| Summary of Contents
| THEMATIC REPORT Switch from Tata Global Beverages to Mcleod Russel Key points -
Rising tea prices benefit plantation companies but unfavourable for tea processors and marketers: When tea prices go up it is preferable to invest in tea plantation companies rather than the tea processing companies. The rising tea prices would keep the profitability of the tea processing and branding companies under pressure, as raw tea is the key input for them. Also, there is this concern of the marginal users downgrading from branded tea to regional tea brands due to the price hikes undertaken by the branded tea players. On the other hand, tea plantation companies would gain from the rising tea prices, as it would have a direct positive impact on their profitability. -
Thus, Mcleod is better placed than Tata Global Beverages currently: Tea contributes around 60% of Tata Global Beverages Ltd (TGBL)'s consolidated revenues. Since CY2008 tea prices have moved up significantly due to a shortfall of black tea in the international market. The margin of TGBL's tea segment that ranged in mid teens has slid to higher single digits in the recent past. On the other hand, Mcleod Russel India Ltd (MRIL)'s operating profit margin (OPM) moved up from around 10% in FY2008 to around 27-28% in FY2012. Hence, we recommend our investors to switch from TGBL to MRIL. -
TGBL's diversification a good long-term strategy with little material in the near term: TGBL has undertaken several initiatives (such as joint ventures with PepsiCo India and StarBucks Corporation) to diversify from the commoditised tea and coffee business to the high-margin beverage business. The company now aims to enhance its presence in the healthy beverage space in the domestic market. However, we believe these initiatives will take some time to start adding substantially to the bottom line of TGBL. Nevertheless, these initiatives will improve the long-term growth prospects of the company. -
Expect better returns from MRIL over next few quarters: Given the margin pressure and the stock's fair valuation, the gains in TGBL are limited from here. On the other hand, we expect MRIL to ride the upcycle in tea prices and consequently give better returns in the near term. Hence, we recommend a switch from TGBL (current market price: Rs117) to MRIL (current market price: Rs317).
Click here to read report: Thematic Report | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
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