MANAGEMENT DISCUSSION AND ANALYSIS REPORT
The Chinese Poet Lu-Wah had famously said that "Tea is water bewitched". Inthe modern world, this is perhaps true of all natural beverages - including tea, coffeeand water - because with every cup, these much loved beverages elevate and transform thelives of people who drink them, across the world.
Your Company is fortunate to be in the space of natural beverages, and seeks to make abig and lasting difference to the world of tea, coffee and water. We will pursue anoverarching strategy of building on our strengths - unique competencies, differentiatedofferings, appealing brands and significant scale - in these three natural beveragecategories. Currently, of these three categories, branded tea accounts for around 70% ofour revenues, coffee around 20%, water and other products constitute the rest.
Your Company is also equally privileged to be a global business, with over 65% of ourconsolidated revenues coming from markets outside India, such as the United KingPom, USA,Canada, Russia, France, Australia and Europe. Approximately 90% of our revenues come fromsale of branded products in over 40 countries. The remaining 10% of our revenues aredelivered by our plantations and extraction businesses.
As a global natural beverages Company, we will utilise both our geographical andproduct range to create value for all our stakeholders, including our consumers,communities and shareholders.
Industry Structure - Global Economic, Consumer and Competitor Trends
The year 2012-13 presented a mixed and challenging picture insofar as global economictrends were concerned. Developing markets, including India and China, witnessed good GDPgrowth, albeit at significantly lower levels than in previous years. Europe continued toexperience recessionary trends, with several countries in that continent passing throughdifficult conditions. The Americas, on the other hand, appear to have recorded someprogress with reference to the previous year.
In these challenging times, two consumer trends emerged. First and foremost, consumerscontinued to seek better value in most FMCG categories, including beverages such as teaand coffee. A second trend that stood out, in sharp contrast to the above, was the growingaspiration for premium and luxury brands in a more affluent segment ofthe population.
In the trade, retailer consolidation continued to be the order of the day. Apart fromdeveloped countries in UK, Europe, Americas and Australia where large retailers havePominated the landscape over the past several years, modern trade has also now begunmaking significant inroads in markets such as Russia and India. Competition continued tobe intense, with global majors in tea and coffee making significant investments in theirbrands particularly in the UK, USA, Canada, Russia and India, and with private labelplayers also gaining market share in developed markets. All these factors, coupled with avolatile commodity environment, makes for a very challenging environment.
Your Company however performed relatively well in this scenario, through investment ina strong brand portfolio, a consistent focus on quality and value, and a sharp focus onproduct innovation.
Industry Structure - Commodity Trends
Globally, made tea production in 2012 was estimated to have increased to 4,681 millionkgs. in 2012, compared to a figure of 4,449 million kgs. in 2011. This represents anincrease of just over 5%. A large part of this increase was on account of higher teaoutput in China, though this was partly offset by declines in production in Africa,InPonesia and South America.
In general, and also on account of the above declines in production outside China,commodity tea prices witnessed an upward trend during the year under review. This trendwas particularly sharp in India and in Africa, with prices in 201 2 stabilising far abovethe 2011 levels. Price forecasts forthe current year continue to remain mixed, thoughKenya has witnessed better than normal cropping conditions and hence lower prices in theinitial months ofthe year.
The coffee segment displayed price trends quite at contrast to the tea market. Pricesof Arabica coffee continued to decline during the year, ultimately reaching new lows onthe last trading day of the year. Prices are now at less than half the peak levels whichexisted two years ago. Prices of Robusta coffee witnessed a similar declining trend at thestart of the year under review, but firmed up towards the end of the year on news of lowercrop forecasts due to drought conditions in Vietnam, which is the largest producer of theRobusta variety. Consequent to the above, the difference in prices between Arabica andRobusta coffees has now shrunk significantly, which is likely to have a sustained impacton the relative usage patterns of these varieties.
