Motilal Oswal Financial Services

Tata Global Beverages

Initiating Coverage | Sector: Consumers

Tata Global Beverages

BSE Sensex

40,470

S&P CNX

11,940

CMP: INR300

TP: INR347 (+16%)

Buy

Brewing a heady mix!

Focus back on high-RoIC India business; Initiating with Buy

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

TGBL IN

631

190.8 / 2.7

323 / 178

4/27/22

620

65.6

Tata Global Beverages (TGB) is a natural beverages company with interest in tea, coffee

and water. It is the second largest branded tea player globally with operations spanning

over 40 countries. Branded products represent ~90% of its consolidated sales, of this, tea

accounts for ~80%.

Focus back on India

Financial Snapshot (INR b)

Y/E MAR

FY19 FY20E FY21E FY22E

Net Sales

72.5 77.7 106.9 113.8

EBITDA

7.9 10.0 14.8 16.4

Net Profit

4.4 5.6 8.9 10.1

EPS

7.0 8.9 9.7 11.0

EPS Gr. (%)

-14.6 26.7 9.5 13.4

BV/Sh. INR

116.2 121.0 149.8 154.2

P/E (x)

42.9 33.9 30.9 27.3

P/BV (x)

2.6 2.5 2.0 1.9

RoE (%)

6.1 7.5 8.3 7.2

RoCE (%)

8.6 9.4 10.8 9.7

Shareholding pattern (%)

As On

Sep-19 Jun-19 Sep-18

Promoter

34.5

DII

12.8

13.1

13.4

FII

27.8

26.6

25.8

Others

24.9

25.8

26.4

FII Includes depository receipts

Winds of change are blowing within TGB. To achieve its aim of building a

dominant, natural beverages brand in the country, the company has shifted its

focus back to the highly profitable India beverage business. Besides, the merger of

Tata Chemicals’ (TTCH) consumer business with itself marks the company’s entry

into an additional segment of staples with an addressable market size of INR770b

(apart from the current addressable market of INR270b in tea and coffee).

Currently, the India brand business contributes 50% to TGB’s consolidated

revenue, which should increase to ~60% post amalgamation of TTCH’s consumer

business. Plans are afoot to deepen its core by strengthening its leadership

position in tea and salt and aggressively expanding its new products (spices,

pulses, liquid beverages, packaged foods etc.)

All under one roof

The merger of TTCH’s consumer business with TGB is in sync with the Tata group’s

focus to create a single FMCG-focused company. As part of the transaction, TTCH

would transfer the salt (brand), spices, protein foods and certain other food items

and products to TGB, while existing shareholders of TTCH would be issued

additional 289.4m TGB shares. The merger of TTCH’s consumer business with TGB

offers multiple synergies, including higher outlet coverage, focused new product

development, stronger cash flow generation and scale efficiencies. Management

expects synergy benefit of INR1-1.5b to accrue over the next 18-24 months, post

consolidation.

Tata Global Beverages

Brewing a heady mix!

India tea business — A key growth driver

TGB’s India tea business is its breadwinner. It is one of the strongest tea

franchisees in India, a leading market player and amongst the only two brands

with national presence. TGB’s India tea business’ revenue/EBITDA has clocked

~10%/13% CAGR over the past decade, impressive for a category where the

penetration is more than ~90%. Branded players like TGB have benefited by taking

share from unorganized players; still huge ~35% unorganized share is indicative of

the significant potential in India’s tea market. Besides, premiumization initiatives

should continue supporting growth.

Sumant.Kumar@motilaloswal.com

Please click here for Video Link

19 November 2019

Tata Global Beverages

Stock Performance (1-year)

Strategic initiatives in overseas tea business to protect margins

TGB has undertaken various strategic initiatives that are supporting margins in its

overseas tea business. It has rationalized costs, sold some of its loss-making

businesses and is focusing on the non-black/higher-margin tea categories to correct

its product mix. In its largest market — the UK, TGB has ~17% market share in the

overall tea market. TGB has strong presence in the Canada market as it commands

40% market share in volume terms whereas Canada contributes 4% to the overall

revenue of TGB. EBITDA margin of its overseas tea business has improved on the

back of lower raw material cost and cost rationalization measures.

Vietnam plant bodes well for Tata Coffee

TGB’s coffee business (ex-Starbucks), i.e. Tata Coffee, is facing near-term challenges

as global coffee production is outpacing demand and depressing prices (currently at

multi-year lows). The commissioning of its Vietnam plant (freeze-dried instant

coffee) in FY19 is expected to boost instant coffee capacity from the current 8kt to

13kt, and thus, should translate into higher earnings. Its overseas coffee business

(Eight O’Clock in the US) is likely to remain stable.

Starbucks

— A promising venture; Potential unlocking once scale increases

Starbucks

(50% JV) is a premium coffee experience, an excellent play on the lifestyle

aspiration of Indian consumers. It is well positioned in a market with very little

competition coupled with strong brand pull. Currently, it has 163 stores across 10

Indian cities. After nearly two years, there has been re-ignition of growth in

Starbucks;

gross margins have witnessed sharp improvement with EBITDA breaking

even for the first time in FY18. Globally,

Starbucks’

margins range between ~13-35%.

We believe there is huge scope for margin expansion as the scale increases over the

long term. We have valued the JV using DCF methodology to arrive at a per share

value of INR31 after factoring in the addition of 40 stores per year, SSSG CAGR of 8%

over FY19-30 with CoE of 12% and terminal growth rate of 6%.

Profits to be augmented by TTCH’s merger

We expect consolidated adjusted PAT CAGR of 32% over FY19-22 to INR10.1b taking

into account the merger of TTCH’s consumer business. Exit from non-profitable

businesses and focus on growing the India portfolio can drive further earnings

upside. FCF generation is expected to be strong on earnings growth, aided by margin

improvement and efficient working capital management. TGB turned net cash after

five years in FY18 and we expect the strong FCF to drive higher dividend payouts.

Valuation and view; Initiate with Buy



We have valued TGB on SOTP basis due to the different growth profiles of the

India tea, overseas tea, coffee, salt and other consumer businesses. We believe

that a business-specific earnings approach appropriately captures the company’s

potential.

Further, TGB offers much potential as it is concentrating on the high RoIC India

business once again. The company has already exited/plans to exit loss-making

businesses and focus on cost control and scalable business opportunities.

The merger of TTCH’s consumer business with TGB doesn’t just give the latter a

strong brand in Tata Salt, but also synergies of the former’s distribution channel.

19 November 2019

Tata Global Beverages



Besides, it also opens up a plethora of opportunities for TGB in the staples

market with an addressable size of INR770b and which is increasing at 17% CAGR

(in addition to the existing addressable market of INR270b in tea and coffee). The

merger also increases contribution of the India business to consolidated

profitability, which we believe provides stability to earnings and would be one of

the factors for re-rating of the stock.

We considered the following factors while valuing each business:



The India tea business (i.e. TGB standalone) on EV/EBITDA basis at 22x, is at a

discount to other FMCG names, given the high market penetration and

working capital requirement.



The coffee business (i.e. Tata Coffee standalone) at 10x EV/EBITDA, given the

commodity nature of the business.



The overseas branded coffee business at 10x EV/EBITDA, is at a discount to

the India branded tea business due to lower growth potential.



The overseas tea business at 10x EV/EBITDA, is at a discount to the India tea

business given the low EBITDA margin of ~5-6%.



TTCH’s salt and other consumer business (which will be merged with TGB) is at

22x EV/EBITDA.



The implied value of TGB’s 50% stake in Starbucks is ~INR29b.

We initiate on the stock with Dec’21 target price of INR347/share, upside of 16%

and

Buy

rating.

Exhibit 1: SOTP based valuation

Multiple (x)

EV/EBITDA, x times

India tea (TGB standalone)

Coffee India (ex-Starbucks) @57%

Coffee Overseas

Salt & Other Consumer

Overseas tea

DCF

Starbucks JV

Price/Sales

NourishCo (JV with Pepsi)

& Others

Enterprise value

Less: Net debt

Market value

No. of shares

Target price, INR/sh

EBITDA (Dec’21)

5,697

805

1,963

4,356

2,069

EV (INR m)

127,610

8,050

19,630

97,564

20,690

28,986

8,000

310,529

-8,624

319,153

921

347

Source: MOFSL, Company

Sales

2,000

19 November 2019

Tata Global Beverages

Focus back on India

TGB is part of the diversified Tata Group; Tata Sons, the group’s holding company, is the

single major shareholder (and promoter) in TGB with ~34% stake. With the appointment of

Mr. N. Chandrasekaran as the Chairman of Tata Sons, there is renewed focus on RoCE.

Also, simplification and consolidation of Tata group companies is on the radar – evident by

the merger of Tata Chemicals’ (TTCH) consumer business with TGB.

Based on media reports, interviews by Mr. Chandrasekaran and management

commentary at the last AGM, we believe the strategic direction for TGB is to:



Grow the profitable domestic business and increase revenue share.



Exit loss-making subsidiaries with limited potential of a turnaround.



Focus on opportunities that are scalable.



