Saral Gyan Value Pick - Aug 2012

EQUITY RESEARCH REPORT

TATA COFFEE LTD

BSE CODE: 532301 NSE CODE: TATACOFFEE

Sector: Plantations – Tea & Coffee CMP: Rs. 964.70 (26/08/2012) Market Cap: 1801.03 (Crores) Target Price: Rs. 1320

Date: August 26, 2012 Time Period: 12 – 18 months

Saral Gyan Capital Services

www.saralgyan.in

An Independent Equity Research Firm

http://www.saralgyan.in/

VALUE PICKS – AUGUST 2012

- 2 - SARAL GYAN CAPITAL SERVICES

TABLE OF CONTENT

S.No Content Page No. 1. Company Background 03 2. Recent Developments 09 3. Financial Performance 10 4. Investment Rationale 12 5. Risk & Concerns 13 6. Future Outlook 14 7. Saral Gyan Recommendation 16 8. Disclaimer 17



1. Company Background

Tata Coffee is Asia’s largest integrated Coffee Plantation Company and the largest grower – exporter of green coffee from India. The Company is the second largest exporter of instant coffee in the country and exports to countries in Europe, Asia and North America. Eight O’ Clock coffee is a segment leader in the US retail market. It is the only company to have various certifications like Rainforest, UTZ and SA800. As per Nielsen, the Company’s flagship brand, Eight O’ Clock (EOC) coffee continues to be the No. 1 whole bean Coffee brand in the grocery segment in USA and 4th in the overall branded segment. EOC has entered into the fast growth single serve coffee segment in the US and this augurs well for the future. Domestic coffee consumption has been growing steadily over the last several years driven by double digit growth in the instant coffee category and out of home consumption. Tata Coffee is gearing up to supply coffee beans to cafes and the tie up with Starbucks will propel this growth in the coming years

Tata Coffee has a hand in every aspect of the coffee making process, with business activities ranging from growing and curing of coffee and tea to the manufacture and marketing of value-added coffee products. Tata Coffee grows coffee on its own estates, processes the beans, exports green coffee, manufactures and exports Instant Coffee and retails coffee with its own branding in the domestic market.

The Company’s two main products are: a) Arabica Coffee b) Robusta Coffee To improve the quality of its Coffee products, the Company is importing technology from Netherlands. With this the Company would be moving in the premium segment which would boost its margin profile.



The Company is now focusing towards producing Speciality Coffee. The Company has also developed new state of the art pulping facilities in Coffee estates.

Plantations

Coffee: Tata Coffee owns 19 coffee estates located in ideal coffee growing highlands of Southern India, with fertile soils and invigorating climate. Spread over 8037 hectares in Coorg, Chickmaglur and Hassan districts of Karnataka and in Valparai district of Tamil Nadu, Tata Coffee produces 10,000 metric tonnes of natural shade grown Arabica and Robusta coffees, in both washed and unwashed forms.

These estates are located at various altitudes, and the coffee produced possess distinct cup characteristics.

Tata Coffee's uniqueness lies in its ability to produce large quantities of estate specific, strain specific, speciality and premium coffee, while maintaining a strict consistency in quality. Apart from coffee and tea, pepper and cardamom are also grown as inter crops on its estates.

Monsoon Malabar, Mysore Nugget Extra Bold, and Robusta Kappi Royale are three of the prominent speciality grades of Indian coffee it grows and processes apart from estate specific coffees. Mr. Bean, a quality product made from the finest coffee beans at its plantation, was recently introduced.

Coffee curing: The Company has the largest curing facility in the country at Kushal nagar with an installed capacity of 10,000mt. The coffee is cured in the company's state-of-the-art curing facility at Kushalnagar in Kodagu district. It has been awarded the prestigious certificate of approval for quality ISO-9002 through certification by Bureau Veritas Quality International, Netherlands. This unit is the first curing industry in India to receive ISO-9002 certification.

Tea: The company also owns six tea estates which spans 4755 hectares in Coorg and Chickmagalur districts of Karnataka and Annamalais district of TN and produce 6.5 million kilograms of tea.

