Tata Coffee - An unique undervalued investment

Tata Coffee is an unique investment play on plantation asset-commodity and brands. It is India’s largest coffee and black pepper producer. It also produces tea and timber.

Sheer diversity of its business and Tata group ownership makes it a compelling portfolio pick that too when market seems to providing a bargain.

Future opportunities exist in terms of Tata Coffee being vehicle for Tata group’s global coffee play where it finds that tea may have limited potential. Supplies to Starbucks is other area where there is enormous opportunity which can unfold.

Market seems to be mis-judging its current valuation:

Asset based valuation:

1.32,000 Acres of plantations. Valuation of even 15 lakhs/ acre gives it a valuation of Cr 4800.

2). 600 M USD valuation for Eight of clock coffee based on 30 M USD profit and 20 PE. considering Tata Coffee’s holding of 51% this is about 900 Cr Rs.

3). Around 1000 Cr Debt

4). Assigning 100 Cr for its Russia based Grand brand, small Indian brands, plus coffee processing units.

Valuation: 4800 + 900 - 1000 +100 = Rs 4800 Cr

Tata coffee’s current valuation is just Rs 1800 Cr

Earning based valuation:

A PE of 13

Last 3 years EPS growth of 20%

RoE of 20% +

Div Yield 1.4 %

Even CCL which just coffee processor and does not have plantations and much of brand play quotes at a PE of 21.

Any additional inputs and viewpoints are welcome.

Disc: Started investing and adding on dips

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nav,

On first look it seems interesting.

Any reason why the stock fell from 1600 levels in Jan 13 to the current levels of 900-1000?

Thanks for your reply Hitesh.

Looks like run up from 1100-1500 was vertical and it just reverted back to normal levels and may be case of selling in panic. May be manipulation by operators. Management seems to have clarified

âWith reference to increase in trading volumes and market price of the shares, the company has clarified to BSE that at present there is no market sensitive information relating to the company that has not been shared with the Exchange,â Tata Coffee said in a regulatory filing.

I started tracking this company from April when the price was 1100. Now the price has fallen to 900 odd although the BSE sensex has gone up by 5000 points in the 6 months. Stopped tracking.

usually coffee plantations have one bad cycle followed by a good one. In this case Fy13 was a bad year which got extended into FY14 due to bad weather conditions…mostly insufficient and untimely rain…which resulted in very low growth in revenue…also in Fy14 they sold one subsidiary in US and written off losses as all the plans of revival did not do any good…perhaps those are the reasons why it came down from 1600 levels…

Just to add eight o clock can command much higher valuation if things pan out as planned. They are aggressively trying to rejuvenate and grow the brand

http://www.brandchannel.com/home/post/2014/09/23/140923-Central-Perk.aspx

Regarding the valuation of plantations, are all of them owned by the company or are they on lease of a fixed period? I think Tata Tea Munnar tea plantations are not owned by the company.

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I think sometime around June-July last yr the stock price had collapsed from 1600. At that time the news that was doing rounds was that @ 8-10% of equity was dumped in da mkt as some pledged was invoked by Kotak. The pledge is said to have been created by the bear S K Shah (reliance infra fame)!

The stock has never recovered since then.

Cheers,

HR!

Discl: Holding CCL. Just sharing the news in public domain about Tata Coffee’s share price plunging.

Sharing my experience on how I payed price on a similar case of land bank valuations trap, may be not so relevant but thought would caution. I held RS Software from Rs 60 to Rs 240 and it was 25% of my portfolio. It was a great stock when I bought,cash on book, consistent growth, expanding margins and very high ROCE and decent dividend payment. But in 2 years of my owning it they never were upto what they would claim but margins expanded some mid teen growth. So when the new govt looked like was going to be NDA, I thought I should sell RS Software and bet on Infra, Railway and Defence R&D. There I found BEML which had mix of all and looked very promising. It was PE of 700!!! when I bought ,was at Rs750 and a market cap of about Rs 3000Cr.