Optimize cost and streamline operations.



Focus on premiumization including green, specialty, fruit and herbal teas.

As part of its strategic decisions, over the last couple of years TGB has:



Exited loss-making operations in China and Russia.

Focused on cost rationalization measures. This, along with lower raw material

cost has improved EBITDA margin of its overseas tea business.

Reorganized international operations. Earlier TGB had two international regions

– Canada, America and Australia (CAA) and Europe, Middle East and Africa

(EMEA) – this has now been pruned to only one international region. The Middle

East markets are now under the India team (v/s the EMEA team earlier). Also,

experienced country heads have been appointed for each of these core markets.

Launched non-black tea and

Tetley Cold Infusion

(health beverage) in the UK to

correct product mix.

Appointed Tata Consultancy Services in Kolkata to manage the company’s non-

core activities such as Global Information Systems, HR, Finance and Commercial

in various regions, including India, the UK, the US, Canada, and Australia.

Has acquired the branded tea business of Dhunseri Tea, owner of the brand

‘Lalghoda’ and ‘Kalaghoda’ as part of its India focus strategy. In Rajasthan,

Dhunseri has ~6% market share while Tata Tea has a meager ~2-3% share. Thus,

the acquisition will not only aid TGB penetrate the Rajasthan market, but would

also help it to leverage Dhunseri’s distribution reach.

The company’s focus on the core India business should boost return ratios – the

India tea business (i.e. standalone) generated RoIC of ~45-50% against ~8-10% for

the group. Also exit from loss-making overseas businesses should aid returns and

help the company focus on more profitable and scalable operations.

19 November 2019

Tata Global Beverages

Exhibit 2: RoIC of India tea and consolidated TGB (%)

India tea (standalone) - %

72.0

50.9

57.5

56.9

46.9

61.1

51.2

48.0

45.6

Consolidated - %

11.7

10.7

12.1

10.4

9.7

8.2

FY16

10.6

11.7

9.8

FY11

FY12

FY13

FY14

FY15

FY17

FY18

FY19

Note: TGB’s standalone operations are considered proxy for India tea business

Source: MOFSL, Company

Exhibit 3: Operating overseas subsidiaries in losses (INR m)

INR m

Zhejiang Tata

Suntyco

Czech Republic

Good Earth

Earth Rules

China

Russia

Czech Republic

Australia

FY15

-421

-147

-119

FY16

-153

-65

-270

-149

FY17

-204

-526

-50

-121

-212

FY18

FY19 Remarks

- Divested

-553

-80 Divested

-42

-47

-72

-79

-178

-168

Source: MOFSL, Company

Exhibit 4:

Tetley

diversifying into health beverages

Source: Company

Merger of TTCH’s consumer business aligns well with TGB’s focus

The merger of TTCH’s consumer business with TGB is in sync with the Tata group’s

focus on consolidation. As part of the transaction, TTCH will transfer the salt (brand),

spices, protein foods and certain other food items and products to TGB. However,

TTCH will retain the salt manufacturing facility. As part of the deal, TGB will issue

additional 289.4m shares to existing shareholders of TTCH.

TGB is primarily into beverages; however, post-merger with TTCH’s consumer

business, the company will enter the staples segment. These two categories

together form an addressable market size of INR1,550b (beverages – INR780b and

staples – INR770b).

19 November 2019

Tata Global Beverages

The merger of the consumer business of TTCH with TGB should drive re-rating of the

latter due to multiple synergies, including higher outlet coverage, focused new

product development, stronger cash flow generation and scale efficiencies.

Management expects synergy benefit of INR1-1.5b to accrue over the next 18-24

months, post consolidation.

Post-merger the combined entity should find itself in a sweet spot owing to:



Presence of market leading brands –

Tata Salt

commands 65% of the branded

market and has an overall market share of 25%, while

Tata Tea

has attained

market leadership position (in volume terms) within three decades of launch.

Further, the company boasts of rapidly growing brands like

Tata Sampann

and

Tetley.



TGB has a direct reach of ~6lacs and an indirect reach of ~2m, while TTCH has

75% of this reach. Hence, the combined entity would have a reach of over 2.5m

retail outlets, over 5,000 stockist distributors and 200m households.



Currently, the India brand business contributes 50% to TGB’s consolidated

revenue; it is expected to increase to ~60% for the combined entity. In India, the

North and the South are TGB’s stronghold areas, whereas TTCH is strong in the

West and the North. This implies much scope of outlet and reach synergies in

the West and South India.



Besides, there are multiple additional synergies, such as (a) superior terms of

trade with channel partners, (b) supply chain opportunities, and (c) scale

efficiencies in areas such as marketing/packaging, etc.



With an aim to deepen its core, TGB is (a) strengthening its leadership position

in tea and salt, (b) aggressively expanding existing new products viz. spices,

pulses, liquid beverages, packaged foods, etc., and (c) entering into the broader

FMCG product space. The brands for TGB’s future focus are (a)

Fruski

— liquid

beverage brand under trial in Delhi, (b)

Tata Cha

— tea retail in Bangalore with

six outlets, (c) Pulses — market size of INR1,600b with ~1% brand penetration,

(d) Spices and condiments — market size of INR1,500b with brand penetration

of 10%, and (e) Snacks and ready-to-cook — market size of INR400b with brand

penetration of 50%.

We expect TTCH’s consumer business revenue/EBITDA to witness 14%/13%

CAGR over FY19-22.

Exhibit 5: Long-term vision of TGB

Source: Company

19 November 2019

Tata Global Beverages

Leveraging its strong franchise in India tea business

Rationality between players driving healthy growth

India tea industry — branded players gaining share



The size of the tea market in India is estimated at ~INR250b (~USD3.5b). Tea is

one of the oldest beverages in India with a penetration level of more than 90%.

The branded tea category (i.e. sold in packages) represents ~65% of the total

market. The share of branded tea has increased over the years (~300bp in the

past four years) due to increase in availability, quality factors and awareness.

Tata Tea and Hindustan Unilever are the two largest branded tea players in India

with a ~40-45% value share in the branded tea market, broadly split equally

between the two. But, the tail of competition is long, including brands like

Wagh

Bakri, Girnar, Society, Eveready, Duncan’s, Marvel,

etc.

India is primarily a black tea market, but the wellness/green tea market is

growing relatively fast.

Exhibit 7: Tata and HUL are dominant players in branded tea

(volume)

Tata Tea

~19%

Exhibit 6: Value share of branded tea has increased (%)

Branded tea

Loose tea

Others

62%

HUL

~19%

FY15

FY16

FY17

FY18

Source: MOFSL, Industry, Company



Tata Tea is amongst the strongest tea franchisees in India

Tata Tea is amongst the oldest branded tea players in India, in existence for

more than 30 years. Besides HUL, it is the only brand with national reach.

Tata Tea currently has eight brands, five national and three regional. The

regional brands target local taste and flavor.

It is present across price-points — various brands cater to a broad range of

consumers — from the mass market to the premium segment.

Tata Tea reaches over ~1.9-2m outlets, having grown at CAGR of ~4% over the

past decade; it is amongst the largest in the beverage category in India.

It has ~20% value market share in the branded tea category in India, which it has

maintained over the last decade.

Tata Tea has been rated as the second most trusted hot beverage brand in India.

Exhibit 8: Tata Tea brands in India

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Exhibit 9: Tea prices across various brands (Black Tea)

Brand

Tata Tea

Brooke Bond

Tata Tea

AVT

Wagh Bakri

Tata Tea

AVT

Tata Tea

Society

Tata Tea

Girnar

Tata Tea

Hasmukh

Brooke Bond

Brand/Type

Agni

Taaza

Kanan Devan

Premium

Wagh Bakri

Teaveda

Gold Cup

Premium

Society

Chakra

Royal

Gold

Hasmukh

Red Label

Taj Mahal

3 Roses

Reach

National

Regional

Regional (South)

Regional (West)

National

Regional (South)

National

Regional (West)

Regional

National

Regional (West)

National

Regional (South)

Owner

TGB

HUL

TGB

AVT

Wagh Bakri

TGB

AVT

TGB

Society

TGB

Girnar

TGB

Hasmukh & Co.

HUL

Size - 1 kg

INR

200

220

256

245

400

396

445

365

415

440

457

460

370

549

457

Source: MOFSL

Exhibit 10: Tata Tea has maintained ~20% value market share in India’s branded tea

category

20.2

21.1

21.4

21.6

20.7

19.6

FY06

FY11

FY16

FY17

FY18

FY19

Source: MOFSL, Company

Exhibit 11: Retail outlet reach has increased at CAGR of ~4% over the decade to 2m

Tata Tea retail reach - in Mn

1.96

1.93

1.99

2.04

1.27

1.44

1.68

FY06

FY08

FY11

FY16

FY17

FY18

FY19

Source: MOFSL, Company

Recent initiatives to capture the growing wellness/green tea market



The company introduced the premium

Tetley Super Green

tea range in early-

2018, roping in popular actress,

Deepika Padukone,

as the brand ambassador.

