Recommendation from Plantations - Tea & Coffee Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon. 

TATA COFFEE LIMITED : THE SCRIP THAT CHEERS!

HERE IS WHY
☛Good quarterly results
☛Dominant market position
☛Attractive valuation.

Tata Coffee Limited is one of the world’s largest integrated coffee cultivation and processing companies. It has a diversified revenue base with presence in roasted and ground coffee, plantation coffee, instant coffee, tea and pepper. The company is a fully integrated coffee company with its own coffee plantations, curing unit, roasted and ground coffee facility and instant coffee production plants. The integrated nature of its operations helps reduce the risk of fluctuations in coffee prices. The company’s focus on selling high-quality, value-added and differentiated coffee results in higher realisations compared to market prices.

More than 90 per cent of the company’s plantation coffee is exported. Tata Coffee currently supplies beans to more than 140 Tata Starbucks’ outlets in India. The unit continues to cater exclusively to the sourcing and roasting requirements of Tata Starbucks’ stores in India. Tata Coffee boosts of being one of the largest organised pepper producers in India. Its subsidiary called Eight O’Clock is the fifth-largest coffee brand in the US in terms of volume. 

With good monsoons and rainfall distribution this year, the production of the domestic plantation division of Tata Coffee is likely to see an improvement in production. With ramp-up in production at its Vietnam facility the company would see better earnings’ growth going forward. The company has witnessed good growth in sales over the last few years. The net sales have grown from Rs 1,567.32 crore in FY18 to Rs 1,966.06 crore in FY20 respectively. The debt to equity ratio is 0.98 with a current ratio of 1.7x. The company is generating enough cash flow from operations. 

Cash flow from operations for FY20 stood at Rs 260.90 crore as against Rs 124.32 crore in FY18. It has a healthy dividend payout ratio of 34 per cent for FY20. The latest quarterly results are encouraging with improvements in operating and net profit margins. For the quarter ended June 2020, the company’s gross sales increased by 25.9 per cent to Rs 587.53 crore in Q1FY21 from Rs 466.67 crore in Q1FY20. Total expenditure for Q1FY21 stood at Rs 476.93 crore as against Rs 387.82 crore in Q1FY20, showing an increase of 22.98 per cent. Thereby, PBIDT, excluding other income, showed an increase of 40.27 per cent to Rs 110.60 crore in Q1FY21 from Rs 78.85 crore in the same quarter last year

PBIDT margin, excluding other income, for Q1FY21 stood at 18.82 per cent as against 16.90 per cent in the same quarter last year. The company’s PAT for Q1FY21 stood at Rs 61.60 crore as against Rs 34.84 crore in the same quarter last year, showing an increase of 76.81 per cent. PAT margin for Q1FY21 stood at 10.48 per cent as against 7.47 per cent in the same quarter last year. ROCE for FY20 stood at 11.00 per cent whereas the RONW for the same period is at 11.58 per cent as against 9.71 per cent and 9.28 per cent for FY19 respectively. 

The company is trading at PE ratio of 17.11x, which is below its 10-year median of 19.48x . The current PB is 1.59x which is below the 10-year median of 2.48x. Hence, there is good scope for multiple expansion too, which will help the stock perform well. By virtue of these factors, our recommendation to reader-investors is to BUY this stock.