Tata Tea and its subsidiaries are consolidating themselves to become a global beverage company.
Arun Kejriwal, director, Kejriwal Research and Investment Services, answers your queries:
Is Tata Tea a good buy? — Ram Kumar
Tata Tea has reported an interesting set of numbers for the quarter ended September 2006. The net profits, after exceptional items, are up substantially at Rs 163.92 crore against Rs 62.92 crore. The company has sold some of its investments in the Tata group and realised about Rs 68 crore from the same. It may be mentioned that Tata Tea is on an acquisition spree and has made many investments in recent quarters. The company has acquired a stake in 8 O’Clock coffee, which is an American brand, and very recently has acquired a stake in the water business of Glaceau.
To pay for these acquisitions, the company has decided to sell some of the equity investments in group companies. It will also make a preferential offer of equity and warrants to the promoters for raising further money.
In an important development, the company has decided to hive off its North Indian tea gardens into a separate company and have IFC Washington, ILFS and workers as stake holders in the new company.
This is being done after the huge success the company had in a similar exercise it did in the South Indian tea estates. Post this exercise, the company has been able to increase the output and improve efficiencies.
Tata Tea and its subsidiaries are consolidating themselves to become a global beverage company. They are operating in key geographies and are in the businesses of tea, coffee and water.
They have learnt the art of leveraging the balance sheet after acquiring Tetley of the UK and are continuing to do the same even now with the new acquisitions announced recently.
The company, on a standalone basis, has earned an EPS of Rs 37.08 for the half year and Rs 29.16 for the quarter ended September 2006. This is against the earnings of Rs 33.25 for the full year ended March 2006.
On a consolidated basis, the company has earned an EPS of Rs 48.76 for the half year and Rs 34.52 for the September quarter against Rs 53.21 for the full year to March 2006.
The company is on a growth part and is in an investment mode. During such stages, the estimation of profits becomes a little more difficult because of the revenue from recently addedacquired businesses getting consolidated.
I believe that the company is well poised to attain greater heights and a substantially higher status in time to come. The share trades at Rs 748, with the recent high and low, being Rs 894 and Rs 725, respectively. The PE of the company based on March 2006 consolidated numbers is 14.06 times.
Investment in the share is recommended at current levels and on dips closer to the Rs 715-725 mark. Once the acquisition and details of revenue and profits from the new businesses are understood, I believe this share has the potential to appreciate to the Rs 950-1,000 level in about six to eight months.
Sebi disclaimer: I have investments in the scrip mentioned above. The writer invites comments at kejriwalarun@rediffmail.com
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