Estate supplies: Tata Coffee also deals in plantation requirements such as fertilisers and chemicals, estate implements, and tyres and tubes through it's Estate Supplies Division

Instant Coffee: Tata Coffee also has the capacity to produce 5000 metric tonnes of Instant Coffee per annum, for which it has a sizable export market. International Tata Café, Mysore Gold and Malabar are the popular Instant Coffee brands which are exported

Timber: Tata Cofee has abundant reserves of timber, which is grown for shade. The company's timber resources on its estates include Rosewood, Silver Oak, and other softwood trees. As part of its plans to optimise the utilisation of the company's captive



timber resources, the company has entered into 'Timber Value-Addition' industry by getting its Silver Oak timber converted into plywood of different types and bearing the brand name 'Conswood'.

Locations

Plantations: The Coorg district of Karnataka, India, is one of the main coffee-growing regions in India and the main plantation operations of Tata Coffee are in Pollibetta, in the Southern part of Coorg. The company owns 19 coffee estates and 7 tea estates located in the districts of Coorg, Hassan and Chickmagalur, including one recently acquired coffee estate and five tea gardens in the Annamallais region of Tamil Nadu. The coffee grown on these estates are naturally grown, in a mixed shade of two tiers. The plantation's head office is at Pollibetta, Coorg, Karnataka.

Instant Coffee: Tata Coffee has two Instant Coffee manufacturing facilities, one at Toopran near Hyderabad and the other at Theni near Madurai in Tamil Nadu. The combined installed capacity of these two plants is 6500 metric tonnes.

Corporate office: The company's marketing and corporate functions are based out of it's corporate office located in Bangalore



Research & Development

Company R&D laboratory is recognised by the Department of Scientific and Industrial Research, Ministry of Science and Technology, New Delhi, as a centre for crop research.

The R&D laboratory is well equipped with sophisticated equipments to undertake basic research work in areas of crop nutrition, quality testing, tissue culture research and crop-improvement through breeding, bio-control research and other related works.

1. Specific areas where R & D is being carried out

Soil nutrient index. Verietal trial of coffee, pepper and cardamom. Bio-control research. Pests and disease control research. Coffee effluent treatment. Compost — vermicompost experiment. Quality analysis of coffee and pepper. Analysis of agro-inputs for quality standards. Water management research — drip irrigation for coffee Water management research — drip irrigation for coffee

Crop diversification — Vanilla.

Pepper value addition

2. Benefits derived

l. Crop nutrition research

Soil fertility status is monitored through soil and leaf analysis, and the results are calibrated to formulate optimum fertiliser recommendation and soil amendment application.

Our fertiliser programme is rationalised based on soil nutrients status, which is optimum and adequate, to enhance crop production and productivity.

Micro-nutrient research:- Monitoring the availability of micro-nutrients such as 'Zinc, Copper, Iron, Manganese' and secondary nutrients such as 'Sulphur, Calcium & Magnesium' to improve coffee, pepper and cardamom productivity.

II. Coffee varietal trial experiments:

Identified location specific high yielding and disease tolerant selection for planting in r estates

III. Organic manure:

Large scale manufacturing of compost with improved technology to enhance the soil fertility status. Introduction of trichoderma fungus to hasten the process of composting and as a control for soil borne disease. Addition of coffee effluent to hasten the process



of composting and to increase the nutritive value.

IV. Bio-control research

Pepper wilt disease control: R and D pioneered the large scale culturing of good quality trichoderma fungus for use in the biological control of pepper wilt disease and root disease of coffee

Coffee berry bored control: Large-scale installation of berry borer traps with the use of organic solvents as part of integrated pest and disease management

In-house formulated high quality neem oil for integrated pest and disease management

V. Organic farming system of coffee and pepper:

Conversion and pepper cultivation is in compliance with organic farming systems

VI. Pepper value addition:

Developed improved methodology for dehydrated green pepper Conversion of low grade pepper into oleoresin and oil

VII. Training programmes and advisory circulars to estates to update current/new trends in cultivation practices

3. Plan of action in-house:

I. Improved crop varieties:

Field Assessment of high yielding and disease tolerant selection of coffee, pepper and cardamom.

II. Field evaluation of breeding plants of coffee:

Field evaluation of breeding plants of coffee for its performance in the field regarding its yield potential and disease resistance

III. Crop diversification:

To study the opportunities of various crop diversification in the marginal coffee/paddy soil areas.

IV. Coffee effluent treatment research:

Experiments are under way to determine economical pollution control of coffee effluent.

