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Tata Coffee Ltd Merged Management Discussions

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Jan 12, 2024|12:00:00 AM

Tata Coffee Ltd Merged Share Price Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

A) Industry structure and developments

Coffee

According to the estimates of the International Coffee Organization (ICO), World coffee production decreased by 1.4% to 168.5 million bags in coffee year 2021/22, hampered by the off-biennial production and negative meteorological conditions in several key origins. However, it is expected to bounce back by 1.7% to 171.3 million bags in 2022/23. Increased global fertilizer costs and adverse weather conditions are expected to partially offset the positive impact of biennial production from Brazil, explaining the relatively low rate of growth in coffee year 2022/23.

The impact of biennial production is anticipated to drive the outlook for Arabica, which is projected to increase by 4.6% to 98.6 million bags in coffee year 2022/23, following a 7.2% decrease the previous coffee year. Robusta production is estimated at 72.7 million bags, lower by 2% from that of last year.

Reflecting its cyclical output, Arabicas share of the total coffee production is expected to increase to 57.5% from 55.9% in coffee year 2021/22. South America being the largest producer of Arabica coffee in the world, despite suffering from the largest drop in output for almost 20 years, which fell by 7.6% in coffee year 2021/22. The recovery in coffee year 2022/23, partly driven by biennial production, is expected to push the regions output to 82.4 million bags, a rise of 6.2%.

World coffee consumption increased by 4.2% to 175.6 million bags in coffee year 2021/22. It is expected to increase to 178.5 million bags in coffee year 2022/23.

As a result, the world coffee market is expected to undergo another year of deficit, with a shortfall of 7.3 million bags in coffee year 2022/23.

The New York (ICE) May terminal, representing Arabica settled at 170.50 c/ lb on March 31, 2023 as compared to 226.40 c/ lb on March 31,2022 .

As on March 31, 2023, the London Robusta May futures settled at 2206 USD/MT as compared to 2165 USD/MT on March 31, 2022 .

Tea

India is the second largest producer of tea, globally, after China. Around 1365 million kgs of tea is produced annually and India is also a leading consumer of the beverage and accounted for nearly a fifth of the global consumption. Almost 85% of the total output in India is consumed domestically.

North India is the leading region for the industry in India, accounting for more than 80 % of the production. South India accounts for nearly a fifth of the industry. By types, black tea is the largest segment in the tea industry in India. By processing, the market is mainly divided into CTC and Orthodox. CTC accounts for 90 % of the production while Orthodox is at 8.6 %, and the rest being green and specialty tea.

The global Production is around 6400 Million Kgs and is estimated to be USD 66.74 Bn in 2022 and is projected to reach USD 91.61 Bn by 2027, growing at a CAGR of 6.54%. The International Tea Committee (ITC) in London estimates that tea consumption has more than doubled in the past 20 years, rising 113% up to 2022.

China continues to be the leading producer at 2740 million kgs/year, followed by India, Kenya, and Sri Lanka. Kenya is the leading exporter at 550 Million Kgs, followed by China and Sri Lanka. India exports around 210 Million kgs per year.

Sri Lankan teas fetches a premium in the global market, averaging around USD 3.80, followed by India, Bangladesh, Kenya and Malawi.

During the year under review, Indias tea production volume was marginally higher by 1.64 % Indias tea exports are expected to achieve more than 95 per cent of the set targets of USD 883 million despite various geo-political, geoeconomic and logistical challenges in FY 2022-23.

Production in Sri Lanka, which the largest exporter of Orthodox teas globally accounting for ~50% of global trade in Orthodox teas, declined by 16 percent year on year in 2022 on the back of the fertiliser issue and disruptions faced in the middle part of the year. The output fell by 48 million kilograms to a 26-year low of 251.5 million.

In the international market, Orthodox supplies from India directly compete with the low grown Orthodox in Sri Lanka, which accounts for ~65% of total production. Key large common markets are CIS (mainly Russia) and the UAE. Tea exporters to Iran, one of the largest markets, are facing uncertainties as the buyers from the West Asian country have stopped signing fresh contracts due to geopolitical situation. The outlook for increasing exports of Orthodox teas is good in the current financial year.