It has also launched a pilot project in the ‘out-of-home’ retail tea format –

Tata

Cha.

The first store was launched in 3QFY18 in Bengaluru; currently 6 stores are

operational with the company targeting to add another 6 stores by end-FY20.

Launched ready-to-drink beverage —

Tata Tea Fruski,

a combination of green

tea with ayurvedic ingredients and available in mango and orange flavors.

19 November 2019

Tata Global Beverages



Launched Chakra Gold tea in Elaichi flavor targeted at consumers in Tamil Nadu

and Andhra Pradesh.

Exhibit 13: Recent new product launches in India

Exhibit 12: A Tata Cha store

Source: Company

Rationality between players and strong franchisee driving stable margins

Although the tail of competition in the tea sector is long in India, there is a fair

degree of rationality between players. We understand that focus has been and

remains on taking advantage of the formalizing market rather than the price-driven

market share gains, clearly evident from the steady market share of the two largest

players over the years. Due to this rationality and Tata Tea’s strong brand

positioning, we believe that TGB has been able to maintain a steady gross margin

profile in its India tea business.

Exhibit 14: Operating cost break-up — TGB standalone (India)

Others

16%

Adv. & Selling

Employee

69%

Source: MOFSL, Company

Steady growth business backed by strong franchisee

TGB’s India tea business is its breadwinner – contributing ~50%/60% to its

consolidated sales/EBITDA. TGB’s consolidated EBITDA witnessed ~2% CAGR over

the last decade to FY19, while the India tea business’ EBITDA was healthy at ~13%

CAGR over the same period. For a matured market like tea, the revenue/gross

profit/EBITDA CAGR of ~10%/~10%/~13% over FY09-19 is very impressive, in our

view. The healthy growth was driven by increased penetration in rural areas, rising

preference for brands, an innovative marketing approach and the benefit of

premiumization.

19 November 2019

Tata Global Beverages

We believe TGB will continue to gain from its strong tea franchisee in India over the

medium-to-long term. We expect sales CAGR of 7% over FY19-22E driven by a mix of

volume growth, inflation and premiumization; EBITDA margin is expected at 13.7%.

Exhibit 15: Revenue CAGR of ~10% over FY09-19 (INR b)

Exhibit 16: EBITDA CAGR of ~13% over FY09-19 (INR b)

5.4

5.8

5.0

2.8 3.2

3.6 3.6

4.4

4.9

1.7 1.5

1.3

14 17 18 20 23 27 29 30 31 32 34 37 40 43

2.3 2.4

Source: MOFSL, Company

Exhibit 17: TGB’s standalone operating cost and EBITDA as % of sales

10.2

5.3

7.5

13.4

63.6

FY10

8.1

5.3

7.5

14.1

65.1

FY11

Other expenses

11.4

4.9

7.6

13.0

63.1

FY12

10.3

5.2

7.0

12.7

64.8

FY13

Adv. & Selling

10.6

5.1

7.8

12.2

64.4

FY14

11.0

5.6

7.2

12.2

64.0

FY15

Employee

12.0

5.6

6.5

12.3

63.5

FY16

11.8

6.1

7.2

13.2

61.7

FY17

EBITDA

15.6

6.5

6.7

12.1

59.1

FY18

12.8

6.3

6.6

13.7

60.6

FY19

Source: MOFSL, Company

Exhibit 18: India tea – Invested capital Dupont

RoIC - %

EBIT / sales

Sales / FA

FA / Invested capital

FY12

72.0

10.8

16.1

0.41

FY13

57.5

9.6

16.2

0.37

FY14

56.9

10.0

17.9

0.32

FY15

46.9

10.3

16.7

0.27

FY16

51.2

11.3

15.2

0.30

FY17

48.0

11.1

14.9

0.29

FY18

61.1

14.7

14.6

0.28

FY19

45.6

11.9

14.6

0.26

Source: MOFSL, Company

Exhibit 19: All India price trend of tea (INR/kg)

Avg yearly tea prices (INR/kg)

150

100

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: MOFSL, Tea Board of India

19 November 2019

Tata Global Beverages

Strategic/cost initiatives aiding margins in overseas tea

Demand headwinds to continue

TGB entered the global natural beverages landscape with the acquisition of Tetley in

2000. Since then, it has strategically expanded its global portfolio through various

M&As. TGB’s overseas tea brands include:



Tetley:

Second largest tea brand globally with presence in over 40 countries.

Vitax:

Fruit and herbal tea brand in Poland.

Good Earth:

One of the first herbal tea companies in the US.

Teapigs:

Home-grown super premium tea brand in the UK.

Joekels:

Third largest tea brand in South Africa.

Exhibit 20: TGB’s overseas tea brands

Source: MOFSL, Company

Note: We have analyzed TGB’s international tea business by deducting from TGB’s

consolidated financials the financials of standalone (proxy for India tea) and consolidated

financials of Tata Coffee.

Demand headwinds/higher competitive intensity drags overseas tea

The overseas tea business has been a major drag on TGB’s consolidated

performance. Overseas tea EBITDA has declined at CAGR of ~10% over FY09-19. Its

share in TGB’s consolidated revenue/EBITDA has declined from ~50% in FY09 to just

~28%/~13% in FY19. The business suffered due to many factors, these include:



Declining black-tea sales in the UK and Europe — a major market for TGB’s

overseas tea business – as consumer preference is increasingly shifting towards

herbal/fruit-based teas, particularly amongst the younger generation. TGB’s UK

portfolio is 85% black tea. The overall market for tea in the UK has declined ~2-

3% over the years, within which, the black tea market has declined ~5%.



Increasing competitive intensity from private labels.



Difficulties to scale up and optimize operations in smaller markets like Poland,

Czech Republic and the US.



Due to Brexit, raw material costs have increased significantly, and thus, have

dented gross margins.

19 November 2019

Tata Global Beverages

Exhibit 21: Overseas tea revenues and as share of consol.

Overseas tea revenue - INR b

FY09

FY15

FY18*

FY19*

3.1

FY09

1.2

FY15

0.7

FY18*

1.0

FY19*

share of consol. - %

Exhibit 22: Overseas tea EBITDA and as share of consol.

Overseas tea EBITDA - INR b

share of consol. - %

Source: MOFSL, Company

* Change in accounting policy from IGAAP to IndAS

Source: MOFSL, Company

Recent strategic/cost initiatives to support margins

TGB has adopted a two-pronged approach to address challenges in the overseas tea

business. On the revenue side, it seeks to address demand headwinds by focusing

on the non-black tea segment, which is growing and is a higher margin business. On

the cost side, it has undertaken initiatives like outsourcing non-core functions, re-

organizing the management structure and divesting from non-core businesses.

To address demand headwinds, TGB has:



Launched

Super Tea Break,

in Canada,



Launched

Tetley Cold Infusions,

a flavored fruit and herbal water drink, to tap

into the growing demand for cold, non-sugary and non-alcoholic drinks.

Through its innovative product launches, TGB has ~17% market share (Twinings is a

major competitor) in the growing UK green/wellness tea market.

On the cost side, the company has:



Sold loss-making operations in Russia and China.



Reorganized international operations; from having two international region

heads – Canada, America and Australia (CAA), and Europe, Middle East and

Africa (EMEA), it now has only one international head. Experienced country

heads have been appointed for each of these core markets. The Middle Eastern

markets have changed hands from the EMEA team to the India team.



Appointed Tata Consultancy Services in Kolkata to manage some of its non-core

activities such as Global Information Systems, HR, Finance and Commercial in

various regions, including India, the UK, the US, Canada, and Australia.

Initiatives showing results

EBITDA margin of its overseas tea business has improved on the back of lower raw

material cost and cost rationalization measures. We expect TGB’s overseas tea

market to continue facing headwinds due to the changing preference for black tea.

We expect marginal sales growth over the forecast period on expectation of market

share gains and success of newly launched wellness/non-black tea categories.

Margins and operating profits are likely to remain steady, though at lower levels,

due to focus on cost initiatives.

19 November 2019

Tata Global Beverages

Exhibit 23: Cost initiatives aiding margin improvement in overseas tea

Overseas tea EBITDA - INR m

13.0

9.5

7.3

6.5

6.4

4.6

375

1.8

5.2

8.9

3.6

9.7

10.3

EBITDA margin - %

3.4

121

0.6

3,085 2,665 2,117 1,995 2,142 1,557 1,164

733 1,043 1,809 1,973 2,101

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Source: MOFSL, Company

Exhibit 24: Overseas tea – Invested capital Dupont

RoIC (%)

EBIT / sales

Sales / FA

FA / Invested capital

FY12

4.9

5.0

16.3

0.06

FY13

4.8

5.0

15.7

0.06

FY14

2.4

2.7

12.7

0.07

FY15

1.3

1.6

12.4

0.07

FY16

-0.7

-1.4

11.0

0.05

FY17

-0.2

-0.4

13.5

0.04

FY18

1.2

1.9

11.4

0.05

FY19

2.1

3.5

11.8

0.05

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Coffee prices near a decade low

Vietnam plant bodes well for Tata Coffee

TGB’s coffee business includes plantations in India, retail coffee in the US (Eight

O’Clock)

and Australia (MAP), and the recently launched retail coffee business in

India (Tata

Coffee Grand).

