Correction in Kenyan tea prices augurs well for TGBL

TGBL derives ~75% of its sales from tea; making it very sensitive to tea price movements. TGBL sources a significant amount of black tea leaf from Kenya, the world's leading exporter of black tea for its international black tea operations, under the Tetley brand and North Indian tea for its Indian operations. The price trends in India mirror that of Kenya due to export price parity. The Kenyan black tea prices have declined by 13% yoy during Jan-Apr’13 due to sharp 71.6% yoy increase in tea production at 155mn kgs aided by favourable weather conditions. North Indian tea prices too have corrected by ~8% yoy YTD (prices collected from auction data of Kolkata, Guwahati and Siliguri) due to 25% yoy increase in production owing to good weather. We believe the correction in tea prices augurs well for TGBL as it will result in a sharp reduction in procurement cost thereby expanding OPM by 100bps over FY13-15E.

Rupee depreciation of ~6% yoy to drive revenues

TGBL will benefit from the ~6% yoy depreciation in rupee during Jun’13 as it generates ~70% of its revenues from outside India. We believe like FY13, the rupee depreciation against US$ will drive TGBL’s revenues in FY14 as well. The revenue growth for FY13 was ~11% yoy of which over 50% was attributed to the favourable forex movement (rupee depreciation of ~8% against the US$ in FY13). We expect TGBL to witness revenue CAGR of 11.2% over FY13-15.

New business initiatives to further drive growth

New business initiatives like entry into energy and health drinks segment, NourishCo (JV between TGBL and PepsiCo India), Starbucks JV (50:50) and tie up with Green Mountain Coffee Roasters, Inc. (Keurig) have a strong growth potential for the next phase of growth. Besides changing TGBL’s revenue mix, these initiatives will also improve margins and capital ratios.

Despite its leadership position in the Indian packaged tea market, No. 2 position in the global tea market and generating ~90% of its total revenues from branded products, TGBL is trading at 14.2x FY15E EPS (which is at a discount to its FMCG peers that are trading at 25-30x FY15E EPS). We recommend Buy on the stock with a target price of Rs149.