Pepper

Pepper, extensively cultivated along the tropical region, is native to south India. Until the 18th century, peppers cultivation and production was confined to India, as it was an important agricultural commodity of commerce and trade with Kerala contributing a major share. Since then, pepper cultivation has been taken up on a commercial scale by several nations such as Vietnam, Brazil, Indonesia, and Malaysia.

At present, Vietnam is the worlds largest pepper producer (38%) followed by Brazil (16%), Indonesia (14%) and India (11%). These countries, except India, resort to monocropping of pepper in their areas, and the vine is grown up to 6 metres height. On the contrary, in India, pepper is intercropped on the shade trees of coffee, tea and minor crops such as Arecanut and coconut without any restriction on vine height. India produces around 65,000 MT of pepper with 70% meant for domestic consumption. Indias pepper is known for its quality, pungency, and taste has created its own niche in the international market.

As per industry sources, Indias pepper production was 66,000 MT in 2022 and is expected to be about 64,000 MT in 2023. During the year, Indias local pepper prices were in the region of Rs.494/kg.

Instant Coffee

Instant Coffee accounted for just over 20% of global coffee consumption in 2022-23. Global consumption of instant coffee has grown by circa 2.5% since 2019-20 with EU, ASEAN, North America, East Asia, and Eastern Europe accounting for over two-thirds of the pie. Inflation and high prices of coffee beans continues to hamper growth in consumption of instant coffee, while the industry seems to have now tided over the challenges posed earlier by high freight rates and availability of equipment.

B) Opportunities

Green Beans, Instant Coffee, and Pepper

The outbreak of the COVID-19 pandemic had caused disruption in the coffee industry. The out-of-home coffee consumption decreased significantly due to growing number of countries adopting a full or partial lockdown to contain COVID-19 spread. But during the year 2022-23 we noticed that out-of-home consumption continued to recover and started going up due to relaxation of the pandemic rules. Therefore, last year we saw good demand for Indian coffees coming back which are traditionally high priced as the out of home started going up.

The coffee industry has a big opportunity to promote out-ofhome coffee given the consumers rising coffee appreciation. Due to increasing urbanization, rising e-commerce retail sales and increase in gen Z income, the market would propel in the forthcoming years. Also, with increased product offerings such as cold coffee beverages and ready to drink coffee is popular among the Gen Z population which has directly increased the sales of coffee market.

The market is projected to grow at a fast pace during the forecast period, due to different selling channels like

e-commerce which helps promoting premium coffees also surge in demand for certified coffee products.

The company has observed demand staging a recovery in across Africa, Middle East, and the Far East. Eastern Europe, backed by structural changes in the market, continues to ring in newer growth levels. The companys deep-rooted relationships across regions gives it the confidence of positively participating in these growth runs to achieve rates higher than witnessed in pre-pandemic years. With markets gradually opening up over the last year, demand from food service and institutional industries has also seen a healthy uptick.

Tata Coffees strategy of market diversification and product portfolio expansion will continue to provide the company new avenues of growth apart from enhanced demand for Indian Freeze-dried instant coffee from Russia. New product development and cost management initiatives will continue to help the company perform in a challenging environment.

Monsooned Coffee

Monsooned coffee is the Companys premium product offering. The Companys facility, situated in Mangalore, on the western coast of India, experiences favourable ambient climatic conditions, which enable the production of Monsooned Malabar, a Geographical Indication (GI) tagged product.

The Monsooning Unit is well prepared to boost operations and enhance quality, with investments in capacities, state- of-the-art technologies, including digital capabilities for the upcoming seasons.

Plantations - Tea

The Companys estates, supported by state-of-the-art facilities, produce CTC, Orthodox and Specialty Tea. The estates are certified with Rain Forest Alliance, Trustea and SA 8000. Tata Coffee continues to conduct its business sustainably and responsibly. Your Company is committed to conserve the environment by restoring rainforests in degraded areas and preserving the local flora and the fauna.