Consolidated Financial and Operating Performance
The consolidated financial highlights for 2012-13 are as follows:
| || || ||Rs. in Crores |
| ||2012-13 ||2011-12 ||Variance |
|Operating Income ||7,351 ||6,640 ||711 |
|Operating Profit ||663 ||527 ||136 |
|Profit before exceptional items and taxes ||665 ||551 ||114 |
|Exceptional items (net) ||(28) ||23 ||(51) |
|Profit before tax ||637 ||574 ||63 |
|Profit aftertax ||473 ||432 ||41 |
|Group Consolidated net profit ||373 ||356 ||17 |
Tata Global Beverages achieved steady growth in revenues in a challenging globalenvironment, notwithstanding recessionary trends in many parts of Europe. The Grouprecorded good sales volume increases in India and Australia, with positive movement inmarket shares. The significant growth in operating profits was led by an unrelenting focuson margins, costs, innovation and execution, and also by the softening of commodity pricesof Arabica coffee.
I ncome from Operations for the year was higher as compared to the prior year by 11 %.Exchange rate movements also had a favourable impact on the income for the year. Theunderlying growth over the prior year was driven by improvements in both the branded andnon-branded businesses. The branded business improvement against prioryear has comefrommarkets like India, USA and Australia.
Profit from Operations was ahead of the prior year led by a smart recovery in the USbranded coffee performance, as well as strong brand performances in India, Australia andthe Plantation and Extraction businesses. Favourable impact of cost interventions alsocontributed to the improvement. The Group continued to invest behind its brands with majormarketing campaigns in the United KingPom, Canada, India and Australia. The non-brandedbusiness also performed well with improvements in volume and realisations.
Finance cost was higher compared to the prior year attributable to higher level ofborrowing in certain parts of the business and currency translation impact.
Exceptionals mainly represents costs relating to restructure of corporate activities inthe UK and provision for retirement benefit obligations and costs incurred on long terminitiatives which has been partly offset by the profit on sale of a non-core investment.The prioryear mainly had the benefit of a higher profit from sale of a non-coreinvestment.
The tax rate for the year is largely in line with the previous year and was favourablyimpacted by the recognition of deferred tax assets in certain markets due torestructuring.
Profit after tax for the year at Rs. 473 crores was higher than the prior year drivenby improved operating performance.
Standalone Financial and Operating Performance
| || || ||Rs. in Crores |
| ||2012-13 ||2011-12 ||Variance |
|Total Revenue ||2,439 ||2,129 ||310 |
|Profit before exceptional items and taxes ||303 ||287 ||16 |
|Exceptional items (net) ||18 ||83 ||(65) |
|Profit before tax ||321 ||370 ||(49) |
|Provision for tax ||62 ||67 ||(5) |
|Profit aftertax ||259 ||303 ||(44) |
Total Revenue for the year at Rs. 2,439 crores increased by 14.5% over the previousyear driven by higher volumes and improved performance in branded tea operations coupledwith the impact of price increases. Profit before exceptional items and taxes at Rs. 303crores are higher compared to the previous year attributable to improvement in operations.
Exceptional Income during 2012-13 represents profit on sale of a non core investmentpartly offset by a provision for retirement benefit obligations and long-term initiativeswhereas the prior year had the benefit of a significantly higher quantum of profit fromsale of a non core investment.
Profit before and after tax was lower than the previous year attributable to higherexceptional profit in the previous year.
Product / Brand Performance - Tea & Coffee
Overall, the year under review was a positive period for countries such as India,Australia and USA. However, both the Canadian and UK black tea businesses came underpressure during the year, because of market declines and intense competitor activity.Other markets such as Russia, Poland, Czech Republic, Bangladesh and Pakistan wrestledwith challenges, but made progress towards achieving their strategic goals. Non-brandedbusinesses, including plantations, and coffee extractions, delivered one of the best everyears in your Company's history.