I come from Bangalore and know BEML has a huge land bank in a very good (eastern Bangalore which is hub of all IT companies) location of Bangalore and it should be at least 200 acre of land.

So my back of the envelope calculation showed land bank valuation of Rs 4000 crores however the market cap was Rs 3000Cr, I thought I am getting entire businesses of sunrise sectors for free!But BEML is -25% since I bought and RS Software is 200% up since I sold!!! I am still wringing my hands!

Hi Hitesh, Looks like they own it. This is what I had got from their AR "During the year the Company had acquired 6 estates from Tata Tea Limited. These estates were transferred

to the Company with effect from 31st December, 2005."

But there are other estates in Munnar called Kanan Deavan which is partially owned by Tata Global.

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Hi nav_1996,

Can we go by land bank story in case of TATA coffee? Since the company’s main business is coffee, I think the company is not going sell the land. Good coffee output depends on rain.

Mahesh, That is true. We should not own a stock for land bank especially PSU who can never monetize land. But Tata Coffee has solid FCF and its owns third largest wholesale brand in world’s largest coffee market USA. As I mentioned earlier they are seriously pushing Eight O Clock and investing behind it.

http://www.brandchannel.com/home/post/2014/09/23/140923-Central-Perk.aspx

Land bank argument was just to show undervaluation.

I know of people who look for alternate investment and invest in plantations and farm land. This appears to be perfect fit for those investments.

So yes this is not going to be fastest growing investment or hold for ever kind of stock or apt for concentrated portfolios; but opportunistic bet for diversified portfolio in medium term.

I see this as zero downside from here and 50% upside in a year and I don’t find many such opportunities in today’s market.

free!But

Regarding the valuation of plantations, are all of them owned by the company or are they on lease of a fixed period? I think Tata Tea Munnar tea plantations are not owned by the company.

How sensitive are the sales number of Tata Coffee to global coffee prices? If I understand correctly, global coffee prices are significantly up (perhaps the only agro commodity to do so in this year) YTD on account of Brazilian drought.

I don’t have numbers.Sales number have definitely +ve correlation with coffee prices. But margin is bit complex. It is +ve for Tata Coffee stand alone biz but -ve for Eight O Clock (as they have to buy coffee from international market).

Would Tata global beverages be a better play especially now that Starbucks has started operating in India?

Starbucks is still a small portion of Tata Global. Though it has good potential. Also Tata Global is not cheap at 25 PE.

Agree with brand, value… mind you its cyclical and a pure commodity. Would you bet on it in this kind of a market? And its topline for last 3-4 years hasnt grown. By the way what does 8 o’clock coffee have to do with Tata Coffe since its part Tata Global Beverages? Have they planned to source coffee from Tata coffee? I had read they have been planning to do for Star Bucks also, how far has it gotten?

Thanks-Mahesh

Eight O Clock is Tata Coffee subsidiary. But they are likely to source independently as they have to maintain the blend and aroma demanded by customers.

This is not a pure commodity play. Eight O Clock is almost 60% of revenue but not contributing substantially to profit. I am betting on its turn around and also on rising coffee prices for commodity part of biz.

Soory my bad. I know wikipedia is not always accurate. http://en.wikipedia.org/wiki/Eight_O’Clock_Coffee

And thanks for all your clarifications.

Dear nav 1996

CCL has just completed a major capex in world 2 nd largest coffe producer Vietnam. So working capital , logistics cost will b greatly reduced. Also no income tax for first 5 years n zero duty access to ASEAN nations n Japan Korea due to Vietnam being a member. Also CCL is now venturing into Indian market with its Continental brand which has been a major success in AP.

ROCE is expected to improve from 15 to 35% in next 2 years.

Don’t u think CCL is not a mere coffee processor but a co with its capex done staring that a major opp size under superb ethical promoter who have shown great execution n first generation fire in belly approach so far?