Tuesday, 30 October 2012

Incredible Stocks - Tata Coffee

Coffee is the second most traded commodity in the world after crude oil. India needs no new introduction to Coffee. The demand for coffee is never ending due to the large youth population in the country. The success of Cafe Coffee Day is the proof of the potential that is available in the vast Indian market. The domestic annual consumption rate is predicted to increase at the rate of 6%.
The coffee production, supply chain and retail outlets all have to increase to cater to this demand. If we follow this sector we might get some good stocks to invest in this sector too.

The company which we are reviewing in this post and which has created news recently is Tata Coffee. Tata Coffee is the world's largest integrated coffee plantation company having approximately 19 acres of plantations in Karantaka and Tamil Nadu and also its own coffee curing facility with a capacity of over 30000 tonnes. It offers Agglomorated Coffee, Spray Dried coffee and Freeze Dried coffee. One of the finest of its various products is the popular Mr. Bean coffee-chickory blend. It has been catering to the Indian market since the year 2000.

Seems like a potentially good stock to invest in. Let's have a look at the annual report of Tata Coffee for a 5 year period i.e. from 2008 to 2012.

2013 2012 2011 2010 2009 CAGR%
Sales(in Cr 598.08 508.52 407.71 335.51 319.56 16.96
Profit (in Cr) 93.69 78.85 55.09 31.99 18.64 49.73
OPM% 25 20 16 13 8
ROCE% 20.47 20.41 10.51 9.47 11.8
ROE% 17.73 17.24 13.66 8.80 6.10
Debt/Equity 0.15 0.16 0.29 0.41 0.58
Interest Coverage Ratio 27.05 14.79 10.49 6.38 5.46

The CMP at when posted was Rs. 1016.80

There has been an increase on all the parameters listed above. Notably the ROCE and ROE have grown considerably showing the efficiency of the company in giving returns. The D/E ratio has lowered showing that the company has grown but also taken care of its debt.

So much about the parameters. But the parameters are only half the story. Before deciding to invest in stocks we should also look at news about the company and also any current and future developments that may have an affect on our stock investments.

Tata Coffee has entered into a JV with Starbucks, a well-known Coffee company and Coffeehouse chain based in the US. With this JV Tata Coffee aims to open a Coffeehouse chain in India to sell its own products at its own outlets. If you study this development carefully, it is a win-win venture for both the companies. In the words of Starbucks CEO Howard Schultz, the JV has helped them to enter the Indian markets very easily and they aim to open around 50 outlets in the first step. The first outlet has already opened in Mumbai.

Moreover this is the first time in history that Starbucks is sourcing the coffee locally in any country. This means the JV has given huge push for Tata Coffee to increase its visibility and footprint in the Indian market. A development that has huge positive potential. When the JV was announced in January 2012, the Market Price of Tata Coffee stock was around Rs. 800-900. In a span of months the stock has now reached its 52 week high of Rs.1100. This gives us the glimpse of the huge positive response to the JV.

Operating a retail chain is not new for Tata Coffee. The company's subsidiary in the US Eight 'O' Clock Coffee (EoC) is a successful coffeehouse. It has approx. 67% of commodity penetration in the US retail coffee market. Also Tata Coffee has a 34.5% equity holding in Barista Lavazza, another coffee chain operating in India.

Considering Tata Coffee’s performance on a consolidated basis with EoC, thier EBITDA margin doubled in Sept 12 Qtr on YOY basis and profits rose by 179% to 45.8Cr in the same period. EBITDA has grown 117% YOY to to 88.2Cr and profit margin nearly double to 19% YOY in Q2 ‘12. In the next couple of quarters, the improved performance of EoC will lead to a better re-rating of the company valuation. The consolidated top-line has grown by 14.7% YOY in Q2 ‘12. EoC sales have grown by 7.5% to Rs.300Cr. for Q2 ‘12. Looks like another good stock to invest here.

As EoC performance also influences Tata Coffee and contributes to its top-line and bottom-line and the home business of Tata Coffee also set to take a big leap with the recent developments, this can be another great stock to invest with very good return on investments.