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Tuesday, July 30, 2013

Tata Global Beverages: Bullish Stock of Bearish Market

Tata Global Beverages will declare its 1st quarter results on 1st August 2013. This is one of the stock which is rising with good delivery volumes and has not corrected much during ongoing market correction. In last couple of trading sessions trading volumes of the stock were impressive with increase from 20 lakhs (average volumes of last one month) to almost 70 lakhs. Delivery percentage has increased from average 40% to 60%.

Is something going to be great? Our equity analysts expect so as stock is under accumulation and in clear uptrend in short term. Looking at strong fundamentals and renewed interest of management, Tata Global Beverages look all set to achieve new heights not only in terms of performance but also in stock price. 

Lets look at Tata Global Beverages fourth quarter results of 2012-13. The company's revenue and net profit grew 7% and 77% respectively, on a year on year basis and were in line with our estimates. Good last quarter numbers were helped by a strong performance in the South Asian region and a turnaround in the 'Eight O' Clock' coffee business in the US, among others.

Our equity analysts strongly believe that Tata Global Beverages is expected to deliver much better performance in first quarter result of FY 2013-14 (announcing on 1st Aug'13) due to a number of factors which are as under: 

1. Company was able to improve its margins in a tough operating environment, and these are expected to grow further due to increased demand for premium tea and coffee products as well as a turnaround in the American and Australian businesses. The margin improvement is also being helped by the constant efforts of the management to launch new value added products. For example, Tata Global Beverages has launched a new range of fruit and herbal teas in Australia and green tea variants in India as well as re-launch 'nutrient water' branded as Tata Water Plus in India. Volume growth is also expected to continue in all major markets except in Europe.

2. Around 65% of the company's revenues are coming from overseas operations, which will benefit from the recent crash in the rupee in the form of increased currency translation. Rupee trading above 60 levels is going to boost top line and operating and net profit margins of the company. 

3. At CMP, Company cannot be called undervalued but our analysts believe that investor interest will remain in the counter due to its unique global non-alcoholic beverage business and strong and prudent management. Its new focus on the health/wellness segment and building brands makes Tata Global Beverages an exciting consumer franchise. The expected strong EPS growth due to the expansion of the product portfolio in new geographies is another reason that justifies the prevailing valuation. The water business and Tata Starbucks JV is not contributing to the EPS now. The loss of the water business was placed at Rs 25 crore in 2012-13. 

Once results are out, company's margin/earnings could surprise on the upside if there is a break-even in these businesses, which means that its an opportunity to accumulate the stock at CMP. Though value addition is happening at a higher level, any sudden volatility in tea/coffee prices could be a short term risk in this counter. 

Our team believes that Tata Global Beverage is going to surprise the Dalal street with great set of numbers on 1st August 2013. In such a case, we may see lot of buying interest from retail as well as institutional investors and expect stock price zooming to test its all time high of Rs. 181.50 sooner than later. 

Disclaimer: Please do not construe this note as investment advice and do carry out your own due diligence before buying/selling the stock.