The Hindu Business Line : Tata Tea: Buy

INVESTORS may consider taking exposures in the stock of Tata Tea at Rs 920. At this price, it trades at 18 times its consolidated trailing 12- month earnings. Its valuation continues to be at a substantial discount to other FMCG companies that now trade at 22-25 times the earnings.

Margins and return on capital employed at Tata Tea's Indian operations have increased sharply. Overseas operations have also chipped in to help it post a healthy earnings growth. Tata Tea is expected to maintain earnings growth, buoyed by the recent acquisition of the US-based FMALI Herb Inc, licensee for Good Earth Tea brand.

Lower imports, higher production levels and lower realisations presented a mixed bag for the tea industry this year. Despite a marginal decline in realisations and hiving off of its tea gardens in the South, Tata Tea reported a 10 per cent revenue growth in the first half of FY 06 aided by growth in its packet tea business and bought leaf operations. Profits grew by about 30 per cent on a consolidated basis.

The acquisition of Good Earth, a speciality tea brand, will strengthen its positioning in the US markets and enhance revenue growth. Good Earth's range of tea bag products in the fast growing speciality segment would also complement Tetley's strong presence in the black tea segment.

Tata Tea has got sizeable holdings in its group companies. The investment book provides cushion to the stock price from downside risk. The company is expected to maintain dividend growth, as a growth in income from dividends appears to be on the cards on the back of healthy earnings growth in the listed entities.

Alagappan Arunachalam

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