It also has a 50% stake in a joint venture (JV) with

Starbucks

for sales in India. Except for

Starbucks

and

MAP,

the other businesses are

part of Tata Coffee, a subsidiary in which TGB has 57.48% stake.

Eight O’clock

jointly owned by Tata Coffee (50.08% stake) and remaining directly by TGB.

India coffee — Peak of over-supply behind

The India (Tata Coffee standalone) business includes the sale of green beans,

processed instant coffee, other value-added coffee products, and small sales of

pepper and tea. Until 2018, 7,369Ha was under coffee cultivation, while 2,456Ha

was under tea cultivation. It also has an instant coffee capacity of 8,500MT. The

company has invested in a freeze-dried coffee plant of 5,000MT capacity in Vietnam,

which was commissioned in FY19. ~72% of Tata Coffee’s standalone revenue is

directly linked to coffee products.

Exhibit 25: ~72% of Tata Coffee’s standalone revenue is linked to coffee products

R&G

Others

15%

Tea

10%

~72%

coffee

Green Beans

Pepper

15%

Instant Coffee

54%

Note: Data for FY19

Source: MOFSL, Company

Exhibit 26: Tata Coffee’s India coffee volumes are volatile due to weather conditions in

recent times (MT)

Robusta

9,456

2,171

8,290

1,670

7,796

2,129

5,667

8,342

1,542

6,857

2,076

6,800

4,781

FY14

7,002

6,222

Arabica

8,596

1,594

8,121

1,899

7,628

1,628

6,000

5,626

1,890

3,736

FY18

6,030

7,587

1,557

7,285

6,620

FY10

FY11

FY12

FY13

FY15

FY16

FY17

FY19

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

The performance of TGB’s standalone coffee business can be correlated to the

movement in global coffee prices. Coffee is a globally traded commodity and hence,

global factors drive its prices. The performance is also subject to local weather and

plantation conditions, influencing output.

According to the International Coffee Organization (ICO), the global coffee market is

expected to be in surplus for the second consecutive year over Oct’18–Nov’19.

Against an output of 168mt, demand is expected at ~165mt.

Exhibit 27: Tata Coffee’s S/A margins are under pressure due to lower coffee prices

Tata Coffee S/A revenue - INR b

21.3

13.5

7.0

20.6

18.1

15.2

10.2

4.5

5.1

EBIT margin - %

15.8

3.3

FY10

4.0

FY11

5.1

FY12

6.0

FY13

6.5

FY14

6.9

FY15

7.1

FY16

7.8

FY17

7.1

FY18

7.0

FY19

Source: MOFSL, Company

Exhibit 28: Global coffee demand/supply balance (in thousands 60-kg bags)

Coffee year starting

Production

Consumption

Balance

Inventory % (Balance/Production)

2014

149,932

151,505

-1,573

-1.0%

2015

156,153

155,443

710

0.5%

2016

157,402

157,768

-366

-0.2%

2017

165,540

161,381

4,159

2.5%

2018

168,047

164,988

3,059

1.8%

Source: ICO

Exhibit 29: ICO composite coffee price (Usc/lb); Prices are at multi-year lows

250

200

150

100

ICO Composite (US cents/lb)

194

125

Source: ICO

Tata Coffee’s standalone revenues have declined consecutively over the last two

years due to lower coffee and pepper prices and weather-related production

disruption. EBITDA margins have declined to ~8% in FY19 and are at multi-year lows.

According to ICO, over-supply in coffee is expected to decline, which should support

coffee prices. Thus, recovery of coffee prices from the lows should aid in driving

improvement in revenue and margins over FY19-22E.

19 November 2019

Tata Global Beverages

Eight O'Clock Coffee

The size of the coffee market in the US is estimated at ~USD12b. Tata Coffee’s

overseas coffee business primarily includes the

Eight O’Clock

business in the US.

Eight O’Clock

operates in the k-Cup and bags segment and has a market size of

~USD6b. Both k-Cups and bags are growing categories. In terms of volumes,

Eight

O’Clock

is the fifth largest coffee brand in the US.

Note: We have derived the overseas coffee business by deducting from Tata Coffee’s

consolidated financials the financials of standalone operations.

Since FY10, the company’s overseas coffee EBIT has declined at CAGR of ~2%.

Exhibit 30: Tata Coffee’s overseas revenue (INR b)

9.6

10.4

9.0

11.0

10.3

10.1

8.4

8.3

8.6

11.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Source: MOFSL, Company

Exhibit 31: Tata Coffee’s overseas EBIT and margin

EBIT - INR b

19.2

17.7

13.9

14.2

EBIT margin - %

18.4

18.7

25.5

20.6

13.6

4.5

1.8

FY10

1.6

FY11

0.5

FY12

1.5

FY13

1.5

FY14

1.9

FY15

1.6

FY16

2.1

FY17

1.8

FY18

1.5

FY19

Source: MOFSL, Company

Exhibit 32: Tata Coffee (consolidated) – Invested capital Dupont

RoIC - %

EBIT / sales

Sales / FA

FA / Invested capital

FY12

11.6

10.0

3.6

0.32

FY13

19.7

16.2

3.8

0.32

FY14

16.6

15.7

3.4

0.31

FY15

16.3

17.1

3.0

0.32

FY16

12.4

14.8

2.6

0.33

FY17

17.5

20.8

2.6

0.32

FY18

10.4

13.4

2.5

0.31

FY19

8.2

10.3

2.7

0.30

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Starbucks

— A promising venture

Value unlocking to happen over the long term

Starbucks

is a 50% JV for TGB and was launched on Oct’12 in India. As at end-Jun’19, it has

expanded to 10 cities with 163 stores.

Starbucks

offers an international coffee experience

in but has adopted a localized approach to penetrate the India market. Beans and Expresso

blends are sourced locally, store designs are in sync with local style and culture, and food

offerings have a blend of the local and international taste.

Retail coffee market nascent, but growing fast

The retail coffee market in India is still in a nascent stage; its size is estimated at

~INR17b, but is expected to grow in healthy double-digits. India is predominantly a

tea-drinking nation (except for the southern parts of India). However, over the

years, the market for the café coffee culture has grown at a healthy pace driven by

increased customer preference for western food, global exposure, penetration of

established coffee brands and their popularity as hangout zones. But, the take-away

coffee culture has still not developed in India; it remains primarily an in-store

consumption habit. Coffee consumption is more prevalent amongst the youth

where the influence of western and hangout culture is higher.

The key players in the café coffee market in India are

Café Coffee Day (CCD),

Starbucks, Barista and Costa Café

among others.

CCD

is the largest with ~1,700

stores; other players have less than 300 stores put together.

Starbucks

has unique positioning

Starbucks

has a differentiated positioning in the café coffee market in India due to

the leverage on its international brand following and for offering a premium coffee

experience. Its menu pricing is generally higher than that of competitors. While it is

a global brand with strong recall, it has adopted a localized approach to penetrate

the India market. Beans and Expresso blends are sourced locally (including from Tata

Coffee), store designs are in sync with local style and culture, and food offerings

have a blend of the local and international taste. It also offers tea in its stores (to tap

the huge tea market in India).

Besides

CCD

and

Starbucks,

the other major café coffee players are in a

consolidation phase.

McDonald’s

has also started offering coffee in its stores, but

the positioning is different from that of

Starbucks.

Exhibit 33: A

Starbucks

store in Mumbai

Exhibit 34: A

Starbucks

store in Bengaluru

50 store in Mumbai, Turner Road

Source: Company

Vittal Mallya Road, Bengaluru

Source: Company

19 November 2019

Tata Global Beverages

Exhibit 35:

Starbucks

is positioned as a premium coffee offering (INR)

Starbucks

190

185

153

125

Di Bella

CCD

190

Barista

195

167

137

Cappuccino

Latte

Source: MOFSL, Company

Achieved EBITDA break-even, to see PAT break-even in a few years

According to the company, all its stores are generating cash profits at the store level.

Given the strong brand recall and

Starbucks’

positioning, typically a store achieves

break-even within a year of operation. But due to the current scale of operations,

overhead absorption is low. It achieved company level EBITDA break-even in FY18.

Over FY14-19,

Starbucks’

sales have increased by ~4.6x to INR4.4b on ~3.4x increase

in store count to 146 by end-FY19. A few other highlights:



Store addition accelerated to 25 stores in FY18 (to 116), after two years of slow

growth. It added 30 stores in FY19 taking the store count to 146.



Revenue per store has stagnated to ~INR30m over the last three years to FY19.



Gross margin was ~71% in FY18 (FY19E:70%); it has improved steadily from

~45% in FY14.



Rent is amongst the largest cost component at ~20-23% of sales.



Employee cost is another key component of cost at ~19-23% of sales.



Starbucks

in India turned EBITDA positive for the first time in FY18 (through

marginal profit of INR13m). EBITDA margin has improved impressively from

negative ~17% in FY15 to breakeven in FY18.