Some key country-wise highlights of the year under review are given below, whichprovide an overview of several important aspects of product and brand initiatives, as wellas performance:
Launch of a major new marketing campaign forTetley, with the theme of "MakeTime, Make Tetley"
Launch ofnew products, in particularTetley "Blend ofBoth"and Tetley"EstateSelection"
Consolidation ofTetley's strong market position in green tea, decaffeinated teaand redbush tea
Decline in the blacktea market by 3.6%, with brand Tetley also being adverselyimpacted
Significant progress and growth of our super-premium brand,Tea Pigs
Launch of a new marketing campaign forTetley, with the theme of "Body,Mind, Soul"
Launch ofa rangeofTetley"GreenTea Plus"blends,and a rangeofdeliciousherbal"mocktails"
Introduction of Tetley Tassimo single-serve discs, postfinalisation ofanagreement withTassimo/Kraft
Distribution ofTata Tea,the Indian market leader brand, in key Canadian marketswhich have significant Indian population
Continued focus on innovative new products, including Tetley Chai Latte
Launch ofa range of specialty teas, under the Tetley brand
United States of America
Launch ofnewflavourand productvariants ofEightO'ClockCoffee
Introduction of Eight O'clock Coffee K-Cups, which are single serve cupsmarketed under the trademark licensing agreement with Keurig
Continued focus on the Good Earth Tea andTetleytea brands
Achievement of value market leadership in the branded tea segment in India,which is a proud milestone. This is in addition to the volume market leadership which ourbusiness had already achieved
Good volume and value growth in the flagship Tata Tea brand - including Tata TeaPremium, Tata Tea Gold and Tata Tea Agni. These were supported by the "SochBadlo" and "Badi Patti Choti Patti" marketing campaigns, during the courseof the year
Continued growth of our regional brand portfolio, in particular Chakra Gold andKanan Devan, supported by strong distribution expansion and other initiatives
Very good growths of theTetley brand which is positioned in the premium segmentofthe market, the teabags range and green tea
Afocused "Gaon Chalo"campaign, designed to take our brands to thehinterlands of rural India
Commissioning ofa newtea factory located at Sampla in Haryana state, to supportthe growing sales volumes
Commencement of operations by our Joint Venture Company,Tata Starbucks Ltd.,which rapidly scaled up and opened 12 stores by end of the year under review; and launchof a customised coffee roastery by Tata Coffee Ltd. to cater to the needs of this jointventure.
Russia witnessed the introduction of the Grand Melange range of freeze driedcoffee (FDC). FDC is now the fastest growing part of our Russian product portfolio
Poland saw a relaunch, in new packaging, of theTetley and Vitax brands, as wellas a focus on transforming the business model in that country
The Czech Republic was driven by re-entry into specific retail trade, and launchofnewflavours ofteas
In Spain and in Switzerland, new listings were gained in the retail trade
Our South African joint venture recorded good progress, with a strong No. 2position in Rooibos tea. A first shipment was also recorded to Nigeria, during the year
In Pakistan,"Tetley Gold"was introduced in the mid-premium segmentwith a new blend, and has registered good initial success
Product / Brand Performance - Water
Since water is our Company's newest and youngest product category, we specificallyintroduce and highlight key areas of progress and performance in this section.
Himalayan, our premium brand of water sourced directly from an underground acquifier inthe Shivalik range of the Himalayas, gained good distribution and made rapid progress. Itis today the preferred brand across a range of fine dine restaurants and cafes, and hasestablished high consumer awareness and salience. During the year under review, a majoradvertising campaign for Himalayan water was launched across various media, and the sales& distribution arrangements through our joint venture Company, NourishCo, were furtherreinforced. The brand is likely to soon reach a stage in its life-cycle whereinternational expansion will become active on the agenda.
Ta ta Water Plus (TWP), the brand of fortified water for every Indian, also expandedits reach and distribution significantly during the year. The first variant of TWP whichwas launched was fortified with zinc and copper, and is now available in Ta mil Nadu andAndhra Pradesh states, both in one litre PET bottles and in smaller single-use poucheswhich contain 200 ml. each. TWP provides consumers an unique opportunity to treat everypoint of water consumption as an opportunity to not merely quench thirst but to also addhealth to themselves. This product was developed in collaboration with internationalscientists and Indian nutritional experts, and your Company holds proprietary rights forthe same. During the year, TWP was also relaunched by our joint venture, NourishCo, withimpactful repackaging, and an appealing advertisement campaign.
