FY10, the company reduced its debt through the sale of ‘Glaceau’ to Coca Cola (at a profit of $523 million), which reduced its interest cost and improved its profitability from thereon. We believe that with margins expected to improve from FY13 onwards and net debt on books being nil, TGBL’s earnings (adjusted PAT) would increase at an impressive rate of 15.7% CAGR in FY13-16E. Exhibit 38: Profit before tax (PBT), adjusted PAT and interest cost (| crore) trend 1400 1200

1072.4

200

917.2

1000 800

250

1230.9

658.2

600

580.1

652.8

749.4 538.1

374.2

400

621.5

244.8

333.6

517.3

628.5

754.2

400.9

100

200

50

0 -200

150

FY08 -79.8

FY09 -29.8

FY10

FY11

PBIT

FY12 Adjusted PAT

FY13

FY14E

FY15E

FY16E

0

Interest Cost


Strong balance sheet Debt in FY13 stood at | 672.7 crore against cash of | 693 crore on the books. Hence, the net debt of the company is (| 20.3) crore. The debt to equity ratio (FY13) is at a comfortable level of 0.1x compared to 0.8x in FY08. The company has not paid its debt as it is seeking acquisitions. Hence, we believe the strong balance sheet of the company would provide it with greater flexibility to grow through the inorganic route, without straining its balance sheet and maintaining a comfortable debt to equity ratio, going ahead. Exhibit 39: Debt-equity ratio trend 1

0.75 0.67

1 1

0.48

1 0 0 0

0.18

0.16

0.14

0.15

0.15

0.16

FY11

FY12

FY13

FY14E

FY15E

FY16E

0 0 FY08

FY09

FY10



Page 21

Return ratios to improve with healthy earnings growth TGBL’s return ratios (on adjusted PAT) have improved over the years aided by improvement in earnings and reduction in debt. FY08 and FY09 reported net adjusted loss due to higher interest cost and consequent increase in debt, straining the RoE. In FY10, with the reduction in debt and improvement in earnings, the company witnessed a comeback in its RoE to 10%. With earnings set to witness higher growth (PBIT at 15.5% and adjusted PAT at 15.7% CAGR FY13-16E), going ahead, and no significant increase in debt, we expect the RoE (adjusted) and RoCE to improve to 11.2% and 13.4%, respectively by FY16E. Exhibit 40: Return on equity and return on capital employed (%) 16 14 12 10 8 6 4 2 0 -2 -4

FY07

FY08

FY09

FY10

FY11

FY12

RoE (adjusted)

FY13

FY14E

FY15E

FY16E

RoCE


Exhibit 41: Return on capital employed from tea & coffee (%) 25 20 15 10 5 0 FY08

FY09

FY10

FY11 Tea

FY12

FY13

Coffee



Page 22

Risks & Concerns Slowdown in black tea market across geographies Black tea is witnessing a slowdown in consumption across key consumption geographies (India, UK). Though consumption is shifting towards specialty black tea and green tea, the rate of shift could be lower. Further, due to the premium pricing in specialty tea, we believe volume growth could remain lower.

Input costs susceptible to higher commodity prices With TGBL’s business largely being marketing of branded tea and coffee, the company is susceptible to price fluctuations in tea and coffee. The significant increase in domestic tea prices in FY13 (~24% increase YoY) increased TGBL’s (standalone) RM cost to 66.4% (higher by ~200 bps), consequently pulling down margins by 110 bps to 10.3%. Similarly, in FY11, EOC sales de-grew ~5% YoY due to price increases taken by TGBL in order to pass on the increase in coffee prices (higher by ~36% YoY in FY11). Therefore, led by the due nature of TGBL’s business, commodity price concerns would continue to haunt TGBL’s revenues and margins.

Higher brand building expenses may keep margins strained TGBL has been witnessing increasing competition across geographies, which has kept the company’s marketing expenses higher over the years. Marketing expenses have witnessed an increase of 7.9% CAGR in FY0813 ranging between 18% and 21% of net sales. We believe that with TGBL increasing brand building expenditure in the US (EOC), Russia (Grand) and Poland (Vitax) to increase market share and in India (water business) and UK (Tetley’s premium launches) to drive market growth, its marketing spends would increase at a higher CAGR of 9.3% from FY13-16E (18-19% of net sales). Though we expect margins to improve ~100 bps to 11.5% by FY16E in spite of higher marketing expense, we remain wary of the fact that any further increase in competition could drive marketing expenses higher, pulling down margins.