Exhibit 36:

Starbucks’

pace of store addition has accelerated

Starbucks

CCD

1,682

1,568

1,607

1,518

FY15

FY16

FY17

116

FY18

146

FY19

1,722

1,751

FY14

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Exhibit 37:

Starbucks’

revenue is ~4.6x in five years

Revenue - INR m

Sales per store - INR m

954

FY14

1,689

FY15

2,348

FY16

2,672

FY17

3,418

FY18

4,369

FY19

FY14

FY15

FY16

FY17

FY18

FY19E

Exhibit 38:

Starbucks’

gross margins have expanded (%)

Gross margin

Rent

Employee

Source: MOFSL, Company

Exhibit 39:

Starbucks

has achieved EBITDA break-even in FY18 (INR m)

1,034

601

160

-143

FY16

-60

-75

FY18

FY19

-413

FY14

-285

FY15

FY17

FY20E

FY21E

FY22E

Source: MOFSL, Company

Value unlocking to happen over the long term

Starbucks

started its operations in India in 2012 and achieved EBITDA break-even

after seven years of operations. The opportunity for growth in the premium coffee

segment in India is huge. After witnessing some slowdown in FY16-17;

Starbucks

focus is now back on growth; it added 25 stores in FY18 and 30 stores in FY19. As it

gains scale, we expect benefits in procurement and better absorption of overheads

to drive margin improvement.

We value Starbucks on DCF basis, given the long-term growth potential in the

business. We make an explicit forecast for FY30; assuming annual store addition at

40, the total store count should rise to 586 stores by FY30. Gross margins should

increase from ~70% in FY19 to 76% by FY30, and EBITDA margins should increase to

~24.5% by FY30. We estimate a terminal growth rate of 6%, with cost of equity

estimated at 12%. The implied value of TGB’s 50% stake in

Starbucks

is ~INR29b.

19 November 2019

Tata Global Beverages

Exhibit 40:

Starbucks’

DCF value

Store count

Revenue

EBITDA

EBITDA margin

Depreciation

PAT

PAT margin

Capex

FCFE

Terminal value

CoE

Terminal growth

Implied value of Starbucks

Tata's share in Starbucks @50%

INR m

INR/sh.

FY20

186

5,979

160

2.7

420

-261

-4

948

-788

12.0

6.0

57,971

28,986

Source: MOFSL, Company

FY21

226

8,014

601

7.5

511

976

-376

FY22

266

10,336

1,034

10.0

601

431

1,005

FY23

306

12,977

1,557

12.0

692

864

1,035

521

FY24

346

15,976

2,157

13.5

782

1,373

1,067

1,089

FY25

386

19,371

2,906

15.0

872

2,032

1,099

1,806

FY26…

426

23,207

4,293

18.5

963

3,329

1,131

3,160

...FY30

586

44,015

10,784

24.5

1,325

7,077

1,165

7,236

125,930

Starbucks’

contribution to TGB’s consolidated earnings is likely to be insignificant

over the next 3-5years. But we expect value unlocking to happen over the long term

as it gains scale and delivers on operating performance.

Exhibit 41:

Starbucks’

overseas performance for the last two fiscals

EBITDA margin - %

Revenue from licensed store - %

34.3

28.3

14.5

37.1

10.3

10.0

Amercia

Asia

EMEA

Source: MOFSL, Starbucks

19 November 2019

Tata Global Beverages

Profits to be augmented by TTCH’s merger

FCF to improve

India tea biz healthy; Merger of TTCH’s consumer business to add delta



The change to IND-AS (effective FY16) distorts analysis of the company’s long-

term revenue growth trend. Adjusting for the accounting change, we estimate

that consolidated revenues should have reported mid-single digit CAGR over the

last decade.

The relatively strong revenue growth in its India tea business (i.e. TGB

standalone) at 10% CAGR (over past decade) was partly offset by mid-single digit

growth in Tata Coffee (consolidated) and declining/modest growth in the

overseas tea business (i.e. TGB consolidated less standalone and less Tata Coffee

consolidated).

Share of the India tea business in consolidated revenues has increased from 28%

in FY09 to 47% in FY19.

TGB operates in India’s matured market segments. Its overseas business is

facing demand headwinds in the core black-tea category. Hence, we expect

consolidated revenues (ex-TTCH consumer salt & others) at ~6% CAGR over

FY19-22E to INR86.3b. However, on consolidation of TTCH’s consumer business,

consolidated revenues are expected to post 16% CAGR over FY19-22E. We

expect the consumer business of Tata Chemicals to contribute 24% to

consolidated revenue in FY22E. Despite the addition of Tata Chemical’s

consumer business, we expect share of the India tea business in consolidated

revenue to remain strong at 37%.

Exhibit 43: India tea share in revenue to increase (%)

India tea

FY16

Source: MOFSL, Company

FY17

Tata Coffee

FY18

Overseas tea

FY19

FY20E

Salt & Others

FY21E

FY22E

Salt & Others

24 28

Exhibit 42: Revenue CAGR of 16% over FY19-22E (INR b)

India tea

Tata Coffee

Overseas tea

20 20

21 21 20

31 33

20 22

28 29

16 18

17 17 17 16

13 15

11 13

34 37 40 43

20 23 27 29 30 31 32

14 17 18

Source: MOFSL, Company

Adj. PAT to grow at CAGR of 32% over FY19-22E



TGB’s consolidated EBITDA came in at ~2% CAGR over the last decade to

INR7.9b in FY19. EBITDA of the India tea business was impressive at ~13% CAGR,

but was dragged by modest growth in coffee (~3%) and sharp deterioration in

the overseas tea business (CAGR of –ve 10%).

Share of the India tea business in consolidated EBITDA has increased from 22%

in FY09 to 56% in FY19.

We expect consolidated EBITDA to come in at ~28% CAGR over FY19-22E to

INR16.4b, driven by steady growth in the India tea business, recovery in coffee

prices and an EBITDA contribution of INR4.5b from Tata Chemicals’ consumer

business. We expect overseas tea business’ EBITDA to remain steady at existing

levels.

Consequently, adjusted PAT is expected at 32% CAGR over FY19-22E to INR10.1b

aided by the improving performance of

Starbucks’.

19 November 2019

Tata Global Beverages

Exhibit 45: EBITDA margin to improve 360bp over FY19-22

(%)

Exhibit 44: EBITDA CAGR of 28% over FY19-22E (INR b)

India tea

Tata Coffee

Overseas tea

Salt & Others

Source: MOFSL, Company

Exhibit 46: Adj. PAT to post 32% CAGR over FY19-22E (INR b)

32% CAGR

8.9

3.7

4.0

3.9

3.8

5.2

4.4

5.6

10.1

2.4

3.3

Source: MOFSL, Company

Working capital days steady



TGB’s working capital is higher than most other FMCG companies due to high

inventory levels in the India tea business (tea being a seasonal business), B2B

nature of the India coffee business and higher working capital in the overseas

tea business.

TGB’s inventory days in India tea business have declined in the last three years

on digitalization efforts and improving inventory management. India tea

inventory days are down from 109days in FY16 to 84days in FY19.

Digitalization efforts in the India tea business should improve distribution

efficiencies, which could drive further reduction in working capital.

Exhibit 48: …in working capital (days)

Inventory

Receivables

Payables

Tata Coffee

Consolidated

33 37

Exhibit 47: India tea business driving improvement…

India tea

Overseas tea

35 38

34 33

101 85 62

FY16

74 83 56

FY17

72 93 65

FY18

84 87 74

FY19

FY16

FY17

FY18

FY19

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Turns net cash after six years; Payout could increase



Cash conversion (EBITDA to FCF) is expected to improve as earnings growth is

aided by improvement in margins and tight working capital management.

Additionally, strong cash generation is expected from the recently acquired

consumer business of Tata Chemicals.

TGB turned net cash after six years in FY18.

We believe there is potential for an increase in the dividend payout as cash

generation improves.

Exhibit 49: Operating cash flows trend (INR b)

Operating CF - INR b

10.8

7.4

2.8

0.5

4.2

1.7

4.2

1.2

3.6

2.6

8.0

5.1

0.6

1.4

Source: MOFSL, Company

Exhibit 50: Cash conversion is expected to improve

FCF - INR b

6.0

9.3

6.5

3.6

0.5

-0.1

-0.5

1.5

2.2 2.4

Exhibit 51: Driving reduction in net debt (INR b)

Net debt - INR b

-1

0.0

-0.1

-0.4

-7

-5

-9

-12

Source: MOFSL, Company

Exhibit 52: Scope for increase in dividend

DPS - INR/sh.

2.0

FY11

2.2

FY12

2.2

FY13

2.3

FY14

2.3

FY15

2.3

FY16

2.4

FY18

Dividend payout - %

2.3

FY17

2.5

FY19

3.3

4.5

5.5

FY20E FY21E FY22E

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Return ratios dragged by goodwill on acquisition



RoIC (pre-tax) in the India tea business is strong at ~45-60%. But consolidated

RoIC is lower at ~10%. The goodwill on various acquisitions over the years and

weak performance in the overseas tea business is driving lower RoIC. It is noted

that forex was also one the key reasons for increasing Goodwill over the year

Excluding the goodwill on acquisition, TGB’s consolidated RoIC has ranged

between 25-40% over FY11-19.

