Star cuppa

Formerly Tata Tea, this company has transformed itself into a global non-alcoholic beverages company with local and international brands in its kitty, the latest entrant being the global coffee chain Starbucks. It is the world's second-largest manufacturer and distributor of tea and a major producer of coffee. This company however spans almost the entire range of beverages:

• Tea (Specialty – green & herbal, in addition to the Tetley brand sold globally and local brands Tata Tea, Tetley, Kanan Devan,Chakra Gold,& Gemini in the branded boxed packed tea market). KANAN Devan, Chakra Gold and Gemini are regional brands with market leadership. ‘Tata Tea’ is the market leader in the retail tea market with above 20% volume market share.
• Coffee (thru the listed plantation and instant coffee subsidiary Tata Coffee -  Eight o’Clock and other brands under its fold)
• Water (thru a listed company Mount Everest Mineral Water with its Himalayan brand).

The company has thrived on brand acquisitions which have complemented its portfolio

• The company acquired Mount Everest in June 2007 to gain foothold in the niche naturally sourced packaged water. Himalaya has since grown its brand and per unit price in a bid to become the nation’s largest spring sourced packaged premium drinking water. The brand is now present in both India and Singapore. The company is focusing on export opportunities for the Himalayan brand. With Starbucks Himalaya has also got a new source to increase distribution.
• TGB has an equal Stake JV with Pepsi Co. in India, Nurischo, which will enable it to leverage on Pepsi’s distribution network.
•  Joekels in South Africa (third largest player)
•  Good Earth in US (21% volume share)
• Jemca, the market leader in Czech Republic
•  Vitax in Poland (16% share of fruit tea market)

The company recently increased stake in its US based JV Rising Beverages’ in the Water business to ~47%.

On a consolidated basis, TGBL derives 70% of its revenue from tea and balance from coffee segment. Tetley, its largest brand contributes 38% to the topline, main geographies being UK and Canada. Eight O'Clock is a gourmet whole bean coffee brand in USA. It contributes 17% to the topline.

TGB has a balanced market share globally:

•  India (22 percent value share of Tata Tea),
• Canada (Tetley)
• UK (27% value share of Tetley),

Not too long back, TGB ventured into the Indian cafe market with a 50:50 JV with Starbucks Coffee Company. The coffee shops branded as "Starbucks Coffee – A Tata Alliance" will source coffee beans from Tata Coffee, a subsidiary company of TGB.

Starbucks, which has just completed 1 year in India, is still in a start-up stage with only 25 cafes in the major metros – Mumbai, Pune and NCR. But from what has been reported, it has got a rousing reception wherever it has opened. Once this chain attains critical mass over the next few years, returns should start flowing in. This will benefit TGB in 2 ways – directly thru its stake in the company and from improvement in Tata Coffee’s financials on the back of this growth since Starbucks will be sourcing coffee directly from them.

And recently TGB announced the merger of its 50% subsidiary Mount Everest Mineral Water (owner of Himalayan brand) with itself. This will now give it full control over the Water portfolio as well. It remains to be seen if Tata Coffee goes the same way.

TGB stock has been moving up on investment buying based on the fact that international tea prices have been softening and demand for tea continues to grow as well as robust coffee business. From about 168 around Diwali, it has come down about 14% to 145 now in line with the general market sentiment. Considering its pedigree and the star brands it owns in a growing consumer space and with not too many listed players of the same ilk, as well as not too many focused players in this space (Georgia, Kinley from Coke and Aquafina from Pepsico are fringe players in the market and will continue to be so since they do not form the core focus areas of their respective parents) it is not expensive @ ttm PE of 24. It must be remembered that this is a branded consumption space with high growth rates; hence though in absolute terms, it may not be cheap compared to the market, it certainly is when compared with FMCG space focused on consumption though not in the same area. And the bonus is that this is a nascent space yet and TGB has a huge head-start over others planning similar forays. So things can only improve from here.