2012

EQUITY RESEARCH REPORT OF TATA GLOBAL BEVERAGES

SUBMITTED BY: SHARDUL BHARDWAJ VARSHA AVTAR SUDEEPTO KONKANA JYOTI PUNJ PRAKASH PRASHANT KUMAR SHARMA

IILM INSTITUTE FOR HIGHER vicky_HP Hewlett-Packard 10/12/2012 EDUCATION

EQUITY RESEARCH REPORT OF TATA GLOBAL BEVERAGES

Market Data Bloomberg Code Returns Code SENSEX NIFTY Equity Capital TGBL IN TTTE.BO 16222 4921 61.84 Million

BUY

Tata Global Beverages 2012 net sales rose approx. 13% on a YoY basis. And reported a recovery in its PAT after decreased by 53% previous year, its increased by 67% this year. Loss at the net level was driven by the exceptional loss of `400 mn, while it had a gain of `560 mn in the year ago quarter, mainly due to a profit on sale of non-core investment. EPS is increased by 67% as compared to last year. The companys net profit rose approx. 67% to 302.68mn, while sales were up 13.53% this year. Tata Global Beverages has maintained leadership in the domestic tea market, with a volume market share of approx. 19.6% and value share of approx. 21.3% at the end of financial year 2011. It has also maintained its share in UK in the black tea segment, although the segment as such declined approx. 3% last year. The company also saw good growth in Canada and has close to approx. 50% market share in black tea there. Tata Global Beverages is betting big on high margin and innovative brands to drive growth in its developed markets. The company has launched a combination of green and black tea in some markets and in UK a super-premium brand Tea Pigs is growing at a compounded rate of over approx. 35%. In India though, it is focusing on rural penetration to boost growth. It has a scheme called 'Gaon Chalo' which it has expanded to 8 states last year. This is a self-employment scheme for women in villages. Under this scheme over 70,000 sales personnel are going door to door selling our products. This scheme is expected to boosting its tea sales in the country.

Key Market Ratios EPS Book Value PE Net Profit Margin Dividend Per Share 4.89 32.89 33.47 0.148 2.15

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INTRODUCTION Tata Global Beverages is an integrated beverage business that has set out on a journey to become a global leader in branded good for you beverages through innovation, strategic acquisition and organic growth. With over 200 years of history in the beverage market and a heritage of innovation and development, Tata Global Beverages has successfully evolved from a predominantly domestic Indian tea farming company to become a marketing and brand focused global organisation with a portfolio of strong brands. The groups annual turnover is US$1.5 billion (FY 2009/10) and it is the second-largest player in tea in the world. Its global expansion is highlighted by the fact that over 65 per cent of the consolidated revenue originates from markets outside of India. The group maintains a strong focus on consumer brands; more than 90 per cent of turnover is delivered by its branded products. Over five years ago, nearly all the groups turnover came from tea interests, but now the figure is nearer 71 per cent, underpinning its successful diversification strategy and giving it a leadership position in the good for you beverage space. Formerly known as Tata Tea, the business diversified and expanded significantly over the last decade. Tata Global Beverages now employs around 3,000 people with a significant presence in over 40 countries worldwide. It recently opened its new corporate headquarters, located in the UK (Uxbridge, West London). The group is now making strong strides towards its mission of life-enhancing sustainable hydration with the recent JV agreement with PepsiCo in the area of non-carbonated ready-to-drink beverages, focused on health and enhanced wellness and the acquisition of a stake in ActivateTM, a performance beverage and bottled water company in the United States.

Areas of business

With innovation and excellence at the heart of everything it does, Tata Global Beverages has a stable of leading global and regional brands.

Tata Tea: Tata Tea is officially a superbrand in India, where it is the second-most trusted hot beverage brand, thanks to national and regional brands Tata Tea Premium, Kanan Devan, Chakra Gold, Agni, Gemini, Life and Tata Tea Gold. Tetley: Acquired by Tata in 2000, Tetley is currently enjoyed in 70 countries worldwide and in close to 11 million UK homes. Tetley is a true leader in black tea, decaffeinated and redbush, with fast growing green tea and innovative tea infusions too. Currently market leader in the UK and Canada, the brand's strong innovation agenda includes the first launch of Extra Strong tea for a fuller flavour and Infusions, a liquid Real Brew tea mix for water.