Consolidated RoE is in single-digits due to the drag from acquisitions.

Exhibit 53: Goodwill on balance sheet increasing over the last 3 years (INR b)

Goodwill - INR b

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Source: Company

Exhibit 54: RoE and RoIC getting dragged down due to…

RoE - %

8.6

7.8

7.4

6.7

5.6

6.1

7.8

6.1

7.5

8.3

7.2

Exhibit 55: …goodwill on acquisition

RoIC - %

RoIC (ex-goodwill) - %

Source: MOFSL, Company

Exhibit 56: TGB consolidated – Invested capital Dupont

RoIC - %

EBIT / sales

Sales / FA

FA / Invested capital

FY13

12.1

9.0

9.1

0.15

FY14

10.4

8.0

8.5

0.16

FY15

9.7

8.0

7.9

0.15

FY16

8.2

8.1

6.7

0.15

FY17

10.6

9.8

6.9

0.16

FY18

11.7

10.6

6.7

0.17

FY19

9.8

9.1

6.7

0.16

FY20E

FY21E

FY22E

11.2

14.7

12.1

10.5

12.1

12.7

7.0

10.0

11.1

0.16

0.12

0.09

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Valuation & View

Initiate with Buy; SOTP-based TP of INR347/share

We value TGB on SOTP basis due to the different growth profiles of its India tea,

overseas tea, coffee, salt and other consumer businesses. Therefore, we believe a

business-specific earnings approach appropriately captures the company’s potential.

We believe TGB offers much potential as it is concentrating on the high RoIC India

business once again. The company also plans to exit loss-making businesses and

focus on cost control and scalable business opportunities. Additionally, the merger

of TTCH’s consumer business doesn’t just give TGB a strong brand in

Tata Salt,

but

also opens up a plethora of opportunities in the staples market with an addressable

size of INR770b and exhibiting 17% CAGR (in addition to existing addressable market

of INR270b in tea and coffee). The merger also increases contribution of the India

business to consolidated profitability, which we believe provides stability to earnings

and would be one of the factors for stock re-rating. We initiate on the stock with

Dec’21 target price of INR347/share, upside of 16% and

Buy

rating.

We considered the following factors while valuing each business:



The India tea business (i.e. TGB standalone) on EV/EBITDA basis at 22x; it is at a

discount to other FMCG names, given the high market penetration and working

capital requirement.



The coffee business (i.e. Tata Coffee standalone) at 10x EV/EBITDA, given the

commodity nature of the business.



The overseas branded coffee business at 10x EV/EBITDA; it is at a discount to

the India branded tea business due to lower growth potential.



The overseas tea business at 10x EV/EBITDA; it is at discount to the India tea

business given the low EBITDA margin of ~5-6%.



TTCH’s salt and other consumer business (which will be merged with TGB) at 22x

EV/EBITDA after factoring in the growth potential due to its merger with TGB’s

consumer business.



Starbucks’

DCF-based value is INR29b.

Exhibit 57: SOTP-based valuation

Multiple (x)

EV/EBITDA, x times

India tea (TGB standalone)

Coffee India (ex-Starbucks) @57%

Coffee Overseas

Salt & Other Consumer

Overseas tea

DCF

Starbucks JV

Price/Sales

NourishCo (JV with Pepsi)

& Others

Enterprise value

Less: Net debt

Market value

No. of shares

Target price, INR/sh

EBITDA(Dec’21)

5,697

805

1,963

4,356

2,069

EV (INR m)

127,610

8,050

19,630

97,564

20,690

28,986

Sales

2,000

8,000

310,529

-8,624

319,153

921

347

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Exhibit 58: TGB 1-year forward P/E (x)

45.0

35.0

25.0

15.0

5.0

Source: Bloomberg

Exhibit 59: TGB 1-year forward EV/EBITDA (x)

24.0

20.0

16.0

12.0

8.0

4.0

0.0

7.5

15.1

9.7

14.8

Source: Bloomberg

Exhibit 60: Peer comparison

M Cap

Company Name

Britannia Industries Ltd

Dabur India Ltd

Emami Ltd

Godrej Consumer Products

Hindustan Unilever Ltd

ITC Ltd

United Breweries Ltd

United Spirits Ltd

Average

TGB

(INR b)

768

816

142

727

4,455

3,080

330

454

189

EV/ EBITDA (x)

FY20E

41.0

40.8

17.9

31.7

42.5

14.6

32.0

30.4

31.4

26.7

FY21E

35.1

35.7

16.3

27.8

35.2

13.1

24.6

26.0

26.7

18.0

PE (x)

FY20E

56.2

48.8

26.9

44.3

60.9

20.1

58.1

50.1

45.7

49.4

FY21E

47.9

42.3

22.8

38.2

51.1

18.2

42.1

39.1

37.7

30.9

RoE (%)

FY20E

29.3%

26.9%

24.2%

21.8%

83.9%

24.3%

16.4%

25.1%

31.5%

7.5%

FY21E

29.4%

26.9%

26.1%

22.8%

77.3%

24.5%

19.4%

25.1%

31.4%

8.3%

Revenue

CAGR %

FY19-21E

10.1%

9.5%

7.8%

6.5%

12.3%

9.6%

11.6%

7.3%

9.3%

21.4%

EBITDA

CAGR %

FY19-21E

8.1%

6.9%

4.7%

6.7%

9.8%

5.5%

14.1%

8.2%

8.0%

37.4%

PAT

CAGR %

FY19-21E

8.0%

7.4%

7.8%

7.3%

10.7%

5.2%

17.5%

13.3%

9.7%

42.2%

Source: MOFSL, Bloomberg

19 November 2019

Tata Global Beverages

Management team



Mr. Ajoy K. Misra, MD and CEO:

Part of the Tata Group for over 30 years, Mr.

Misra is a Civil Engineering graduate from BITS Pilani and holds an MBA from

FMS, Delhi University. He has also completed the Advanced Management

Program from Harvard Business School.

Mr. L. Krishna Kumar, CFO:

He is a Chartered Accountant, Cost Accountant and

Company Secretary by qualification. Before joining the Tata Group, his last role

was with L&T as General Manager - Finance.

Mr. Amit Chincholikar, Global Chief Human Resources Officer:

He has been

with the Tata Group since 2010 and serves as the Global Chief Human Resources

Officer for TGB. He holds a post-graduate degree from Symbiosis Institute of

Business Management, Pune and is a graduate in Statistics & Operations

Research from University of Mumbai.

Mr. Adil Ahmad, President — International Business:

Mr. Ahmad joined TGB in

2015 as Chief Marketing Officer. Prior to joining TGB, he had a twenty year

career with Reckitt Benckiser, holding leadership positions across the UK, India,

Middle East and East Asia. Mr. Ahmad has graduated from St. Stephens College,

Delhi and holds an MBA from Case Western University, Cleveland, Ohio, USA.

Mr. Sushant Dash, Regional President — India:

Mr. Dash joined TGB in 2000. He

was previously Senior Director – Marketing and Business Development for Tata

Starbucks. Mr. Dash holds a post-graduate degree from Mudra Institute of

Communication, Ahmedabad (MICA) and is a graduate in Economics from

Ravenshaw University, Cuttack.

Mr. Vikram Grover, President – Water Vertical:

Mr. Grover heads TGB’s water

business; he is responsible for product and market development and to build a

global footprint for the water business. Prior to joining TGB, he has worked with

Unilever, holding significant roles such as Global Strategy and Archetypes

Director for Beverages and Country Head for Beverages in India. He has an MBA

in Marketing from the Indian Institute of Management, Kolkata, and is an

engineering graduate from the Punjab Engineering College, Chandigarh.

Mr. Chacko Thomas, MD and CEO, Tata Coffee:

Mr. Thomas holds a Bachelor’s

degree with specialization in Computer Science from the University of Jodhpur.

He has over 27 years of rich experience in the Plantation Industry. Before joining

Tata Coffee, he was the MD of Kannan Devan Hills Plantations Pvt. Ltd.

Mr. Rakesh Sony, Global Head- Strategy and M&A:

Mr. Sony is Global Head-

Strategy and M&A at TGB, and is responsible for development and deployment

of strategies. He has over 20 years of experience and has held key leadership

roles in the Financial Services industry, such as the Director & India Head of

Proterra Investment Partners and Partner at Motilal Oswal PE Fund. He is a

Chartered Accountant and a graduate from St. Xavier’s College, Kolkata.



19 November 2019

Tata Global Beverages

Bulls and Bears

Bull case



India tea business:

We assume EBITDA margin of 15.4% in FY22 (v/s base case

of 13.7%) on lower competitive intensity and lower raw tea prices.

Coffee business:

We assume revenues in the coffee business at ~10.3% CAGR

over FY19-22E (v/s base case of 8.9%), aided by higher-than-expected coffee

prices and quick ramp-up of the new plant; EBITDA margins should come in at

18.2% (v/s base case of 17%) in FY22.

