Wake Up With Tata Coffee-Its Hot, Happening

The coffee arm of Tata Global Beverages is spread over 19 estates of 10000 MT capacity of shade grown coffee plants in southern India. The plantation is carried out with the sustainable use of practices like irrigation and water management and significant use of renewable energy. Tata Coffee also supplies high quality roasted Arabica beans to Tata Starbucks, a joint venture between Tata Global Beverages and Starbucks Corporations. The company also has 2 Instant Coffee manufacturing plants, all these having Utz, Rainforest Alliance and SA8000 certification. Its lead importers are Europe, Asia, Middle East and North America.

Tata Coffee has its 19 operating plants of coffee spread over 18224 acres in Coorg, Chickmagalur and Hassan districts of Karnataka with major production of Robusta and Arabica beans. The company also has largest coffee curing plants at Kushalnagar with 20k MT. The instant coffee segment bears the capacity of 8400 MT in Toopran and Theni (??? rewrite this sentence properly). Other plants include production of tea and pepper. Tea output was 7500 MT spread over seven estates with 6067 acres in Coorg, Chickmagalur. Pepper vines production at 1150 MT.

TGBL, world’s second largest producer of branded tea, has recently forayed into the instant coffee business in India through a launch of Tata Coffee Grand tracking the rising consumption of coffee in India. The product is produced from Tata Coffee’s own plantation in Southern India.

·        Coffee as a commodity:

Coffee prices are consistently decelerating since the high of 300 cents achieved in April 2011. The prices saw a bottom fishing at 100 during the end of 2013 and has bounced back to recover near 150 levels. Since April 2015 the prices are range bound between 120-140. Above 150 levels, we can see the prices gaining grounds up to 170-175 levels.

·        Processing: The lifecycle of coffee is unique where it starts bearing flowers after 4-5 years and later coffee cherries come out of the flowers in next 8 months with just one harvest in a year. The cherries ripen from green to red when they are harvested. The sowing to processing is a prolonged cycle and that is why there is hardly any attractive margin in the industry. Considering Tata Coffee, it is a blend of both labour and machinery intensive processing. Out of the total direct costs after raw material charges of coffee and advertising expenses the third in line comes employee benefit expenses which account for nearly 18-20 percent. On the other side out of the total tangible assets, the Plant & Machinery cost accounts for nearly 60 per cent.

·         India Opportunity: Brazil, the largest producer of coffee produces nearly one third of the total in the world. However, there was a moderate frost in various areas of Brazil’s main coffee belts that may cause the coffee leaves to die cutting down the productive potential of the next crop thereby cut country’s output in 2017. Brazil government may decide to auction 693300 bags i.e. nearly 50 per cent of the stocks in 2016 amid high coffee prices and expected supply scarcity. The remaining produce will be auctioned in the fiscal year 2017. The weakest harvest in seven years in Brazil will cut supplies in 2016-17 and weak Robusta bean output battered the boost from Arabica. This may come as a good opportunity for Indian exports with higher Arabica prices and demand. 

·        Export Opportunity: India ranks 6^th in coffee production in the world with 4 per cent of the world production mostly from the southern part of India. In terms of the International Coffee Organisation, Asia Pacific is expected to post a growth to almost 50 per cent of the total world consumption by 2020. China and Russia are the emerging markets for coffee while Africa and Asia have market nearly 5 per cent of growth. In India the total coffee production estimate for 2015-16 is 348000 MT while the post blossom estimate in FY 2016-17 is likely to fall at 320000 MT. Arabica and Robusta production are in the ratio of 30:70. Total exports of Coffee from India in FY14-15 amounted to 283320 MT out of which Italy reported 21.17 per cent, Germany 9.24 per cent and Russia 7.93 per cent.

Tata Coffee Financials:

Tata Coffee's revenues for FY16 came in at Rs 1694.66 crores as against Rs 1591.94 crores in FY2014-15 an increase of 6.5 per cent. The sales five years CAGR stood at 6.2 per cent while faced negative headwinds in 3 years that dropped 1.3 per cent. The total income held through the overseas subsidiary Consolidated Coffee Inc. came in at 159.90 Million USD as against 164.89 Million USD in the previous year. During the year company has incurred higher employee benefit expenses at Rs 301.82 crores in FY16 as compared to Rs 267.12 crores in the previous year with an increase of 13 per cent. Company’s net profits came in at Rs 118 crores as against Rs 120 crores in FY15 a decrease of 2.1 per cent. Profit 5 years CAGR stands at almost 9 per cent while 3 years stands at negative 4.33 per cent. The ROE for 5 years is 18.36 per cent which shows an increase from 10 years ROE at 15.21 per cent. The numbers have slumped but surely outperformed against the depressed commodity prices and currency volatility. The company withstood the commodity price challenge and has moved forward proactively. The instant coffee which is mostly exported maintains a robust portfolio.

Meanwhile the company has decreased its borrowings to Rs 897.41 crores as against Rs 901.84 crores in FY15. Company’s debt to networth ratio stands at 1:1. The interest expense too dropped in line at Rs 35.31 crores as against R 39.45 crores. Interest coverage ratio is 7.74 which stands strong to pay off its interest obligations. Company’s cash from operating activities saw a muted growth but stood positive at Rs 239.61 crores.

The recent Q1FY17 quarter results are expected to come out on August 05. As far as March 2016 quarterly results are concerned, the consolidated revenues remained muted at Rs 436.48 crores as against Rs 439.42 crores in Q3FY16. Company’s EBITDA declined by Rs 81.51 crores as against Rs 93.47 crores in Q3FY16. QoQ net profits stood at Rs 34.47 crores as against Rs 30.45 crores. However, YoY sales have seen a rise of 2.5 per cent while net profits witnessed a YoY decline of 12.5 per cent.

Other than its promoter Tata Global Beverages, Bombay Burmah, CCL Products are the other major peers of the company. The company stands apart from others maintaining its healthy dividend payout and dividend yield. Its dividend yield is 1.1 per cent as against 0.25 and 0.58 per cent of others. Company’s P/E stands stable at 20 as compared to 7.5 of Bombay Burmah. Company’s P/B and PEG stand at 2.47 and 1.46 which is a fair value. Bombay Burmah has comparatively lower P/B of 1.5 while CCL’s P/B is too high at 6.2.

Tata Global Beverages, the biggest supporter for Tata Coffee, has seen growth after its partnership with Starbucks Coffee and has over 80 outlets in 6 cities. It will offer a single-origin coffee to US from India, from the Tata Nullore Estates located in the Coorg coffee growing area of India. It’s a booster to Tata Coffee, being its supplier of roasted Arabica beans.

On the whole, the morning coffee is going to turn expensive with the Robusta and Arabica to hit their highest prices amid first supply deficit and rising demand and strengthening currencies worldwide. Frost in Brazil has already fuelled the prices.

The company’s direct costs include nearly 80-85 per cent in purchase of coffee beans for further processing. So it may impact the company’s costs if the prices are increased. However, the costs account only for 30-35 per cent of the sales which also suggests offsetting it against their home production. On the whole, considering muted revenues and earnings numbers but holding potential from expected rising prices and ever growing demand for coffee we suggest HOLD in the company at current levels.