V. Drip irrigation:

To develop an economically viable technique of irrigation for coffee and improve the efficiency of nutrient delivery through fertigation



VI. Mechanical trough drier:

To preserve the quality of coffee during drying and to reduce the drying time in barbecue

4. General

I. Collaboration with Research Institute: Central Coffee Research Institute, Balehonnur. Indian Institute of Spices Research, Calicut

Awards & Certifications

Tata Coffee has been a significant contributor towards the growth and development of Indian coffee. Tata Coffee is committed to the environment and works in tandem with nature to produce quality crops. Agro-chemicals are scrutinised at the research and development laboratory and indigenous methods used to control pests instead of pesticides. Leaf litter, fruit droppings, cherry husk and coffee pulp are also used as

compost to retain the fertility of the soil. These factors contribute to the production of large quantities of Estate Specific, Strain Specific, Speciality and Premium Coffees while consistently preserving quality. The company takes pride in its efforts towards corporate social responsibility and estate workers enjoy very high living standards and congenial working conditions.

It has won several certifications and awards some of which are:

Utz Kapeh certification for growing coffee in a socially and environmentally responsible manner

Devarcadoo division of Balmany estate in Coorg is certified by IMO for manufacturing quality organic coffee

SA 8000 for social accountability

Instant coffee factory, Toopran is ISO 9001:2000 certified

Curing works, Kushal Nagar is ISO 9001:2001 certified



2. Recent Developments Tata Coffee modern roastery to serve beans to Starbucks – July 26, 2012 The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India, as well as to Starbuck operations oversea Tata Coffee Ltd reportedly signed an agreement with Starbucks to source and roast premium coffee beans for the global coffee chain, which will soon kick off a modern roastery in Kushal Nagar, Coorg in Karnataka. Hameed Huq, Managing Director, Tata Coffee informed that the Rs. 30mn, 375-tonne-a-year roastery is fully-automated. The roastery, which conforms to the best food safety standards, will source and roast the best Arabica coffee beans from Tata Coffee estates for Starbucks as well as other coffee retailers. The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India, as well as to Starbuck operations overseas.



3. Financial Performance Tata Coffee net profit rises 89.32% in the June 2012 quarter Tata Coffee net profit rose 89.32% to Rs. 24.46 crore in the quarter ended June 2012 as against Rs. 12.92 crore during the previous quarter ended June 2011. Sales rose 26.16% to Rs. 151.53 crore in the quarter ended June 2012 as against Rs. 120.11 crore during the previous quarter ended June 2011 Tata Coffee net profit rises 107.91% in the March 2012 quarter Net profit of Tata Coffee rose 107.91% to Rs. 28.13 crore in the quarter ended March 2012 as against Rs. 13.53 crore during the previous quarter ended March 2011. Sales rose 31.89% to Rs. 132.74 crore in the quarter ended March 2012 as against Rs. 100.64 crore during the previous quarter ended March 2011. On standalone basis for the audited full year, net profit rose 43.16% to Rs. 78.85 crore in the year ended March 2012 as against Rs. 55.08 crore during the previous year ended March 2011. Sales rose 27% to Rs. 509 crore in the year ended March 2012 as against Rs. 393 crore during the previous year ended March 2011



Current & Expected Earnings:

QUARTERLY RESULTS Sep '11 Dec '11 Mar '12 Jun '12 Sep'12E

Dec'12E

Sales Turnover 132.03 124.11 132.74 151.53 153.49 162.96

Other Income 0.36 0.01 2 2.23 2.17 1.42

Total Income 132.39 124.12 134.74 153.76 155.66 164.38

Total Expenses 102.06 95.36 107.45 114.02 118.31 123.53

Operating Profit 29.97 28.75 25.29 37.51 35.18 39.43

Profit On Sale Of Assets -- -- -- -- -- --

Profit On Sale Of Investments -- -- -- -- -- --

Gain/Loss On Foreign Exchange -- -- -- -- -- --

VRS Adjustment -- -- -- -- -- --

Other Extraordinary Income/Exps -- -- -- -- -- --

Total Extraordinary Income/Exps -- -- 11.13 -- -- --

Tax On Extraordinary Items -- -- -- -- -- --

Net Extra Ordinary Income/Exps -- -- -- -- -- --

Gross Profit 30.33 28.76 27.29 39.74 37.35 40.85

Interest 0.19 -0.5 1.48 1.47 1.34 1.74

PBDT 30.13 29.25 36.93 38.27 36.01 39.11

Depreciation 3.11 3.18 3.95 3.32 3.85 4.10

Depreciation On Reval. of Assets -- -- -- -- -- --

PBT 27.02 26.07 32.98 34.95 32.16 34.01

Tax 8.21 7.08 4.85 10.49 9.91 10.27

Net Profit 18.81 18.99 28.13 24.46 22.25 23.74

Prior Years Income/Expenses -- -- -- -- -- --

Earnings Per Share 10.07 10.17 15.06 13.1 11.91 12.71

Book Value -- -- -- -- --

Equity 18.68 18.68 18.68 18.68 18.68 18.68

Reserves -- -- -- -- -- --

Face Value 10 10 10 10 10 10

Company sales was up by 27%, Profit before Taxes was up by 52% and Profit after taxes was up by 44% in FY 2011-12 compared to FY 2010-11. EPS was up by Rs. 12.73 i.e. Rs 42.22 in FY 2011-12 vs 29.49 in FY 2010-11. Company has delivered robust first quarter results and is expected to perform better with realisation of higher income and profitability in coming quarters.



4. Investment Rationale i) Triple Certification - Key Differentiator for Tata Coffee There is growing demand in developed countries for sustainably grown coffees.Tata Coffee is the only Coffee Plantation Company with comprehensive Triple Certification leading to differentiation.

Utz - Efficient Farm Management Practices. Rainforest Alliance - Bio-diversity (For Environment Protection) SA8000 - Labour standard certification

ii) Premium and Specialty Products There is a high degree of focus on quality leading to well-established reputation in the premium markets and company has achieved large number of National & International awards year-on-year for quality, rapidly growing sales to the premium paying market segments for Certified and Specialty coffees. Company also entered into lucrative US market with washed Robusta. iii) Joint Venture with Starbucks Coffee Company Tata Global Beverages and Starbucks Coffee Co. announced a joint venture between the iconic international coffee brand and the second-largest branded tea company in the world. The 50/50 joint venture, named Tata Starbucks, will own and operate Starbucks cafés which will be branded Starbucks Coffee “A Tata Alliance”. Tata Coffee Limited will roast coffee to supply TATA Starbucks Limited, and to export to Starbucks Coffee Co. which is a big positive for the company. iv) Improvement in Sales & CAGR Net Sales of the company has increased to 509 Crs in FY-12 Vs 312 Crs in FY-09 growing with the CAGR of 17.69% whereas Net Profit increases from 53.62 Crs to 124.72 Crs in just 4 year registering a growth of 32.50%. v) Continuous Reduction in Debt Debt Equity Ratio of the company has constantly decreased from 0.58 in FY-09 to 0.06 in FY-12 i.e. almost NIL which is good indicator for the company and could expect better dividend policy in coming fiscals. vi) Increase in Opetating Margins Net Profit Margin of the company is increases from 5.95% in FY-09 to 15.46% in FY-12 and Operating profit margin increases from 17.13% in FY-09 to 24.45% in FY-12 which indicates company is uses its resources very efficiently and effectively.



5. Risk & Concerns i) The first and foremost risk for any commodity is the Demand & Supply and Coffee is no exception. Demand for coffee is both within the country as well as outside, at theinternational market. The demand and supply is dependent on world coffee production, stocks held by the producing countries and the political/economic situation in theimporting countries. ii) The second important factor that governs the demand/supply chain is the quality of theproduct. In India, 98.8% of the coffee holdings are with small growers who hold between 2to 10 hectares and the balance 1.2% are large growers, holding above 10 hectares. The small growers normally sell their produce at the farm gate to the traders due to economic conditions and the difficulties involved in taking the crop to a Curing Works for curing and grading. The traders, who collect coffee from these small growers, cure it at their small mills or hullers without paying much attention to the quality. These coffees are normally utilized to meet the demand inside the country. iii) The other major concern for Coffee plantations is the availability of labour and thecontinuing demand of the labour unions for wage increase. The minimum wages are being increased by the Government regularly on year-to-year basis, which has a direct bearing on the cost of production. Apart from this, there is shortage of skilled labour since the younger generation is pursuing higher studies or migrating to cities, looking for greener pasture. iv) Another big concern for any plantation Company is the vagaries of nature and uncertainty of weather conditions during critical months.



