Tata Coffee’s Q4 FY19 sales number underlined better volume growth in the domestic coffee business and an improving margin profile.
Result snapshot
Source: Company
Note: Lower net profit is due to high base of last year where there was a tax reversal of Rs 53 crore on account of reduction in the US Federal Tax rates.
Key positives
Q4 FY19 consolidated sales grew five percent on account of volume growth in the value-added coffee business, partially offset by plantation business. Value-added business (83 percent of sales) was up seven percent in the quarter gone by, aided by domestic instant coffee business sales – 18 percent sales growth year-on-year.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margin gained both annually (518 bps) and sequentially (183 bps QoQ) on account of sharp improvement in operating performance of the plantation business (17 percent of sales). This was partly aided by weak base of last year when the plantation business posted a loss at the operating level due to Kerala floods and lower product realisations.
Key negatives
Competitive pressure remains for the value-added segment. Operating margin in this segment is marginally lower than last year. Key drag in this segment has been Eight O’Clock business (around 60 percent of consolidated revenue), wherein sales are down seven percent. Profitability of this business has been also impacted by restructuring cost of Rs 4.84 crore (versus Rs 10.81 crore last year).
Key observation
Vietnam plant (5,000 tonne capacity) for freeze dried coffee has been commissioned and expected to attain 70 percent utilisation in FY20. The management expects margin from this facility to be higher than the Indian coffee business.
Outlook
The company is gradually treading past some of the domestic challenges. The plantations business is expected to witness 10-15 percent volume growth in FY20. Volume growth would be aided by the quick ramp-up of the Vietnam plant. Pricing growth is expected to be muted. Taking account of a gradual improvement in Eight O’Clock coffee business, we expect a 12 percent sales growth in FY20.
On account of elevated competitive pressure we don’t expect a sharp rebound in operating profit margin. Rather a gradual margin improvement led by an anticipated change in product mix.
As far as the stock is concerned, it has corrected by 33 percent from its 52-week high and currently trades at 22 times FY20 estimated earnings. The counter merits attention as it is witnessing improving volume trend in select segments and is likely to benefit from a favourable product mix. We take note of the management’s mention that asset monetisation of non-core assets would continue. This gives credence to the opinion that restructuring of business is not over.
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