Overseas tea:

We assume revenues to grow at ~1.5% CAGR over FY19-22E, led

by premiumization initiatives undertaken by the management. EBITDA margins

should come in at 10.8%.

Consumer (salt and others):

We assume revenues to grow at ~17.3% CAGR over

FY19-22E (v/s base case of 14.4%), led by new product launches. EBITDA

margins should come in at 17.5% (v/s base case of 16.5%) in FY22.

The SOTP value increases to INR426/share.

Bear case



India tea business:

We assume revenues at CAGR of 5.2% over FY19-22E (v/s

base case of 7.4%) on lower market demand growth. EBITDA margins should

come in at 12.6% (v/s base case of 13.7%) in FY22.

Coffee business:

We assume revenues at 7.8% CAGR over FY19-22E (v/s base

case of 8.9%), factoring in lower-than-expected recovery in coffee prices.

EBITDA margins should come in at 16% (v/s base case of 17%) in FY22.

Overseas tea:

EBITDA margins should come in at 10% in FY22.

Consumer (salt and others):

We assume revenues to grow at ~11.1% CAGR over

FY19-22E (v/s base case of 14.4%) due to lower growth in pulses and spices.

EBITDA margins should come in at 15.2% (v/s base case of 16.5%) in FY22.

The SOTP value decreases to INR256/share.

Bear

108,115

5.2

7.8

0.1

11.1

14,332

12.6

16.0

10.0

15.2

8,616

256

Base

Bull

113,823

119,811

7.4

9.4

8.9

10.3

0.5

1.5

14.4

17.3

16,406

18,780

13.7

15.4

17.0

18.2

10.3

10.8

16.5

17.5

10,130

11,854

347

426

Source: MOFSL, Company

Exhibit 61: Scenario analysis - Bull & Bear case

Revenue

India tea growth CAGR FY19-22E

Coffee growth CAGR FY19-22E

Overseas tea growth CAGR FY19-22E

TTCH Consumer growth CAGR FY19-22E

EBITDA

India tea margin

Coffee margin

Overseas tea margin

TTCH Consumer margin

PAT

SOTP based TP

India tea - EV/EBITDA

Coffee India - EV/EBITDA

Coffee Overseas - EV/EBITDA

Overseas tea - EV/EBITDA

TTCH Consumer

INR m

INR/sh

19 November 2019

Tata Global Beverages

Company description

Transitioning into a true-blue consumer company

Tata Global Beverages is a natural beverages company with interests in tea, coffee

and water. It started out as a domestic Indian tea farming entity and over the years,

has strategically evolved as a global, branded beverage play. Recently, the company

announced the merger of Tata Chemicals’ (including the iconic brand ‘Tata

Salt’)

consumer products business into TGB. Post amalgamation of the merger, TGB’s

focus is to aggressively expand its existing new products (pulses, spices, packaged

foods, beverages, etc.) and to enter into broader FMCG (dairy, home care, personal

care), thereby transitioning into a true-blue consumer company.

It entered the global beverages landscape with the acquisition of Tetley in 2000

(>50% its then sales); thereafter, it expanded through many mergers and

acquisitions (M&As) and currently operates in over 40 countries. Of TGB’s

consolidated sales in FY19, 47% came in from the India tea business, 25% from India

and overseas coffee business, and remaining from overseas tea and others.

TGB is the second largest player in branded tea globally. It is a dominant player in

the organized tea market in India (~20% market share) and Canada (~30% market

share). Branded products represent ~90% of its consolidated sales, with tea having a

major ~80% share of sales in the branded category. As of FY19, the consumer

business of TTCH constituted 25% of TGB’s consolidated sales and 40% of its

consolidated EBITDA.

It is also in an alliance with Starbucks (50% JV) and PepsiCo (named NourishCo, for

non-carbonated health and enhanced wellness beverages).

Exhibit 62: TGB’s brands

Source: Company

19 November 2019

Tata Global Beverages

Exhibit 64: Tea represents ~81% of the branded sales

category

Tea -

Others

Coffee

19%

Others

Exhibit 63: Branded products represent 88% of consol. sales

Non-

branded

12%

Tea - Tetley

26%

Tea

81%

Branded

88%

Source: MOFSL, Company

Tea - India

47%

Source: MOFSL, Company

Exhibit 65: South Asia (mainly India) is the largest market for

TGB

N. America

/ Canada

25%

Europe /

ME / Africa

20%

Non-

branded

12%

Others

Exhibit 66: Region-wise sales over the last few years (INR b)

South Asia

EMEA

CAA

FY17

Non-branded

Others

FY18

Source: MOFSL, Company

South Asia

43%

Source: MOFSL, Company

FY16

Geography wise revenue for FY19 is not available

Exhibit 67: Positioning of various TGB brands

Source: Company

19 November 2019

Tata Global Beverages

Exhibit 68: Product portfolio of TTCH

Source: Company

Exhibit 69: Branded tea is the largest contributor to EBIT

Exhibit 70: EBIT by category – INR m

Brd. Tea

Brd. Coffee

8,720

1,370

1,790

5,780

-220

FY17

Brd. Others

9,120

420

1,980

6,900

Non Branded

8,931

416

1,783

6,944

Brd. Coffee

19%

Brd. Others

-2%

Brd. Tea

74%

Non

Branded

7,520

720

1,290

5,790

-280

FY16

-180

FY18

-212

FY19

Brd = Branded

Source: MOFSL, Company

Note: EBIT excludes corporate expenses Source: MOFSL, Company

Exhibit 71: TGB’s sales mix in FY19 (pre-merger)

Tea -

Others

Tea - Tetley

23%

Coffee

16%

Non brd.

12%

Others

Tea - India

42%

Brd = Branded

Source: MOFSL, Company

Exhibit 72: TGB’s pro-forma sales mix in FY19 (post-merger)

Non brd.

Coffee

13%

Tea -

Others

Tea - Tetley

19%

Tea - India

33%

Source: MOFSL, Company

Others

Salt &

Others

20%

19 November 2019

Tata Global Beverages

Exhibit 73: Pro-forma EBIT mix in FY19 post-merger of Tata Chemical’s consumer business

Salt & Others 26%

Non Branded 3%

Brd. Others -2%

Brd. Coffee 15%

Brd. Tea 58%

Note: EBIT excludes corporate expenses Source: MOFSL, Company

TGB’s India tea business is a part of the standalone operations while the overseas

tea business is owned through a ~89% subsidiary. The coffee business (ex-Starbucks)

is part of Tata Coffee, a separate listed entity in which TGB has ~57% stake. TGB also

has less than 50% stake in two tea plantation companies, namely Amalgamated

Plantations and Kanan Devan; which are classified as associates.

Exhibit 74: TGB’s corporate structure

TGB

TGBL Standalone

(100%)

Tata Tea India

Revenue - INR34.3b

(47%)

EBITDA - INR4.4b

(56%)

Tata Coffee Consol.

(57%)

Revenue - INR18b

(25%)

EBITDA - INR2.4b

(31%)

Tetley UK

(89.1%)

Overseas Tea and others

Revenue - INR20b

(28%)

EBITDA - INR1b

(13%)

Associate

Starbucks

(50%)

Standalone

(100%)

Plantation India

Revenue - INR7b

(10%)

EBITDA - INR0.6b

(8%)

Amalgamated

Plantations

(41%)

Noursh Co.

(50%)

Kanan Devan Hills

Plantations

(28.5%)

Eight O Clock

(78.7%)

Coffee US

Revenue - INR11b

(15%)

EBITDA - INR1.8b

(23%)

Joekels

(51.7%)

Source: Company

Ownership interest|

Revenue/EBITDA contribution

Exhibit 75: TGB’s acquisition details

Acquired co.

Tetley

Good Earth

Jemca

Eight O'Clock

Joekels Tea

Vitax & Flosana

Zhejiang JV*

Mount Everest

Mineral**

Mar-09 Grand*

Oct-10 Rising Beverages

*Divested since, **Merged since

Year

Feb-00

Oct-05

May-06

Jun-06

Sep-06

Apr-07

May-07

Jun-07

Country

Czech Republic

South Africa

Poland

China

India

Russia

Acquired for

GBP271m

USD31m

GBP11.6m

USD220m

GBP0.91m

Remarks



Largest tea company in the UK and Canada



Specialty tea company in the US



Market leader in black, herbal, green, fruit tea category



Third largest coffee brand



Third largest player in South Africa



Fruits and herbal tea brand in Poland



JV to manufacture tea and tea-related products



Himalayan natural mineral water brand, business since merged with

TGB



Coffee brand in Russia



Flavored water under Activate brand

Source: MOFSL, Company

19 November 2019

Tata Global Beverages

Financials and valuations

Income Statement

Y/E March

Net Sales

Change (%)

Gross Profit

Margin (%)

Other operating exp.

EBITDA

Change (%)

Margin (%)

Depreciation

Net Interest

Other income

PBT before EO

EO income/(exp.)

