Investment rationale:
Standalone business is finding strength in rising commodity prices & instant coffee business.
– There is an increase in demand for Robusta bean globally. Demand for Robusta coffee is on a rise as demand from roasters globally increases in a bid to cut costs for blends. Demand from emerging markets as well as increasing demand for instant coffee are also key growth drivers for Robusta bean demand. ~ 75% of Tata Coffee’s produce is Robusta coffee which it exports globally. YTD Robusta prices are up by 6% vs. a 20% fall in Arabica prices. In India the current crop has suffered on account of weather and prices of Robusta have moved up by ~25-30%YTD.
– The company is taking initiatives to increase its Arabica production. The company has attained a series of quality certification and in turn increased sales focus of the same to command a premium in the market.
– Pepper & Tea, the other 2 major plantation crops for Tata coffee, are also witnessing higher realizations on the back of weather vagaries. Prices for orthodox tea are higher by 15% for the current fiscal while pepper prices are up ~40%.Tata coffee is the largest single producer of black & white pepper in India.
– Demand for soluble coffee is on a rise globally. Demand is stemming from emerging markets. Tata Coffee is investing Rs55 crs. in setting up a premium freeze dried plant with focus on new markets to drive growth.
– The tie-up with Starbucks to provide beans for their India operations to support growth in the future.
Eight o’ Clock( company’s branded whole bean brand in the US) business performance to improve on the back of launch of single serve cups & falling prices ofArabica Beans.
– The recent tie-up with Green Mountain Roasters to launch Eight o’ Clock coffee (also Good Earth & Tetley) in single serve K- cups to drive volumes.
– Cost savings on account of correction in international Arabica prices: Prices of Columbian Mild beans have corrected ~35% from the peak price and 21%YTD to 202 cents/lbs.
Valuation: The company’s coffee plantation business set to enjoy better realizations on the back of sustainable demand from new markets. Weather vagaries have reduced crop and increased realizations for other plantation crops – pepper & tea. Way2wealth beleives that there will be significant improvement in profitability of Eight o’ Clock coffee as Arabica prices correct substantially. The stock was significantly re-rated during the period of 2010 to 2012. At the CMP of Rs1012 the stock currently trades at 17 x its FY13 estimated EPS of Rs59.7. Accumulate
source: http://www.valuenotes.com / Article / Way2Wealth / October 12th, 2012
