Tata Tea -- Not everybody's cuppa

Reshma Krishnan

DESPITE stirring times in the tea industry, Tata Tea's financial fundamentals remain strong.

The company's fixed deposit scheme, with a coupon of 11 per cent, may be suitable for those looking for fixed deposit schemes. However, those who do not as yet have a debt portfolio should explore debt-oriented mutual funds before opting for an FD scheme. Open-end debt funds offer both liquidity and tax-free dividends.

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Considering that the tea industry is going through a turbulent phase, Tata Tea's financial performance seems acceptable, if not impressive. Sales for the nine months ending December 2000-01 fell 8.3 per cent to Rs 621.58 crore from Rs 677.86 crore the previous period, and the net profit fell 13 per cent to Rs 91.15 crore from Rs 104.82 crore.

The gearing is acceptable and the debt-equity ratio, which has been falling steadily the last couple of years, stood at 0.40 for the year ending 1999-2000. The company's financial fundamentals are solid and the company should face no problem with payment of interest or principal.

Tata Tea is the largest integrated tea manufacturer in the world, involved in all phases of the value-chain. This has both pluses and minuses. Since the company owns gardens, it has control over both quality and quantity of the leaf it requires without having to look to the open market. The year 2000 was not good for the industry as the first half saw falling prices, rising production and dropping exports. While prices recovered marginally, they are still way below their 1999 levels.

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The average prices of tea at auction centres have also been falling from a high of Rs 81.62 a kg in October 1999 to Rs 47.82 in April 2000 -- down 41 per cent. This can be attributed to excess production and imports from Sri Lanka. Prices have since improved marginally to Rs 64.23 per kg in September 2000, still 18 per cent lower than the corresponding previous period.

Tata Tea offers two FD schemes. The non-cumulative scheme requires a minimum deposit of Rs 25,000 and, therefore, may not be attractive for small investors. Also, the deposit will be locked for three years and pay 11 per cent per annum.

In the cumulative scheme, the interest is compounded monthly and paid at the end of three years. The coupon is 11 per cent and the effective yield works out to 11.57 per cent, resulting in a pay-out for Rs 34,722 (on Rs 25,000 deposit) at the end of three years. This might be attractive to investors willing to invest the high minimum amount.