PBT after EO

Tax

Rate (%)

Reported PAT

Minority and Associates

Adjusted PAT

Change (%)

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Goodwill & Intangibles

Investments

Curr. Assets

Inventories

Account Receivables

Cash and Bank Balance

Others

Curr. Liability & Prov.

Account Payables

Other liabilities

Provisions

Net Curr. Assets

Def. tax liability

Appl. of Funds

2014

77,376

5.3

40,601

52.5

33,083

7,519

-2.2

9.7

1,291

865

818

6,181

888

7,069

1,845

26.1

5,224

419

3,917

-2.3

2015

79,934

3.3

41,561

52.0

33,812

7,749

3.1

9.7

1,331

819

700

6,299

-1,300

4,999

2,155

43.1

2,844

365

3,778

-3.6

2016

66,365

-17.0

30,149

45.4

23,606

6,543

-15.6

9.9

1,168

1,169

820

5,026

-3,329

1,698

2,000

117.8

-302

-247

3,274

-13.4

2017

67,796

2.2

32,180

47.5

24,269

7,911

20.9

11.7

1,260

915

831

6,566

6,619

1,983

30.0

4,636

742

3,841

17.3

2018

68,154

0.5

31,160

45.7

22,771

8,389

6.0

12.3

1,160

428

942

7,743

-211

7,531

1,859

24.7

5,673

717

5,167

34.5

2019

72,515

6.4

32,439

44.7

24,580

7,859

-6.3

10.8

1,226

525

1,571

7,680

-333

7,347

2,609

35.5

4,738

656

4,415

-14.6

2020E

77,691

7.1

34,926

45.0

24,888

10,038

27.7

12.9

1,860

643

1,210

8,745

-96

8,649

2,342

27.1

6,307

811

5,592

26.7

2021E

106,924

37.6

48,021

44.9

33,174

14,847

47.9

13.9

1,927

677

1,149

13,392

3,750

28.0

9,642

710

8,932

59.7

(INR M)

2022E

113,823

6.5

51,053

44.9

34,647

16,406

10.5

14.4

1,997

677

1,207

14,939

4,183

28.0

10,756

626

10,130

13.4

(INR M)

2022E

921

141,047

141,968

12,013

8,783

162,764

32,189

22,191

9,998

4,244

95,451

5,635

66,504

24,188

10,827

21,176

10,313

18,024

11,786

4,221

2,017

48,479

1,043

162,764

2014

618

57,870

58,489

9,241

14,381

82,110

22,552

12,625

9,928

596

41,882

6,079

40,630

15,185

6,544

7,283

11,619

16,542

7,689

4,118

4,735

24,088

463

82,110

2015

618

54,297

54,915

8,762

13,240

76,918

23,904

13,608

10,296

459

38,921

6,178

38,710

16,253

6,161

5,485

10,811

16,624

7,594

4,089

4,942

22,086

1,022

76,918

2016

631

61,841

62,472

8,618

13,541

84,630

24,033

14,511

9,523

394

37,096

11,926

40,009

16,290

5,924

6,744

11,051

13,532

6,773

2,776

3,983

26,477

786

84,630

2017

631

62,024

62,655

9,195

7,866

79,716

23,711

13,650

10,060

632

34,979

13,534

36,309

14,530

5,925

7,412

8,444

14,345

7,378

3,389

3,578

21,965

1,454

79,716

2018

631

69,685

70,316

10,090

10,676

91,082

25,424

15,181

10,244

1,352

37,235

6,431

49,343

14,483

6,483

18,067

10,310

13,525

7,057

3,562

2,906

35,818

-3

91,082

2019

631

72,686

73,317

10,277

11,283

94,877

27,689

16,407

11,282

4,244

37,851

6,045

49,385

16,099

6,806

16,168

10,313

12,887

6,649

4,221

2,017

36,498

1,043

94,877

2020E

631

75,721

76,352

10,777

11,283

98,412

29,189

18,267

10,922

4,244

37,851

5,734

54,986

16,510

7,390

20,774

10,313

14,283

8,045

4,221

2,017

40,703

1,043

98,412

2021E

921

136,993

137,913

11,352

11,283

160,548

30,689

20,194

10,495

4,244

95,451

5,599

63,112

22,722

10,171

19,907

10,313

17,310

11,072

4,221

2,017

45,802

1,043

160,548

19 November 2019

Tata Global Beverages

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Dividend yield (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins (%)

Net Profit Margins (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Debtor (Days)

Creditor (Days)

Inventory (Days)

Leverage Ratio (x)

Debt/Equity

Cash flow statement

Y/E March

EBITDA

Prov. & FX

Others

Direct taxes (net)

CF from Op. Activity

Capex

FCFF

Interest/dividend

Investments in subs/assoc.

Others

CF from Inv. Activity

Borrowings

Finance cost

Dividend

Others

CF from Fin. Activity

(Inc)/Dec in Cash

Opening balance

Closing balance (as per B/S)

2014

6.2

8.3

92.7

2.3

26.6

1.5

48.3

36.4

3.2

3.5

35.6

1.5

9.7

5.1

7.4

9.1

10.4

7.8

0.9

0.1

2015

6.0

8.1

87.0

2.3

48.9

1.5

50.1

37.1

3.4

3.3

34.5

1.5

9.7

4.7

6.7

8.8

9.7

7.8

1.0

0.1

2016

5.2

7.0

99.0

2.3

1.9

57.8

42.6

3.0

4.0

40.9

1.9

9.9

4.9

5.6

7.6

8.2

7.0

0.8

0.1

2017

6.1

8.1

99.3

2.3

30.6

1.5

49.3

37.1

3.0

3.9

33.8

1.5

11.7

5.7

6.1

9.0

10.6

6.7

0.9

0.0

2018

8.2

10.0

111.4

2.4

26.1

0.9

36.6

29.9

2.7

3.9

31.9

0.9

12.3

7.6

7.8

9.4

11.7

6.7

0.7

-0.1

2019

7.0

8.9

116.2

2.5

33.3

1.2

42.9

33.6

2.6

3.7

34.0

1.2

10.8

6.1

8.6

9.8

6.4

0.8

-0.1

2020E

8.9

11.8

121.0

3.3

32.5

1.5

33.9

25.4

2.5

3.4

26.7

1.5

12.9

7.2

7.5

9.4

11.2

7.1

0.8

-0.1

2021E

9.7

11.8

149.8

4.5

43.0

2.1

30.9

25.4

2.0

2.5

18.0

2.1

13.9

8.4

8.3

10.8

14.7

10.2

0.7

-0.1

2022E

11.0

13.2

154.2

5.5

47.1

2.6

27.3

22.8

1.9

2.4

16.3

2.6

14.4

8.9

7.2

9.7

12.1

11.4

0.7

-0.1

(INR M)

2022E

16,406

-1,408

-4,183

10,815

-1,500

9,315

1,207

-293

-2,500

-677

-6,076

-9,253

1,269

19,907

21,176

2014

7,519

-123

-714

-2,548

4,218

-2,037

2,180

663

-426

1,502

-298

-895

-863

-1,623

-252

-3,633

287

6,996

7,283

2015

7,749

-492

-1,320

-71

-1,687

4,178

-1,792

2,386

611

-932

-2,053

-1,311

-820

-1,615

-178

-3,924

-1,798

7,283

5,485

2016

6,543

-132

-2,719

-190

-2,342

1,160

-1,545

-385

697

-509

4,273

2,917

-796

-663

-1,871

512

-2,818

1,259

5,485

6,744

2017

7,911

1,485

100

-2,106

7,412

-1,382

6,030

574

-280

2,503

1,415

-4,848

-615

-1,890

-805

-8,158

668

6,744

7,412

2018

8,389

-14

-1,389

-438

-2,992

3,556

-3,588

-32

485

373

10,133

7,403

2,160

-282

-2,118

-65

-304

10,655

7,412

18,067

2019

7,859

-2,347

-333

-2,609

2,571

-3,000

-429

1,571

-1,429

-525

-1,893

-623

-3,041

-1,899

18,067

16,168

2020E

10,038

400

-96

-2,342

8,000

-1,500

6,500

1,210

-290

-643

-2,461

-3,104

4,606

16,168

20,774

2021E

14,847

-5,966

-3,750

5,131

-1,500

3,631

1,149

-351

-677

-4,971

-5,648

-867

20,774

19,907

19 November 2019

Tata Global Beverages

NOTES

19 November 2019

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

Tata Global Beverages

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30

days take appropriate measures to make the recommendation consistent with the investment rating legend.

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1 MOSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.

2 MOSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

6 MOSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

7 MOSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months

8 MOSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months

9 MOSL has not received any compensation or other benefits from third party in connection with the research report

10 MOSL has not engaged in market making activity for the subject company

********************************************************************************************************************************

The associates of MOFSL may have:

financial interest in the subject company

actual/beneficial ownership of 1% or more securities in the subject company

received compensation/other benefits from the subject company in the past 12 months

19 November 2019

Tata Global Beverages

other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific

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might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

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be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies)

discussed herein or act as an advisor or lender/borrower to such company(ies)

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The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report

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19 November 2019