Goodwill in balance sheet TGBL has a goodwill of | 3598.1 crore (FY13) on its books. The goodwill has been accumulated on account of the various acquisitions by the company over the years. We believe a possible impairment of this goodwill remains a key risk if the acquired brands fail to generate the expected growth.

Slowdown in Starbucks store addition to impact sales growth We have estimated the higher revenue growth in TCL’s coffee business to be supported by higher supplies to Starbucks stores in India. Further, the growth in revenues of the others segment (102.8% FY13-16) of TGBL would constitute 80-90% revenues from sales through Starbucks stores. We have estimated that the company would open ~95 stores by FY16E. Hence, any slowdown or a significant downtrend in stores addition would adversely impact the revenue growth estimate for TCL and TGBL.


Page 23

Valuation We have valued TGBL on a sum of parts (SOTP) valuation methodology and arrived at a fair value of | 182/share. We have divided the overall business into four sub parts, TGBL (standalone), Tata Coffee (consolidated), Mount Everest Mineral Water and Tata Global (other subsidiaries). With Tata Coffee and MEMW being listed subsidiaries in India, we have valued them individually and assigned the contribution of each proportionately to TGBL’s share price. Exhibit 42: SOTP Valuation TGBL (Standalone) Sales FY15E Multiple

2914.8 2.0

Mcap

5829.6

Propotionate Mcap

5829.6

No. of Shares

61.8

Value/share

94.3

Tata Coffee (Consolidated) EBITDA FY15E EBITDA Multiple EV Debt (FY15E)

374.2 5.0 1870.8 125.1

Cash (FY15E)

15.4

Target Mcap

1761.1

Propotionate Mcap (57.5% Stake)

1012.3

No. of Shares

61.8

Value/share

16.4

MEMW Current Market Cap

458.9

Discount (%)

25%

Mcap (FY15E)

344.2

TGBL's propotionate

172.3

No. of shares

61.8

Value/share

2.8

TGBL (other subsidiaries) Sales FY15E

4362.5

Multiple

1

Mcap

4798.7

Propotionate Mcap

4254.1

No. of Shares

61.8

Value/share

68.8

Target Price

182.2



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EV/EBITDA Valuation Over the past eight years, TGBL has traded in the average range of 8-10x two year forward EV/EBITDA multiple. At the CMP, it is trading at lower band of its historic range at 8.6x FY15E EBITDA/share. At the target price of | 182, the two-year forward multiple would be 10.2x FY15E EBITDA/share. We believe the increase in multiple would be on account of improving margins led by change in product mix in both tea and coffee and reduction in the losses from the JV businesses.

EV

10x

8x

6x

Apr-13

Dec-12

Aug-12

Apr-12

Dec-11

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Apr-05

EV (Rs Cr)

Exhibit 43: Two-year forward EV/EBITDA

4x


Price to sales valuation At the CMP of | 146, the stock is trading at 1x its FY15E and 0.9x its FY16E sales per share of | 150 and | 164.4, respectively. At our target price of | 182, the two-year forward multiple would be 1.1x its FY15E price/sales. The increase in multiple would be supported by the increasing contribution of specialty and premium tea in the company’s portfolio and higher revenues from the coffee segment. Exhibit 44: Market capitalisation to sales ratio (two years forward) 200 160 120 80 40

Close (|)

0.8x

1x

1.2x

Apr-13

Oct-12

Apr-12

Oct-11

Apr-11

Oct-10

Apr-10

Oct-09

Apr-09

Oct-08

Apr-08

Oct-07

Apr-07

Oct-06

Apr-06

Oct-05

Apr-05

0

1.4x



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Price/earnings valuation At the CMP of |146, the stock is trading at 16.4x its FY15E and 14.6x its FY16E EPS of | 8.9 and | 10, respectively. Historically, the stock has traded in the range of 12-18x its two-year forward earnings. At the assigned target price of | 182, the two year forward P/E multiple would be 18.2x FY15E EPS. Exhibit 45: Price/earnings ratio (two years forward) 200 160 120 80 40

Close (|)

12x

14x

16x

Apr-13

Dec-12

Aug-12

Apr-12

Dec-11

Aug-11

Apr-11

Dec-10

Aug-10

Apr-10

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

0

18x



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Tables Exhibit 46: Profit & Loss Account (Consolidated) (| Crore) (Year-end March) Net Sales Other Operating Income Total Operating Income