The third water based product marketed by NourishCo is Tata Gluco Plus (TGP), whichbrings consumers a delightful, tasty and healthy beverage that combines the goodness ofglucose with very enjoyable flavours, at an affordable price. TGP received excellentconsumer response, and is now available in Tamil Nadu and Andhra Pradesh states. Duringthe year, two new TGP flavours were launched - Orange and Mango, in addition to theexisting flavor of Lemon.
In the USA, your Company is a significant investor in a small start-up Company whichmarkets a fresh vitamin water brand called "Activate". This is still in an earlyexperimental stage, and with successful marketing efforts, can hold good potential for thefuture.
Overall, the water category in our portfolio of products continued to expand, and stepswere also taken during the year to fine-tune the business model of all the above brands.
Outlook - Consumer, Commodity and Competition
As detailed earlier in this Pocument, the market environment continues to be quitedifferent across continents, and these opportunities and challenges are likely to continueduring the year ahead.
Consumer optimism in Asia, the Americas and Australia is likely to be higher than inEurope, over the next several months. Most consumers are likely to seek value at themid-end of the market, even as some discerning consumers pursue aspirational andsuper-premium products.
The outlook on tea commodity costs remains mixed and a definite direction will only bevisible later in the year. Coffee commodity costs are likely to remain muted and wellbelow the historical peaks achieved.
We expect competition will continue to be intense, across the categories of tea andcoffee, and also in the premium water segment. Both global and local players will continueto invest strongly in their brands, and if commodity prices dip we could see a resurgenceof local players in the Indian tea market. The growth of private own-label brands launchedby retail stores will also pose strong competition, in many developed markets.
Your Company will respond to this challenging environment with a strong pipeline ofproduct innovation, and sharply focused product-segment strategies, to drive profitablegrowth. A renewed focus on rapidly growing segments within the tea and coffee categorieswill be in place.
In the water category, your Company will focus on aggressive expansion plans, forHimalayan water, TWP and TGP Given the size of this category and our first-mover advantagein India, every effort will be made to expand distribution and strengthen these brands.
Outlook - Interest Rates and Exchange Rates
Given the global operations of your Company, both interest rates and exchange rates invarious currencies / geographies are of significant importance to our business.
In most ofthe geographies we operate in, interest rates continued to be benign, on theback of recessionary headwinds and economic uncertainty, except in India. In India,inflationary pressures ebbed slowly in the second half of the fiscal and helped inlowering of signal interest rates. Strong commodity costs, mainly in tea, resulted inhigher working capital borrowings. However, we continued to protect the Group's overallliquidity position.
The Group's foreign currency exposures continue to be mainly in respect of GBP againstUSD and INR against USD. We also have exposures in Euros, Russian Rouble, AustralianPollars and Canadian Pollars. Persistently weak INR helped in augmenting export revenuesout of India. However, GBP weakness against USD, from the third quarter ofthe fiscalexacerbated concerns over payables out of UK. The company has managed to mitigate currencyexposure risks by adhering to the mandate of policies approved by our Board of Directorsin this regard. In order to protect currency exposures, a mix of forward contracts andsimple option contracts were used.
Opportunities and Threats
The biggest single opportunity for your Company is the global consumer trend towardshealth and wellness. Natural beverages such as tea, coffee and water are strongly alignedto this trend, which is therefore likely to greatly benefit your Company, now and in thefuture.
Our strong brands - including our flagship brands Tetley, Tata Tea and Eight O'Clockcoffee - also constitute a big opportunity, as we expand their range and strengthen theirpresence.
Our joint ventures with PepsiCo, Starbucks and Activate are also significant sources offuture opportunity. We thank these Organisations for helping build robust partnerships.