Good quality tea continues to command competitive price. Orthodox prices are likely to be bullish.

C) Risks, concerns, and threats

European Union are still struggling with the high cost of interest/funding cost and increased inflation rate. In 2022, EU annual inflation reached the highest level ever. Added to the above transit times have reduced drastically due to which customers are carrying low inventory levels. Green coffee coverage period of Roasters is now shorter, due to which demand has mostly moderated.

Inflation impacting consumption economics, raw material availability challenges and prices, and delicate geopolitics continue to mask the growth potential of instant coffee.

Steep increases in borrowing rates, packaging material and fuel prices, and heightened challenges on cross-border trade - currency and regulations, may lead to slower than estimated growth rates in the near- to medium-term.

Ecological concerns and responsive measures

European Union are still struggling with the high cost of interest/funding cost and increased inflation rate. In 2022, EU annual inflation reached the highest level ever. Added to the above transit times have reduced drastically due to which customers are carrying low inventory levels. Green coffee coverage period of Roasters is now shorter, due to which demand has mostly moderated.

Inflation impacting consumption economics, raw material availability challenges and prices, and delicate geopolitics continue to mask the growth potential of instant coffee. Steep increases in borrowing rates, packaging material and fuel prices, and heightened challenges on cross-border trade - currency and regulations, may lead to slower than estimated growth rates in the near- to medium-term.

Ecological concerns and responsive measures

The entire Plantation Industry is dependent on nature, making it susceptible to climatic parameters. The major weather factors that influence coffee yield are rainfall, temperature, light intensity, and relative humidity. As the plantations is susceptible to vagaries of weather, company has mitigated this dependency by irrigating its Robusta areas. All the estates are equipped to irrigate its 100% area of Robusta for blossom and backing also covering pepper Vine population. White stem borer in Arabica which is the major threat across plantation is monitored by tracing to keep the pest under check below the threshold levels. In addition to the standard established practices to control WSB, key initiatives by R&D to overcome infestation of this pest includes wrapping of impregnated Non-woven Fabric. This initiative plays a key role in curtailing the targeted pest without affecting ecological balance. Similarly, Infestation of Tea Mosquito Bug in the Anamallais Region has affected the yield per hectare of tea, and the Company has taken various efforts to control the pest, in joint working with United Planters Association of Southern India (UPASI) and National Bureau of Agricultural Insect Resources (NBAIR).

The Company has been increasingly concentrating on labour optimization initiatives and mechanization of critical cultural operations in order to achieve better operating efficiency. Efforts are also being made to retain the repeat work force.

Wild menace into plantations is creating man-animal conflict increasingly and becoming an issue. The Company has taken all measures to minimize man-animal conflict. The Wildlife Cell has been conducting regular awareness programmes across all Estates and systems that are in place to track the movement of Wild animals and avoid potential danger to the Workers.

D) Performance by major products

(Rs. in Lakh)

Particulars

FY 2022-23

FY 2021-22

Green Bean

30550

21239

Pepper

2817

3193

Tea

7418

6433

Instant Coffee

54863

44997

Others [Plantations Allied/Roast & Ground/Inter Unit Transfers]

6684

5827

Total Revenue from Operations

102332

81689

E) Outlook

Green Beans and Instant Coffee

The Company produces Premium Differentiated Coffees. In addition to this our Company has taken lot of initiatives to produce micro lot coffees in large quantities created by a combination of flora and fauna with distinctive soil conditions and elevation influencing the intrinsic quality of the beans.

The following is the parameters continue to be focused upon:

• Efforts to augment water resources for blossom and backing irrigation.

• Skill competency mapping and development along with sourcing of repeat workers to enhance labour productivity.

• To maintain high quality of Crop production with maximum premium grades, by harvesting at the right time.

• Aligning to Plantation certifications standard requirements which is based on Ecofriendly Practices.

As per estimates, global consumption of instant coffee is expected to grow at circa 2.70% till 2025. The Company will continue to focus on converting prospective customers and entering new geographies along with strengthening its diverse product portfolio. With an ever-increasing emphasis on sustainability, conscious consumption, and differentiated offerings, the Company believes it is well positioned to cocreate solutions and products ideally suited for its customers.