FY12 6,551.1 89.0 6,640.0

FY13 7,232.4 118.6 7,351.0

FY14E 8,375.5 122.9 8,498.4

FY15E 9,276.6 126.2 9,402.7

FY16E 10,163.4 128.6 10,292.0

Raw Material Expenses Power & Fuel Manufacturing Expenses Employee Expenses Marketing Expenses Administrative Expenses Miscellaneous Expenses Total Operating Expenditure EBITDA Interest Other Income PBDT Depreciation Less: Exceptional Items PBT Total Tax PAT before MI Minority Interest PAT after MI Adjusted PAT EPS (Adjusted)

3,321.3 79.6 124.5 681.3 1,217.9 293.0 299.3 6,017.0 623.1 70.4 94.5 647.2 96.1 (22.5) 573.6 141.7 431.9 60.7 371.3 339.2 5.5

3,567.0 85.2 136.2 740.1 1,387.1 304.9 361.9 6,582.5 768.5 84.4 86.0 770.1 105.1 28.2 636.8 164.1 472.7 72.3 400.4 393.7 6.4

4,050.8 100.5 146.6 845.9 1,608.1 376.9 427.2 7,556.0 942.4 85.0 85.3 942.7 117.2 825.6 247.7 577.9 72.3 505.6 479.3 7.8

4,469.6 104.4 167.0 941.6 1,734.7 440.6 482.4 8,340.3 1,062.4 91.6 88.4 1,059.1 136.3 922.8 276.8 646.0 72.3 573.7 548.7 8.9

4,927.4 111.8 167.7 1,041.7 1,809.1 508.2 538.7 9,104.6 1,187.4 97.3 90.2 1,180.4 156.5 1,024.0 307.2 716.8 72.3 644.5 620.7 10.0



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Exhibit 47: Balance Sheet (Consolidated) (| Crore) (Year-end March) Equity Capital Reserve and Surplus Total Shareholders funds LT Borrowings Total Debt Deferred Tax Liability Minority Interest Other Non Current Liabilities LT Provisions Total Liabilities

FY12 61.8 4,503.9 4,565.8 739.3 739.3 65.7 1,065.9 155.8 174.0 6,766.5

FY13 61.8 4,748.3 4,810.2 672.7 672.7 54.0 813.9 92.4 203.2 6,646.3

FY14E 61.8 5,070.1 5,131.9 772.7 772.7 54.0 886.2 92.4 203.2 7,140.4

FY15E 61.8 5,461.2 5,523.1 872.7 872.7 54.0 958.5 92.4 203.2 7,703.8

FY16E 61.8 5,924.4 5,986.3 972.7 972.7 54.0 1,030.8 92.4 203.2 8,339.3

Total Gross Block Less Total Accumulated Depreciation Net Block Total CWIP Total Fixed Assets Other Investments

5,233.9 988.0 4,246.0 49.2 4,295.1 473.5

5,508.1 1,069.0 4,439.1 90.7 4,529.7 576.0

5,858.1 1,186.2 4,671.9 150.2 4,822.1 626.0

6,058.1 1,322.5 4,735.6 100.2 4,835.7 676.0

6,258.1 1,478.9 4,779.1 100.2 4,879.3 726.0

Inventory Debtors Loans and Advances Other Current Assets Cash Current Investments Total Current Assets

1,160.7 651.8 734.4 17.1 731.6 93.0 3,388.6 -

1,382.9 712.9 792.4 21.3 693.0 1.9 3,604.5 -

1,528.3 821.5 795.7 25.1 429.2 1.7 3,601.4 -

1,702.8 914.9 881.3 27.8 709.2 1.9 4,238.0 -

1,893.5 1,002.4 965.5 30.5 1,016.6 2.0 4,910.5 -

Creditors Provisions ST Borrowings Other CL Total Current Liabilities Net Current Assets LT Loans & Advances Other Non CA Total Assets

805.2 263.6 148.9 294.6 1,512.3 1,876.3 88.3 33.3 6,766.5

803.4 310.0 344.1 690.2 2,147.6 1,456.9 83.6 6,646.3

917.9 321.3 418.8 335.0 1,992.9 1,608.5 83.8 7,140.4

965.8 338.0 463.8 371.1 2,138.7 2,099.3 92.8 7,703.8

1,002.4 350.8 467.5 457.4 2,278.1 2,632.4 101.6 8,339.3



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Exhibit 48: Cash Flow Statement (Consolidated) (| Crore) (Year-end March) Profit after Tax Add: Depreciation Add: Interest Paid CF before WC changes Changes in inventory Changes in debtors Changes in loans & advances Changes in other CA Changes in Current Investments Net Increase in CA Change in creditors Change in provisions Change in ST borrowings Changes in other CL Net Increase in CL Net CF from operations Change in LT loans & advances Change in Non CA Change in other investments Change in FA Change in deferred tax liability Change in minority interest Change in other non CL Change in LT provisions Net CF from Investing activities Proceeds from Equity Capital

