Successful transformation into a global beverage player

TGBL has emerged as a global beverage player from a pure tea producer, with geographically diversified revenue base and a well developed product portfolio. Acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks offers a huge market potential for TGBL as it can develop and market products in local as well as global markets. With its strong product portfolio, TGBL is well placed to benefit from rising beverage consumption in India. We expect TGBL to witness revenue CAGR of 11% over FY13-16.

Rising share of coffee business

TGBL has a strong presence in the hot drinks category especially in tea and coffee. The key geographies for TGBL are India (Tata Tea, Tetley), UK (Tetley) and the US/Canada (Eight O’Clock). To reduce its overdependence on tea business, TGBL has strategically diversified into segments like coffee and other beverage brands. As a result, tea business revenue contribution has reduced from ~94% in FY06 to ~73% in FY13 and high margin coffee business contribution increased to ~25% in FY13 against a mere 4% in FY06.

New business initiatives to further drive growth

New business initiatives like entry into energy and health drinks segment, NourishCo (TGBL and PepsiCo India JV), 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. Within a short span of time (18 months) TGBL has opened 42 Tata Starbucks stores (as of Mar’14). TGBL is also likely to promote Mount Everest Mineral Water (MEMW) as an international brand through Starbucks outlets. We believe, besides changing TGBL’s revenue mix, these initiatives will also improve margins and capital ratios.

Attractive valuations; recommend BUY

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 15.1x FY16E EPS (which is at a discount to its FMCG peers that are trading at 25-30x FY16E EPS). We recommend Buy.