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Thursday, January 3, 2013

Value Pick: Tata Coffee - ROI @ 70% in 4 Months

Dear Reader,

We are delighted to share that Tata Coffee (Value Pick - Aug'12) is appreciated by almost 70% since our recommendation. Our equity analysts published Value Pick - Aug'12 research report and shared it with all Value Picks members on 26 Aug'12. Tata Coffee was recommended at price of Rs. 965 and stock has already achieved its target price in Nov'12.

It gives us immense pleasure to share that Tata Coffee was also included in our Diwali Muhurat Portfolio which was shared with all our members on 11th Nov'12. In Diwali Muhurat portfolio, we allocated 10% weightage to Tata Coffee at price of Rs. 1098 considering reasonable valuations with great future outlook and prudent management. Within couple of months, stock price has appreciated by more than 45%. Today, stock has made all time high of Rs. 1674 and closed at Rs. 1626. We continue to suggest our members to hold Tata Coffee as smart money is getting into this stock.

Below is the summary of Tata Coffee Ltd published in our Value Pick research report - Aug'12.

Company Background

Tata Coffee is Asia’s largest integrated Coffee Plantation Company and the largest grower – exporter of green coffee from India. The Company is the second largest exporter of instant coffee in the country and exports to countries in Europe, Asia and North America. Eight O’ Clock coffee is a segment leader in the US retail market. It is the only company to have various certifications like Rainforest, UTZ and SA800. As per Nielsen, the Company’s flagship brand, Eight O’ Clock (EOC) coffee continues to be the No. 1 whole bean Coffee brand in the grocery segment in USA and 4th in the overall branded segment. EOC has entered into the fast growth single serve coffee segment in the US and this augurs well for the future. Domestic coffee consumption has been growing steadily over the last several years driven by double digit growth in the instant coffee category and out of home consumption. Tata Coffee is gearing up to supply coffee beans to cafes and the tie up with Starbucks will propel this growth in the coming years.

Tata Coffee has a hand in every aspect of the coffee making process, with business activities ranging from growing and curing of coffee and tea to the manufacture and marketing of value-added coffee products. Tata Coffee grows coffee on its own estates, processes the beans, exports green coffee, manufactures and exports Instant Coffee and retails coffee with its own branding in the domestic market.

The Company’s two main products are:
a) Arabica Coffee
b) Robusta Coffee

To improve the quality of its Coffee products, the Company is importing technology from Netherlands. With this the Company would be moving in the premium segment which would boost its margin profile.

The Company is now focusing towards producing Speciality Coffee. The Company has also developed new state of the art pulping facilities in Coffee estates

Recent Developments

Tata Coffee modern roastery to serve beans to Starbucks – July 26, 2012

The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India, as well as to Starbuck operations oversea

Tata Coffee Ltd reportedly signed an agreement with Starbucks to source and roast premium coffee beans for the global coffee chain, which will soon kick off a modern roastery in Kushal Nagar, Coorg in Karnataka.

Hameed Huq, Managing Director, Tata Coffee informed that the Rs. 30mn, 375-tonne-a-year roastery is fully-automated. The roastery, which conforms to the best food safety standards, will source and roast the best Arabica coffee beans from Tata Coffee estates for Starbucks as well as other coffee retailers.

The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India, as well as to Starbuck operations overseas.

Investment Rationale  (26 Aug'12)

i) Triple Certification - Key Differentiator for Tata Coffee
There is growing demand in developed countries for sustainably grown coffees.Tata Coffee is the only Coffee Plantation Company with comprehensive Triple Certification leading to differentiation. 
  • Utz - Efficient Farm Management Practices.
  • Rainforest Alliance - Bio-diversity (For Environment Protection)
  • SA8000 - Labour standard certification
ii) Premium and Specialty Products
There is a high degree of focus on quality leading to well-established reputation in the premium markets and company has achieved large number of National & International awards year-on-year for quality, rapidly growing sales to the premium paying market segments for Certified and Specialty coffees. Company also entered into lucrative US market with washed Robusta.

iii) Joint Venture with Starbucks Coffee Company
Tata Global Beverages and Starbucks Coffee Co. announced a joint venture between the iconic international coffee brand and the second-largest branded tea company in the world. The 50/50 joint venture, named Tata Starbucks, will own and operate Starbucks caf├ęs which will be branded Starbucks Coffee “A Tata Alliance”. Tata Coffee Limited will roast coffee to supply TATA Starbucks Limited, and to export to Starbucks Coffee Co. which is a big positive for the company.

iv) Improvement in Sales & CAGR
Net Sales of the company has increased to 509 Crs in FY-12 Vs 312 Crs in FY-09 growing with the CAGR of 17.69% whereas Net Profit increases from 53.62 Crs to 124.72 Crs in just 4 year registering a growth of 32.50%.

v) Continuous Reduction in Debt
Debt Equity Ratio of the company has constantly decreased from 0.58 in FY-09 to 0.06 in FY-12 i.e. almost NIL which is good indicator for the company and could expect better dividend policy in coming fiscals.

vi) Increase in Opetating Margins
Net Profit Margin of the company is increases from 5.95% in FY-09 to 15.46% in FY-12 and Operating profit margin increases from 17.13% in FY-09 to 24.45% in FY-12 which indicates company is uses its resources very efficiently and effectively.
Saral Gyan Recommendation (26 Aug'12)

i) Tata Coffee is Asia’s largest coffee plantation company and the 3rd largest exporter of instant coffee in the country. It exports green coffee to countries in Europe, Asia, Middle East and North America. We believe that demand of premium coffee will remain strong and company will do well with its new entrant - Washed Robusta in lucrative US market.

ii) As per our estimates, Tata Coffee can deliver total sales of Rs 630 crores and PAT of Rs 98 crores, resulting in EPS of Rs 52.5 in FY 2012-13. This translates in an expected PE multiple of 18.4 times based on FY 2012-13 earnings.

iii) We expect Tata Coffee net profit margin will be maintained at 15-16%. Tata Coffee operating margins is better to peers group companies and can improve further considering robust demand for its premium product range and recent agreement with Starbucks to source and roast premium coffee beans.

iv) Tata Coffee Ltd has declared good numbers in first quarter of current financial year registering sales growth of 26% and profit growth of 89% compared to same quarter - last year and is expected to perform better in coming quarters.

v) On equity of Rs. 18.68 crores the estimated annualized EPS for FY 12-13 works out to Rs. 52.5 and the Book Value per share is Rs. 244.82. At a CMP of Rs. 964.70, price to book value is 3.94.

Saral Gyan Team recommends “BUY” for Tata Coffee at current market price of 964.70 for a target of Rs. 1320 over a period of 12-18 months.

Buying Strategy:

50% at current market price of 964.70
50% at price range of 885-900 (If stock price falls during market correction)

To Read/Download Value Pick Aug'12 Research Report - Click Here 

Remember, an opportunity missed is an opportunity lost. Create Wealth-Builder portfolio by investing in Hidden Gems and Value Picks of stock market.

In case of any queries, simply write to us. We will be delighted to assist you!

Team - Saral Gyan