Losing Their Steam

Tea and coffee companies are expected to remain under pressure this year
Rahul Oberoi/Money Today        Print Edition: May 2013

After staying hot in 2012, shares of tea and coffee companies are not expected to do well in 2013. Experts point at rising input costs and unfavourable weather in countries that are big producers of these two commodities.

The stock of CCL Products, which returned over 175% in 2012, has fallen over 32% to Rs 259 this year till March 28. B&A Ltd, Bombay Burmah Trading Corporation and Tata Global Beverages returned over 75% in 2012. On March 28, they were 33%, 11% and 20% lower, respectively, than the December 31 levels. Bombay Stock Exchange Midcap and Smallcap indices fell 13.6% and 21%, respectively, during the period. Most tea and coffee stocks belong to midcap and smallcap categories.

"Some profit-booking and correction was expected. That has coincided with the negative market sentiment since the start of the year. It will be a year of slow and steady returns," says Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities.

Alex Mathews, head of research, Geojit BNP Paribas Financial Services, says rising wages, shortage of workers and higher fuel & fertiliser prices may hit the sector in 2013.

CURRENT SCENARIO
The average price of tea rose 17% to Rs 121.81 a kg in 2012 from Rs 104 per kg in 2011. The country produced 1,059 million kg tea between April 2012 and January 2013 as against 1,040 million kg in the year-ago period. "We expect production to remain flat this financial year, which could lead to a 5-10% increase in prices. We believe this will expand margins of tea growers," says Sanjay Manyal, research analyst, ICICI Securities.

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Some profit-booking was expected. That has coincided with the negative market sentiment since Jan. It will be a year of slow and steady returns.

SUDIP BANDYOPADHYAY

MD & CEO, Destimoney

Coffee production rose to 3,15,500 million tonnes (mt) in 2012-13 from 2,89,600 mt in 2009-10. "The postmonsoon crop estimate for 2012-13 is 3,15,500 mt. Since harvesting is still on, the final estimate will be available by May," says a commerce ministry press release.

India's coffee consumption is increasing at 6% a year. According to the government, the country's consumption in 2009-10, 2010-11 and 2011-12 was 1,02,000 mt, 1,08,000 mt and 1,15,000 mt, respectively. About 75% coffee produced in India is exported, which is why returns depend to a large extent on global price trends.

Coffee prices rose for five straight years till 2011 but have been falling in 2012, especially of the Arabica variety. In the international market, the price of Arabica coffee has fallen 25% to 163.46 cents per pound in the 12 months to March 2013.

FACTORS TO WATCH
Tea and coffee prices are decided by output and inventory levels, the former depending upon rain in east and north-east India, mainly West Bengal and Assam. Before investing, one must also look at fundamentals of the company, the track record of the management and debt levels. Runjhun Jain and Kavita Vempalli, analysts, Nirmal Bang Securities, say, "Investors should look at production in big exporters such as Kenya, Sri Lanka and China, plus weather-related factors such as droughts and floods."

INVESTMENT OPTIONS
A total of 25 stocks from the tea sector and two from the coffee sector trade on the Bombay Stock Exchange. The biggest ones, on the basis of market capitalisation, are Tata Global Beverages, Mcleod Russel India and Tata Coffee. Experts say out of these 27 stocks, Mcleod Russel India, Tata Global Beverages and CCL Products can give positive returns in 2013.

Mcleod Russel India:
The world's largest tea maker produces nearly 100 million kg tea a year from its estates in Assam, West Bengal, Vietnam, Uganda and Rwanda.

In the year to April 3, the stock rose 23% to Rs 340.30. On 31 March 2012, the company's consolidated gross debt stood at Rs 263 crore as compared to Rs 316 crore on 31 March 2011. Figures for 2012-13 were not available at the time of writing the article.

"One can invest in Mcleod Russel. With tea production expected to remain flat or post slow growth, we have modelled a 5-6% rise in realisations in our 2013-14 earnings estimate. The company has a strong balance sheet. This helps it increase capacity by acquiring tea gardens abroad and in India," says Manyal of ICICI Securities.

"One can buy McLeod Russell India on declines in a phased manner for the medium term," says Mathews of Geojit BNP Paribas Financial Services.

For the current year, the company has already sold 95% inventory. It expects prices to be higher by Rs 15-20 in March. It also expects to increase production by five-six million kg. Thus, with higher recovery of crop and increase in the proportion of bought leaves, the company intends to increase its total tea production by 10 million kg. At Rs 343, the stock is trading at a price to earnings, or P/E, ratio of 9.7 times 2013-14 estimated earnings per share of Rs 35.2. "We advise investors to hold the stock with a target price of Rs 387, a 12.8% upside from the current levels," says Vikram Dhawan, director, Equentis Capital.

Tata Global Beverages:
The company gets 65% revenue from overseas operations and is one of the biggest tea players in the markets where it operates.

6 per cent is the annual increase in India's coffee consumption, according to a government survey

According to a report by Equentis Capital issued in March, acquisitions and strategic tie-ups with global beverage giants like PepsiCo and Starbucks offer a huge potential for Tata Global Beverages. These, it says, will help it develop and market products in local as well as global markets. In the quarter ended December 2012, the company posted a net profit of Rs 92.96 crore, up 14.05% from Rs 81.51 crore in the year-ago quarter.

"At the current market price of Rs 128 (on April 5), the stock is trading at a P/E ratio of 16.4 times expected 2013-14 earnings per share of Rs 7.8. We have a 'buy' call on the stock with a target of Rs 175, which gives an upside potential of 30.6%," says Dhawan of Equentis Capital. The stock has risen 10% in the last one year and was at Rs 130 on April 3.

CCL Products:
CCL makes soluble instant spray dried coffee powder, spray dried agglomerated or granulated coffee, freeze dried coffee as well as freeze concentrated liquid coffee.

The company posted consolidated revenue of Rs 207 crore in the quarter ended December 2012 as its Vietnam plant went on stream. This was 51% higher on a year-on-year basis and 64% on a quarter-onquarter basis. The Vietnam plant has a capacity of 10,000 mt per annum. The company plans to add another 5,000 mt in 2013-14.

In the one year till April 3, the stock has risen 80% to Rs 272. Experts are bullish for 2013 as well. Jain and Vempalli of Nirmal Bang Securities say, "The stock can touch Rs 400 in the next few quarters. We believe that the company can register 34.8%, 20.3% and 8.4% growth in net sales, Ebitda margin and net profit, respectively, in 2013-14." Ebitda, also called operating profit, stands for earnings before interest, tax, depreciation and amortisation.

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