6. Future Outlook Coffee is getting more and more popular with both importing and exporting countries. Unfortunately, the situation in global commodity markets is ambiguous. The overall tendency is bearish. However, there are occasional hikes connected with bad weather and other factors affecting production. What should investors get ready for? What is the situation in exporting countries? Analysts anticipate an abundant coffee harvest in Brazil, the world’s major producer of the premium-quality “Arabica” coffee. Brazil has been the world’s leading coffee producer over a long period of time (over 48% of the global production). Its influence on the global market of coffee can hardly be overestimated. Experts anticipate a price decline attended by hikes in advance of mass supplies. However, unstable weather conditions may cardinally change the situation. In particular, Southern Brazil keeps suffering from droughts while scanty rains do little to increase the crop capacity. Ethiopia and Columbia: These two countries are the runners-up in terms of coffee production. According to the ICO (International Coffee Organization), this year Ethiopia is expected to gather a more decent harvest than Columbia. Substantial rains are expected to contribute to the harvests of coffee in both the countries. Vietnam: Its coffee harvest is expected to improve due to rainy weather. Vietnam grows a cheaper sort of coffee. It is called “Robusta”. More affordable prices make it more popular with the middle class. This year Vietnam is expected to gather a record-high harvest - 1.32 million metric tons. The price on Robusta is expected to be around $1.9 per pound while Arabica is getting less popular (its price is around $1.82 per pound). The global consumption of coffee keeps growing every year: USDA: The experts anticipate a slight production decline. However, it will exceed the global consumption (135m bushels, 1 bushel = 60kg). ICO: The International Coffee Organization expects the global consumption to exceed the global production in 2012 due to Brazil’s lower production last year caused by unfavorable weather conditions. Chemico Limited: If to consider its forecast, the average annual price of Arabica will decline by 8% but retail prices may stay unchanged as major coffee houses have already bought substantial amounts of coffee for sale. Masterforex-V Academy: Several factors may cause a sharp decline in coffee prices: volatile currency markets, weather conditions, speculative factors, higher refining of

http://www.profi-forex.us/news/entry4000002905



http://www.masterforex-v.su/



coffee beans by major importers, higher re-export, seasonality, poorer harvest in Africa etc. Business Outlook

Global consumption maintained 2% growth rate to touch 137 mln bags in spite of high coffee prices.

Coffee is a biennial crop with alternating years of high and low production, also known as ‘ON’ and ‘OFF’ years leading to cyclic supply trends.

The world’s largest supplier, Brazil is harvesting it’s biggest ‘ON’ year crop, although the estimate has been downgraded from 60mln to 55 mln bags. But even at 55 mln bags, the tightness in the market has considerably eased resulting in Arabica prices softening.

World inventory in Arabica in producing and consuming countries is at an all time low but is expected to build up slightly with the big harvest from Brazil. Robusta inventories which peaked in July 2011, has started declining slowly.



7. Saral Gyan Recommendation

Tata Coffee is Asia’s largest coffee plantation company and the 3rd largest exporter of instant coffee in the country. It exports green coffee to countries in Europe, Asia, Middle East and North America. We believe that demand of premium coffee will remain strong and company will do well with its new entrant - Washed Robusta in lucrative US market.

As per our estimates, Tata Coffee can deliver total sales of Rs 630 crores and PAT

of Rs 98 crores, resulting in EPS of Rs 52.5 in FY 2012-13. This translates in an expected PE multiple of 18.4 times based on FY 2012-13 earnings.

We expect Tata Coffee net profit margin will be maintained at 15-16%. Tata Coffee

operating margins is better to peers group companies and can improve further considering robust demand for its premium product range and recent agreement with Starbucks to source and roast premium coffee beans.

Tata Coffee Ltd has declared good numbers in first quarter of current financial year

registering sales growth of 26% and profit growth of 89% compared to same quarter - last year and is expected to perform better in coming quarters.

On equity of Rs. 18.68 crores the estimated annualized EPS for FY 12-13 works out

to Rs. 52.5 and the Book Value per share is Rs. 244.82. At a CMP of Rs. 964.70, price to book value is 3.94.

Saral Gyan Team recommends “BUY” for Tata Coffee at current market price of 964.70 for a target of Rs. 1320 over a period of 12-18 months.

Buying Strategy:

50% at current market price of 964.70 50% at price range of 885-900 (If stock price falls during market correction)



8. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. Disclosure: The author of this article does not hold shares in the recommended company. © SARAL GYAN CAPITAL SERVICES

This document prepared by our research analysts does not constitute an offer or solicitation for the

purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable

but we do not represent that it is accurate or complete and it should not be relied on as such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any way responsible

for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and

must not alone be taken as the basis for an investment decision.

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Saral Gyan Value Pick - Aug 2012