FY12 356.2 96.1 70.4 522.7 (91.1) (78.6) (108.0) (3.6) 13.5 (267.7) (24.8) 3.9 (149.6) 22.5 (148.1) 106.9 2.8 (29.1) 6.4 (588.7) 2.0 (42.2) (8.2) 85.7 (571.3) 0.1

FY13 372.8 105.1 84.4 562.3 (222.2) (61.1) (58.1) (4.2) 91.1 (254.5) (1.9) 46.4 195.2 395.6 635.3 943.1 4.6 33.3 (102.5) (339.7) (11.8) (252.0) (63.4) 29.2 (702.2) -

FY14E 479.3 117.2 85.0 681.5 (145.3) (108.6) (3.3) (3.8) 0.2 (260.7) 114.5 11.3 74.6 (355.1) (154.7) 266.0 (0.1) (50.0) (409.5) 72.3 (387.3) -

FY15E 548.7 136.3 91.6 776.7 (174.6) (93.5) (85.6) (2.7) (0.2) (356.5) 47.9 16.8 45.1 36.0 145.8 565.9 (9.0) (50.0) (150.0) 72.3 (136.7) -

FY16E 620.7 156.5 97.3 874.5 (190.6) (87.5) (84.2) (2.7) (0.2) (365.2) 36.6 12.8 3.7 86.3 139.4 648.7 (8.9) (50.0) (200.0) 72.3 (186.6) -

Proceeds from LT borrowings Payment of dividends Interest Paid Adj in General Reserve Adj in Revaluation reserve Adj in Statutory Reserve Acturial Gain/(Loss) Reserve Exchange Rate Fluctuation Contingency Reserve Net CF from Financing activities

16.5 (157.0) (70.4) 7.1 (2.3) (70.7) 465.1 10.2 198.6

(66.6) (157.5) (84.4) 0.3 1.4 (0.3) (27.0) 30.9 23.8 (279.5)

100.0 (157.6) (85.0) (142.6)

100.0 (157.6) (91.6) (149.2)

100.0 (157.6) (97.3) (154.8)

Net Cash Flow Opening Cash Closing Cash

(265.7) 997.3 731.6

(38.6) 731.6 693.0

(263.8) 693.0 429.2

280.0 429.2 709.2

307.3 709.2 1,016.6



Page 29

Exhibit 49: Ratio Analysis (Year-end March) Per Share Data EPS Cash EPS Cash per Share Revenue per Share Operating profit per share DPS

FY12

FY13

FY14E

FY15E

FY16E

5.8 7.3 11.8 105.9 10.1 2.1

6.0 7.7 11.2 117.0 12.4 2.1

7.8 9.6 6.9 135.4 15.2 2.2

8.9 11.1 11.5 150.0 17.2 2.2

10.0 12.6 16.4 164.4 19.2 2.2

Operating Ratios EBITDA / Total Operating Income PAT / Net Sales

9.4 5.4

10.5 5.2

11.1 5.7

11.3 5.9

11.5 6.1

Return Ratios RoE RoCE RoIC RoA

7.8 8.3 8.9 5.3

7.7 10.5 11.3 5.6

9.3 12.2 12.5 6.7

9.9 12.6 13.4 7.1

10.4 12.9 14.3 7.4

25.3 30.0 1.4 1.6 14.5 1.4 1.5

24.2 28.7 1.2 1.5 11.7 1.2 1.5

18.8 22.3 1.1 1.3 9.9 1.1 1.5

16.5 19.5 1.0 1.2 8.7 1.0 1.5

14.5 17.2 0.9 1.1 7.6 0.9 1.5

0.2 7.5 2.2 1.5 -

0.1 7.9 1.7 1.0 -

0.2 9.7 1.8 1.0 -

0.2 10.1 2.0 1.2 -

0.2 10.6 2.2 1.3 -

Turnover Ratios Asset turnover Debtors Turnover Ratio

1.0 10.1

1.1 10.1

1.2 10.2

1.2 10.1

1.3 10.1

Creditors Turnover Ratio Inventory Turnover

8.1 5.9

9.0 5.7

9.1 5.8

9.6 5.7

10.1 5.7

Valuation Ratios P/E Target P/E Market Cap / Sales Target Market Cap / Sales EV / EBITDA EV / Net Sales Dividend yield Solvency Ratios Debt / Equity Interest coverage Current Ratio Quick Ratio



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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head – Research

[email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected] ANALYST CERTIFICATION We /I, Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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