Tea

The Indian tea market is expected to exhibit a CAGR of 4.5 % upto 2027.

India is among the largest producers and consumers of tea across the globe and tea has emerged as one of the most cost-effective and healthy beverages. Moreover, the increasing consumer preference for premium and packaged tea brands is providing a thrust to the market growth. There are two major trends that have developed in the past two years - and they are trends that are staying strong: selfcare and societal care. Addressing these two key trends coupled with consumer awareness regarding the health and medicinal benefits of organic and green tea variants will contribute to the market growth.

The expanding product portfolio of teas, including herbal tea, green tea, black tea, white tea, and other tea varieties, is creating interest among tea lovers. The booming concept of sustainable tea is augmenting the market demand, providing an opportunity for the global tea market to thrive.

Over the past few years, the out-of-home market for tea has been expanding where various tea lounges have been opening across the globe. Proliferating online retail channels, are anticipated to drive the market toward growth, with at 5.9% CAGR over the forecast period. The popularity of online apps, coupled with the availability of discounts and easy product delivery has positively impacted the markets supply chain. This factor is anticipated to bode well for the growth of the segment over the forecast period.

With busier lifestyles and a growing workforce, the RTD segment has the potential to witness a healthy increase as consumers seek more convenient foods and beverages. The industry will also be driven by the increasing innovation in packaging and flavours in the coming years. The rural sector presents another segment for the expansion of the industry. The increasing disposable income in the developing regions of the world is further promoting tea consumption. The demand for tea is predicted to experience continued growth owing to a constant demand from the Asia Pacific region. The robust economic growth in these countries has also created a large consumer base among middle-class groups with a preference for premium tea blends. The consumers are frequently enhancing their purchases from unpackaged tea to packed and bagged specialty varieties. A growing, increasingly urban young population segment entering the middle class is prepared to consume more and to pay for premium tea products. Therefore, these changes have the potential to develop into stronger and longer trends.

The demand for tea from the Middle East and Africa (MEA) is anticipated to continue to expand in the near future. Countries such as Turkey and Iran are some of the worlds leading consumers.

Good liquoring CTC teas will continue to command the market. South Indian Orthodox is set to remain bullish for well-made teas.

Pepper

We use true-to-type plant materials from mother plants and all cultivation practices are scientifically based and monitored. Black pepper produced by the company will be of premium quality with its initiatives of sustainable cultivation practices, processing, certifications, upgraded processing centres and getting EIA certified and implementing traceability initiatives.

F) Internal control systems and their adequacy

The Company has laid down procedures and control framework for the governance of orderly and efficient conduct of its business, including adherence to policies, safeguarding of assets, prevention and detection of fraud and errors, accuracy and completeness of accounting records and timely preparation of reliable financial reports. These include regulations in manual or automated (ERP applications including other IT applications, wherein transactions are approved and recorded). Appropriate review and control mechanisms are one of our mandates in ensuring that such control systems are adequate and are operating effectively on an ongoing basis. The Company is responsible for establishing and maintaining optimal internal controls in preparation and presentation of financial statements, including assertions on the internal financial controls.

G) Evaluation framework

The operating management has analysed the effectiveness of the Companys internal control over financial reporting as on March 31, 2023. M/s. Deloitte Haskins & Sells LLP, the Statutory Auditors, have audited the financial statements included in this Annual Report and issued their report on internal control over financial reporting (as defined under Section 143 of the Companies Act, 2013).

The Company has a collaboration of in-house and outsourced internal auditors who report to the Audit Committee, thereby maintaining its objectivity. The internal audit plan is approved by the Audit Committee, and the Internal Auditors directly present their report to the committee for its consideration. The Audit Committee, comprising Independent Directors, reviews issues raised by the Internal and Statutory Auditors and the status of rectification measures regularly, to ensure that risks are addressed and mitigated appropriately and in a timely manner.