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Good Earth: One of the first American herbal tea companies and a leader in specialty teas, Good Earth produces and markets fruit, medicinal, red, green, black, white and organic teas. Today, its premium teas and coffees, all with green packaging are enjoyed across the US, Canada and the UK. Vitax: A part of the Tata Global Beverages portfolio since 2007, this is a wellestablished fruit and herbal tea brand in Poland Jemca: This is a market leading tea brand in the Czech Republic with a growing range of fruit and herbal, black and green teas Tata Coffee: The well-known brands here include Mr Bean, Mysore Gold, Coorg Pure, Tata Cafe and Tata Kaapi. The coffees are grown on 19 estates in the southern states of India and produce about 10,000 tonnes of natural shade grown Arabica and Robusta coffees. Eight OClock Coffee: This is the best-selling whole-bean coffee in the United States and the third-largest coffee brand by volume in the country. Grand: Joining the Tata family in 2009, Grand is one of Russias leading umbrella beverage brands known for its consistent quality, good value coffee, tea, cocoa, chocolate, green tea and iced tea products all made using natural, environmentally friendly ingredients. Himalayan Water: A brand that has been a part of Tata since 2007. The water is sourced directly from an underground aquifer located about 120 metres below the earth's surface in the Shivalik range of the Himalayas, and is bottled at the source.

SWOT ANALYSIS Strengths: 1. Tea can be considered as a health drink (known of its antioxidant properties) as opposed to more favored coffee, which also has a lot of negative effects on health. 2. Demand for tea has been growing at some 2% per annum and should accelerate further as the demographics of the tea consuming nations is favorable (all former British colonies most of developing Asia, Africa and Middle East) 3. Demand and Supply mismatch, in coming years because of underinvestment in the production activities worldwide. Furthermore, it takes 5 years to reap the first tea crop from the time of plantation and no capacity has been added in last 4-5 years. 4. Huge land holdings of tea estates could be used for farming of alternative crops alternative (with massive investments proposed for farm and farm related supply chain, in next few years we could see companies like Reliance retail acquiring tea estates for growing fruits and vegetables)

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5. Tea is one of the few agriculture commodities, which has not moved since the Bull Run in commodities started some 6 years back, its high time that the cycle turns in favor of producers the same fundamentals (inflations cost escalation of all input variables have gone up across the spectrum) 6. Highly fragmented industry and consolidation could help price rationalization. Weakness: 1. The Indian labor laws are draconian and do more harm to industry and labor than help. 2. labor intensive industry and therefore comes with all problems and constrains which are attached to such industries (labor unions, politics and low productivity) 3. Scalability is limited; its a US $ 5 billion market globally and is growing at a very slow pace. 4. Climate change may do more harm to tea growing region, hence escalating prices but also resulting hampering the capacity. 5. The downward trend might continue for some more time. Opportunities: 1. The trend towards the health drink is quite visible; it is up to the tea industry to make the consuming population at large to make aware of the facts. 2. Tea has a distinct advantage over more popular beverage coffee 3. To make tea more acceptable and fashionable like coffee 4. To come up with new flavors/formulation of the tea Threats: 1. 1. To retain the young population of the tea consuming countries mostly developing countries, from being lured by multination to aerated and flavored drinks. 2. Labor problems 3. cost escalation 4. Fragmented production FUNDAMENTAL ANALYSIS The net profit of company is fluctuating year by year. it has increased 146.11% in 2010 from 2009 and then decreased by 53.87% in 2011 and again increased by 67.61% in 2012.

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The net sales increased by 13% in this year and EPS is also increased. Thats a good sign for the investment. The acid test ratio that is quick ratio is 0.3 to o.4 over the 5 year. the company holds inventory more. That is a concern for the company. It should be 1:1. However the current ratio of 1.78:1 is good. The ideal current ratio is 2:1. Net profit margin of the company is greater than industry. Its a good sign for the investment. However benchmark analysis is concern, company is doing well as compare to industry expect some ratios. Major ratios of company are greater than the industry. So we can say that company is fundamentally strong. TECHNICAL ANALYSIS CO VARIANCE 0.0000812064 VARIANCE 0.0001090975 BETA 0.744347186 RISK FREE RATE 5% REQUIRED RETURN 74% We perform a regression analysis assuming the risk free rate of return is 5%. We got beta of 0.74 for the Tata Global Beverages which means that the stock is less volatile and less risky. The expected required rate of return is 74%. It can be true because the company gave a 100% in last year and now the company is at booming phase.

Latest on Tata Global Beverage : As on 12th October 12, 2012 , the stock of Tata Global Beverage has hit a new all time high price of Rs 163.30.The stock has appreciated 26% in the last 3 weeks. Major Factors driving this rally :

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Tata Global Beveragess plan to open its first Starbucks outlet, a global Coffee chain giant , in India by the end of October in Mumbai. Speculation of high-profile HNIs picking up stake in the company has also led to flaring up of the prices.

With tea and coffee prices being lower than the previous year's levels, the company is expected to announce strong performance during the quarter ended September 2012.

Conclusion We recommend to buy this stock because the expected rate of return is good and the stock is less risky. Fundamentally the company is strong. As we consider about the industry it comes under FMCG Industry which is growing well and expected to grow in the future. The demand of Beverages is going to increase. Company is expending their business in outlet which will increase their sales. Company broke the resistance level of 161 and now it will go further up. So we recommended that we should buy this stock.

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