Tata Global Beverages Ltd.

Fundamental Analysis and

Valuation

Business Model
Revenue model

Growth model

a. Sale of products
b. Share of revenues from
JV

a. Differentiation thru
premiumisation to
improve margins

FROM
COMMODITY
b. Pursuing related
c. Revenues from
business opportunities
TO
investments
e.g. JV
INNOVATION
Businesses,
Offerings
DIFFERENTIATI
1. Branded
ON beverages in DEVELOP
India and abroad
ALLIANCES
- Tea, Coffee, mineral
water

CREATE
ECONOMIES
2. JVs SCALE
in the beverages
space

Key costs
a. Production, mktg,
S&D

Premiumization -> improved margins

New markets -> increased topline -> scale
economies -> profitability

External environment analysis

(STEP framework)
Social:
Preference of people
shifting to healthy food
and drinks; encouraging
scenario for green,
specialty teas
Economic
n
o
e
v
i
Tight credit; high
it
s
orates of
inflation; high
P
l
ecost
interestag(high
of
v
e
l
b oimpact
funds)
on
d
r
e
x
ac sector vs.
i
defensive
M em
ththat on premium
brands?

e
h
t

Technological t
a
o
None explicitly;t smaybe
o
digital marketing,
n
;
t
n
customer
data
o
r
f
analytics,
etc.
o
r
c
mi
Politico-legalregulatory
Political uncertainty;
elections round the
corner; policy paralysis

Industry Analysis
(Porters 5-Forces framework)
Competition
Medium to High
Mainly commoditized
offerings

Barriers to entry &

exit
g
Higher barriers in the gin
branded segmenten

ll
a
h
c
in
s; bargaining
s
Customers
h
e power
t
n
w
e
o
Threat of substitutes
v
r High
ti
g
c
High if one takes the ra
h switching costs;
g
Low
t
i
overall beverages t
a st hsufficient choices; ability
universe to include
to transfer increased
um p o
alcoholic beverages
i
prices suspect; info from
d to
e
receivables?
m t ry
t
u us Suppliers bargaining
o
b nd
a
power
i
t
s
Low to medium
Ju
Not much info; captive
tea estates and coffee
plantations hedge; info
from payables?

SWOT Analysis
Strengths
1. Stead margins, predictability
2. Low leverage
3. Ownership of raw material sources
control over cost
4. Strong brand portfolio
5. Geo diversification
6. Market leader/ key player in tea in India
and abroad

Opportunities
1. Many consolidation opportunities
2. Branding and premiumization of Indian
tea/ coffee markets
3. Evolving tea market in the US
4. Coffee growth in US driven by gourmet
coffee beverages high margin
5. Opportunities in mineral water segment

Weaknesses
1. US coffee brands vulnerable to coffee
prices due to lack of pricing power
2. High vulnerability to commodity prices
3. High marketing expenses to differentiate
in a competitive market
4. ROE lower as compared to peers

Threats
1. Commodity prices volatility
2. Stagnating volume growth across
geographies
3. High dependence on premiumization
strategy in India for growth
4. Value of goodwill in balance sheet

Implication for valuation

Cash flows: Predictable, modest cash flows;
high growth possible only if premiumization
works.
Growth: High growth possible only via
premiumization. For a g=10% to 14%, with an
ROE of 11.5%, reinvestment required is over
100%! Unless premiumization can drive ROE to
17% to 20% levels then reinvestment can be at
70%-80%.
Risk: Low beta for current business and current
growth; will increase marginally if firm invests
heavily into premiumization strategy

TGBLs valuation forecast: justified or

not?
Price per share projected for July-Dec 2014= Rs.182
Implied P/E (current) in valuation = 182/6.4 =
28.44 times
Current Div-Payout ratio = 30% (average)
Cost of equity = 15% (approximate)
Implied growth rate = 14% p.a.
This requires over 17% ROE (current ROE = 810%) and 80% retention.
Have the analysts forecasts assumed either of
these?

Analyzing TGBLs financial ratios and

business strategy for valuation
Du Pont Analysis: ROE = NPM * ATR *
Leverage
10.1% = 6.4% * 0.87 * 1.81
What can TGBL do in order to improve ROE?
- Improve net margins
- Improve ATR
What business strategy has the management
proposed for this? Has the analyst assumed
any such business strategy? If yes, is its
impact visible in his forecasts?