The Audit Committee meets the Companys Statutory Auditors to determine, inter alia, their views on the adequacy of internal control systems and keeps the Board of Directors informed of their major observations periodically. Based on its evaluation (as provided under Section 177 of the Companies Act, 2013 and Clause 18 of SEBI Listing Regulations), the Audit Committee concluded that as on March 31, 2023, the internal financial controls were adequate and operating effectively.

H) Business excellence

We, at Tata Coffee, believe in Business Excellence that drives overall business performance to next level, providing superior performance for the stakeholders. During the financial year 2022-23, the Company has focused on improving the Operational efficiencies projects across Business Units through Six Sigma/Kaizen initiatives. These projects have focused on capacity utilization, cost optimization across the locations and have provided satisfactory results.

The Company has focused on building capability towards Lean Six Sigma methodology through Master Black Belt, Green Belt across Instant Coffee operations.

I) Mission and values

Mission : Create distinctive, long-term value for all stakeholders with coffee and allied plantation products, embracing sustainable practices

Values : Safety; Customer focus; Responsibility; Innovation

& Agility; People-centric; Transparency

J) Financial and operational performance

The total income for the current year stood at Rs.1091 crore, as compared to Rs.887 crore in the previous year. Profit before Tax for the year under review was Rs.287 crore as against Rs.122 crore in the previous year. Profit after Tax during FY 2022-23 stood at Rs.231 crore as against Rs.102 crore in the previous year.

K) Significant Changes in Financial ratios and Change in Return on Net worth:

During FY 2022-23, the significant changes in the financial ratios of the Company and change in Return on Net worth as compared to that of the previous year are summarised below:

Financial Ratio

FY 2022-23

FY 2021-22

Change %

Reason for change
Net Profit Margin

22.61%

12.47%

81%

Profit After Tax includes Exceptional Items (net of tax). The variance is mainly on account of the same.
Return on Net Worth

18.34%

9.03%

103%

Profit After Tax/Net Worth includes Exceptional Items (net of tax). The variance is mainly on account of the same.
Interest Coverage Ratio

11.73

17.98

-34.80%

The variance in Interest Coverage Ratio is on account of increase in current borrowings

L) Human assets and industrial relations

The workforce strength of the Company as on March 31, 2023, stood at 6044 permanent employees, including 150 management staff across different locations. The Company maintained harmonious industrial relations across all its units during FY 2022-23.

Capacity building programmes

The Company is building capabilities for its workforce through adoption of specific and targeted interventions across diverse categories. With respect to the leadership development, the Company has partnered with Tata Management Development Centre (TMDC) and in-house learning programmes aligned with the business needs. Additionally, the Company has tied up with Nettur Technical Training Foundation, Bangalore towards training our workmen at Instant Coffee Division. The Company has also implemented a development centre, in association with global talent companies for building a leadership pipeline. The Company has integrated the self - learning as part of the appraisal process to build learning culture in the organisation.

For the junior management and staff cadre, several programmes were conducted at specific locations with internal and external faculties. The Company adopted various governmental skill developmental programmes to build and enhance plantation and shop-floor related skills. Integrated online programs were also included.

M) Employee awareness

To improve awareness on business ethics, the Prevention of Sexual Harassment (POSH) Policy and the Whistle Blower Policy, the Company has launched campaigns across locations, with each employee being bestowed with the responsibility of training a designated co-worker. Making employees responsible was an effective way to improve awareness across the organization.

N) People practices

The Company has implemented an online Human Resource Information System (HRIS), which automates several HR processes and leads to better data management.

The Company is focused on strengthening reward and recognition practices by launching the reward policy which cater to the needs of all levels of employees. The Company also has online portal to encourage and foster employee engagement across all levels and locations.

Forward Looking Statement

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute forward looking statements, within the meaning of applicable laws and regulations. Actual results may differ from such expectations, whether expressed or implied. Several factors could make a significant difference to the Companys operations. These include climatic and economic conditions affecting demand and supply, government regulations and taxation, any epidemic or pandemic, natural calamities over which the Company may not have any direct/indirect control.

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