Tata Coffee expects markets of West Asia, Turkey and Iran to open up and becoming new buyers. It is also witnessing shift in dynamics of its US market business. “We are shifting much of our business from bulk to packaging currently,” said Huq.
Hameed Huq, MD of Tata Coffee said the rally in coffee prices is based on the severe drought in Brazil, the world’s biggest coffee producer.
The prices of Arabica coffee have gone up by 60 percent in the last 6-8 weeks, and this rise is here to stay, says Huq. “While Robusta coffee prices have gone up, they have not moved up as dramatically as Arabica coffee prices,” said Huq. Tata Coffee expects markets of West Asia, Turkey and Iran to open up and becoming new buyers. It is also witnessing shift in dynamics of its US market business.
In an interview with CNBC-TV18’s Reema Tendulkar and Ekta Batra, Huq said, “We are shifting much of our business from bulk to packaging currently.”.
Tata Coffee garners 50 percent of its revenue from instant coffee business. Huq says the company plans to focus more its coffee business and sees no new additions in its tea business. “We are seeing huge upside in margins for our instant coffee business,” he told the channel.
Below is the verbatim transcript of the interview:
Q: We have witnessed sharp increase in coffee prices across 2014, how much does Tata Coffee stand to gain since the company exports a considerable proportion of the produce?
A: The coffee prices in the terminals are determined by two factors. One is a fundamental factor, the other is the funds, etc playing. This rally is based on a very severe drought in Brazil, so this is a rally and Arabica prices have gone up by 60 percent. However, along with anticipated shortfall in Brazil the Robusta prices have also moved up. It has not gone up to the same extent whereas Arabica has moved up by 60 percent; this has moved up by 30 percent odd. So, what does it do for Tata Coffee – essentially we have just completed our harvest. We finished Arabica, we got good crop. Robusta, the crop was marginally lower. We have got all this coffee now to sell in financial year ’14-15. So, to that extent price increase will translate back into the bottom line and the various quarters coming forward.
Q: Analyst views are suggesting fall in coffee prices globally, what is your view?
A: We have to look at what has caused it because a lot of people are analyzing it. Essentially, we were looking at a carry forward, a surplus stock at the end of the next coffee year, about five-six million bags. The crop has come down by 10 million bags. So, from a surplus situation this has gone into a deficit situation on the closing stock. The other thing to understand is what has caused this. If it was simple lack of rainfall, definitely rains would come and things would correct itself but in Brazil what has happened, it was not only lack of precipitation rainfall, it was compounded with very high temperatures which depleted the soil moisture with the result certain amount of damage has been done not only to this year’s crop, people are talking for next year’s crop also being affected. So, if we come out with a deficit situation or a breakeven situation and then come into not a big crop next year; with steady 2 percent rise in consumption, these prices – our understanding will remain whether it will remain at USD 2 or come down, nobody can say but gone are the days what we saw second half of last year of dollar end 5 and dollar end 10 cents to the pound, which is below the cost of production of many producers in the world and everybody will have views on this. Our views are that because this is by fundamental, the retraction will not go back to the levels we saw six months ago.
Q: The fall in coffee prices during 2013 or last year did hit your performance. So, in that sense, can you give us a sense, number wise that if in case there is an improvement in coffee prices, what would be the impact number wise on the profit and loss (P&L) front for Tata Coffee?
A: We generally do not give guidance on principal. There is a normal escalation in cost with the wages and everything else and take the percentage increase because we generally do not give guidance on percentage on improvement on margins. Q: Your Company exported nearly 40 percent in January on stronger prices but how are you seeing the current situation pan out? A: The maximum benefit will come into the next financial year largely on account of – although we are a plantation company, 50 percent of our revenue comes from instant coffee. If you look at it, the Arabica prices have hardened substantially but the Robusta prices have not got up to the extent. Our major competition with low Arabica prices came from the South American producers who use a lot of Arabica in instant coffee. To that extent, we will be much more competitive with higher percentage of Robusta and also having covered our coffee fairly well. In instant coffee business also we are seeing an uptick after this. Last year there was acute competition from producers in Brazil but to that extent Arabica prices have gone up substantially and our competitive pressure also comes down in instant coffee which is significant for our business now almost 50-55 percent of income comes from instant coffee.
Q: During 2013 we did see you enter into the south East Asian markets. What is on the anvil for the international markets at this moment or perhaps in the near future, anything that you have slated in 2014-2015?
A: We have been able to consolidate our position in Japan which is a very difficult market but a remunerative market. Russia, which has given us problem, last year on account of dumping from Ecuador and Brazil is again opening up in spite of the internal problems. However, what is very interesting is that Middle East, Turkey, Iran, they have become new buyers. These are economies that are opening up. So, this is our new thrust. We will consolidate our position in West Africa; we are also entering into Eastern Europe which is roasted ground coffee but instance coffee is there. So, these are the new markets, the new initiatives we have taken on. We have commissioned a very modern packaging unit at our Theni plant. So, we are moving our business more from bulk to the packing. So, these are the two significant steps we have taken and should start seeing the result in the next financial year.
Q: What about the Eight O’ Clock business because it saw a fall close to about 12.5 percent in Q3. Has there been any recovery and would be the expectations be how Eight O’ Clock will perform going ahead?
A: There has been a little change in the market dynamics in the US coffee market. Large reason the shift from black coffee to single serve is very rapid but Eight O’ Clock is in both the segments. So, you may see some volume issues, topline issues but if you look at the overall profitability, the business is very sound. So, we are adjusting to the market dynamics, we have had a major relaunch of our Eight O’ Clock coffee and this way, we started seeing the volumes coming in there but we are fully attune to changing the dynamics from black coffee to single serve but fortunately we are in both the segments so I see the businesses should not be under any pressure in the coming year.
Q: What about your tea business. It contributes to around 5 percent of your revenues at this point. How do you expect to scale it up if in case that is the plan for Tata Coffee going ahead?
A: Not really because we have a tea business, it’s a very small part of the business. Our focus has been on coffee. If you look at margins that we get out of coffee and tea in plantation – it is much easier to add value to coffee. In our Arabica – when the prices were down last year, we had a substantial value by producing very high quality specialty coffee – that protected our bottom line in spite of a difficult year the results that you are seeing are not to that extent. Second, we are committed on going into instant coffee, the soluble coffee business where also we see huge upside on the margins going forward and new markets coming in. Tea is there, we have the estate but we dot not have any vigorous growth plant on tea as we have in coffee.
Tata Coffee stock price
On February 24, 2014, Tata Coffee closed at Rs 916.95, up Rs 1.90, or 0.21 percent. The 52-week high of the share was Rs 1675.00 and the 52-week low was Rs 869.90.
The company’s trailing 12-month (TTM) EPS was at Rs 56.40 per share as per the quarter ended December 2013. The stock’s price-to-earnings (P/E) ratio was 16.26. The latest book value of the company is Rs 280.80 per share. At current value, the price-to-book value of the company is 3.27.
source: http://www.moneycontrol.com / MoneyControl.com / Home> News> Business / Source: CNBC-TV18 / March 10th, 2014
