Tata Coffee: Hold

Recommendation: Hold

Reshma Krishnan

THE Tata Coffee (TCL) scrip trades at Rs 75 and has fallen almost 43 per cent since January.

It has a price-to-earnings ratio of 3.6 times, based on an earnings per share (EPS) of Rs 20.49. Existing investors should consider holding on to this stock at its current price on the back of strong fundamentals and decide on the scrip when underlying industry fundamentals are clearer.

TCL is Asia's largest integrated plantation company with 6,773 hectares under cultivation. In 1999, four of Tata Tea's (which holds the controlling stake) coffee companies were merged into TCL. The merger created a fully integrated player in the coffee business, as all four companies were in the various aspects of producing coffee.

TCL primarily cultivates coffee, accounting for 73 per cent of its income. The rest is derived from tea, pepper, cardamom, orange, and timber. TCL's coffee business is divided into exports (which consists of bulk and instant coffee) and the domestic market (which consists of branded roast and ground (R&G) and instant coffee).

The company has major brands in each segment. Mysore Gold and International Tata Cafi (the export and Russian market), Coorg Pure and Coorg Double roast (domestic R&G segment) and Tata Kaapi and Tata Cafi (domestic instant segment).

On an average, 80 per cent of the turnover is from exports and the rest from the domestic market. TCL's strengths lie in its ability to use the Tata distribution network to market its brands in the domestic market, and its presence across product segments insulating it from a volatile coffee market to some extent.

However, a crucial factor that determines TCL's profitability is its performance in the export market. This market is now witnessing a sharp fall in prices. International coffee prices have fallen by an average of 40 per cent since December 1999 and this fall has been a fairly sustained one. The main causes for this fall are not only the increasing production, but also the carry-overs and stock pile-ups that have resulted in huge coffee reserves.

India accounts for around 4 per cent of the world export market. Since domestic coffee consumption accounts for 20 per cent of the Indian output, producers rely on exports for realisations and are at the mercy of the international market. Unfortunately, export volumes have also been on the downward trend in 1999 and 2000.

Despite the negative trend for the country as a whole and Russia's market conditions, TCL's exports increased and it exported 2,866 tonnes of coffee in 1999-2000 against 1,924 tonnes (for the merged entities) the previous year. But unsurprisingly, TCL's financials have come under pressure.

For 1999-2000, TCL's comparable sales increased 17.7 per cent to Rs.217.87 crore and net profit by 10.3 per cent to Rs 26.11 crore for the same period. Considering the prevailing international scenario, the sales performance is reasonably good. This is probably due to its multi-crop cultivation. But operating profit margins have dipped in the last couple of years. Margins fell from 30.5 per cent in 1998-99 to 22.7 per cent in 1999-2000. Margins slipped further to 18.47 for the first quarter of 2000-01.

Any revival in the international market would depend on the proposed retention scheme planned by the ACPC _ which aims to boost prices by retaining 20 per cent of the world's exports. This scheme will only work if Vietnam, the regional robusta giant, joins in, which is uncertain. Existing investors in this stock can watch for developments before trimming exposures. Fresh investments in this stock can be avoided now.