The nascent water category, with its large potential ahead of us, also remains a verylarge future opportunity.
Threats to our business could arise from strong competitor activity, high commodityvolatility or dilution of margins due to multiple reasons. The decline ofthe black teamarket in specific countries is also a potential threat.
Risks and Concerns
The risks of swift changes in commodity prices or rapid currency rate fluctuationsremain, and your Company's management is constantly watchful for the same. These couldcause significant inflation in commodity input costs, thereby leading to dilution ofmargins and earnings, which could in turn limit our scope to innovate, invest and expand.
In the water category, while the size and scope is large, competition is intense andexisting brands in the premium segment are well entrenched globally. Competing with thesebrands globally will require investments in the future. In value-added waters includingfortified waters, bringing to timely commercial fruition new product development usingappropriate technologies is also a risk and concern, and this subject is therefore high onyour Management's agenda.
Human Resources and Industrial Relations
Culture change and employee engagement
A team of highly motivated and imaginative employees from different teams andgeographies are working together to create an energising charter for the Ta ta GlobalBeverages Group. The mission of the charter is to make people feel good about themselvesand the Company they work for. Energisation ofthe entire global workforce, on the back ofa clear vision and purpose, continues to be a priority.
Employees across the world were also constantly engaged through direct quarterlycommunication sessions addressed by the CEO, and more frequent communication sessions intheir respective countries and teams. During the past months, your Company's long-termvision, purpose and strategy were also communicated and discussed with team members invarious global locations, to ensure a strong sense ofownership and alignment.
For strategic reasons, the Tata Global Beverages group relocated some global functionsfrom UK to India during the year under review. This relocation was carried out smoothlyand in the best traditions of the Tata Group. Consequently, effective around November2012, the Senior Management of the Group and certain global functional heads are operatingfrom India, while other Global functional heads will continue to be based in the UK andUSA.
Human Resources Management
The Regional HR teams, located in three continents, continue to drive the businessforward through the implementation of strategic HR process and practices. The Global ChiefHuman Resources Officer (CHRO), who leads this function, provides overall direction forthis effort.
The industrial relations situation across all locations of the Ta ta Global BeveragesGroup remained harmonious. The total number of employees on the rolls of Tata GlobalBeverages Limited as of 31st March 2013 was 2,489. The Beverages group, which includes theCompany's subsidiaries, employs more than 8,000 people, including plantation workers.
Internal Controls and Governance
Your Company has adequate internal controls and systems to ensure that all its assetsare fully protected. The Internal Audit Department carries out an audit of thetransactions based on a programme approved by the Audit Committee. The Audit Committee ofyour Company periodically review the observations made by the internal auditors in theirreports with specificfocus on the control environment and suggest measures for improvementwhere necessary. The senior management also periodically reviews the internal controls andfollow up on audit observations. The Ta ta Code of Conduct prescribed guidelines outliningthe key disclosure and governance requirements besides mandating the observance ofapplicable statutory requirements by the Company. Your Company and its senior managementhave affirmed adherence to the Code.
Certain statements made in this report relating to the Company's objectives,projections, outlook, expectations, estimates, among others may constitute'forward-looking statements' within the meaning of applicable laws and regulations. Actualresults may differ from such expectations, projections etc., whether express or implied.Several factors could make a significant difference to the Company's operations. Theseinclude climatic conditions, economic conditions affecting demand and supply, governmentregulations and taxation, natural calamity, currency rate changes, among others over whichthe Company Poes not have any direct control.
Your Company is very conscious that it operates in a highly challenging and dynamicglobal environment, where realities vary between continents and countries. We believe thatthe best way to navigate this environment is by constructing a robust strategy that putsconsumer needs first, and thereafter focusing on sharp execution of that strategy. Youwill be happy to note that we have acted on both these priorities - robust strategy andperfect execution - and we believe that this will constitute a winning combination that,alongwith passion and commitment, will make us the finest natural beverages company onthis planet.