UTI AMC: Significant Re-rating Candidate

Stock Idea: UTI AMC

Grade: TIER 2

(This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)

UTI AMC is a melodrama but the drama started with the debacle of US-64 fund of UTI in early 2000 forced Indian government to split UTI in 2003 into UTI Asset Management and Special Undertaking Unit Trust of India (SUUTI, having the junk/illiquid assets of UTI). First melody was tried with the likes of SBI, PNB, LIC and BOB acquiring 25% stake in the troubled (reputation) UTI AMC bringing in 500 cr.

Things were going fine but it still had the trauma of US-64 and then in 2009 these 4 decided to sell 26% stake to the US investment giant T Rowe Price who manages more than $1 trillion globally for $ 140 million (Rs. 650 cr). I think this was done to do some image makeover by bringing in global giant as largest investor as this would make people to have trust in UTI as global giant was picking a stake. This was a good move or we can say a perfect move. But these 4 could not leave the greed to manage one of the biggest AMC in India (holding some 10% (4^th biggest) share of Indian market at that time, now 6% share and 8^th biggest). They continued to interfere in the working of UTI along with government who wanted to dominate and control the board of UTI which was just the opposite of what had been promised to TR Price that UTI AMC would be a professional firm.

On the contrary except PNB, the rest three were having their own AMC businesses and they owned 18.5% stake each which clearly was a case of conflict of interests. After the initial stage, these 4 were not interested in running the UTI. In fact, LIC and SBI who were having relatively very small AMC business even tried to acquire the stake of others to control and merge UTI AMC with their own AMC business. It was without the head for two years and so could not introduce new schemes because SEBI rules do not allow a new fund offer without the approval from the head of a fund house. Even around 2018 TR Price took these four gentlemen to court. As the three gentlemen (except PNB) were running their own AMC businesses so they were not that much focused on growing UTI AMC as they were  having just 18.25% share in UTI so their only attempt was to merge it with their wholly owned AMC business.

The association of these three investors (LIC, SBI, BOB) having their own AMCs with UTI was a clear case of conflict of interests which was badly hurting the growth of UTI which was losing market share continuously (SBI now is the biggest AMC in India). So things were terrible for the growth perspective although the schemes of UTI AMC were doing well and they have done well in last 20 years. But then amid this tussle over controlling UTI; SEBI happened as a blessing. In 2018, SEBI in order to control the conflict of interests made a regulation that a sponsor of a mutual fund, its associates, group company and its AMC cannot hold 10 per cent or more stake in a rival AMC. They also can’t have a representation on the board of another mutual fund house. This regulation forced these three investors to sell their stake in the recent IPO and brought the same to 10%.

In the recent IPO, TR Price and PNB also sold 3% of their stake bring down their stake to 23% and 15%. So this is a significant event in the journey of UTI and in my view this is going to change the fate of this company.

In all research reports, I have seen issues related to high employee cost and high operating expenses eating out the profit margins so these reports conclude that UTI deserves lower valuation due to these issues impacting profitability and they declare it is working just like a PSU. But its historical ROE was around 16% and it is around this level in Dec-20 and Nippon is also having the similar ROE. HDFC is having high ROE of 31% but this is due to the fact that HDFC can distribute its funds from its vast banking channel at much lower costs and at a much bigger scale. Bank brand name also helps. Same has happened with SBI with highest market share although it is also a PSU. Also, low dividend payout and large cash in the books is one of the reasons for lower ROE for UTI and recently it has approved dividend policy for much higher dividends (50% of profits) so this will improve the ROE. Dividend payout ratio of UTI was around 20%-30% while the likes of Nippon and HDFC have much higher dividend payout ratios (80% and 50% respectively). Even due to growing net worth the ROE of HDFC has also fallen from 40% in 2018 to 36% in 2020.

Further, banks distributing schemes of AMCs related to their group are a clear conflict of interest as banks are forcing their group mutual funds on the customer rather than really giving honest advice and in this process they are earning huge commissions from the group AMCs. But I think SEBI is going to tighten the things more here in the near future. Direct schemes (Online sale without any intermediary) are gaining momentum as current investors are well informed and they don’t need to go to some selfish intermediaries for deciding their choice of fund as they can do the research on their own in this digital age. So things are going to change in the fund distribution very fast. Already direct channel has grown to 50% share from some 30% 2-3 years back. In today’s world, investors can find the information related to consistent fund performers like UTI against others and they can take independent decisions so due to this there is a possibility of smaller funds growing faster than the other big brands. Like, UTI is one of the best performer in the retirement solutions (pension funds) and its funds under this are growing faster. Its retirement benefit pension fund is the largest in its category.

I was looking for the performance evaluation of UTI AMC schemes and luckily I found the recent report from CITI which has very detailed data and I found the same in their report saving much of my time. UTI schemes have done much better. In last one year, UTI Equity schemes have outperformed the benchmark index in 63% of their schemes. The same figure is 10% and 30% for HDFC and Nippon. Axis is the leader with 78%. The equity schemes of HDFC are performing badly and it is losing market share (at 13.6% from 15.8% last year Dec-19). Its stock price is also doing badly with negative returns in last one year. Actually people do not realize that AMC is a knowledge based business and skills of managers matter the most rather than their costs. UTI has higher employee costs as it got large number of employees from the erstwhile UTI in 2003 split and management is working on it to reduce it. In next 5 years the retiring employees will reduce some 80-90 cr payout.

But if it has legacy issues then it has some high growth catalysts also. First, most of these problems were related to past and already happened in time and space and current board run management is working to resolve these issues. Second, UTI AMC has strong distribution strength in Tier 3 cities (B30) having the largest share. Future growth in the AMC/Mutual fund industry will be driven by these small cities. These cities have higher focus on equity schemes where charges are higher than debt funds so UTI can earn higher than other due to its strong presence in these cities. But for me the most important event is the coming possible restructuring in the ownership of UTI. I don’t think the likes of LIC/SBI/BOB have any scope left to acquire it or mismanage it. In fact, they have sold their stakes in UTI Trustee Company to TR Price in line with their stake sale in AMC business. A Mutual fund trust holds assets of the fund on behalf of investors and monitor performance and compliance with regulations.

So trustees have significant control over the working of an AMC due to regulatory powers. After the stake sale by these three; now TR Price holds 51% stake in Trustee Company which enables it to indirectly control the operations at AMC also. TR Price is a global giant and is waiting patiently for the things to turn good in India as India is the next high growth market. It has waited 11 years for the things to take shape in india which shows its commitments to India. So my feeling is that very soon something is going to happen in UTI AMC shareholding. It may be that these four may sell their stake (or part) making TR price the majority holder running the show. TR Price can channelize huge funds from its US business to India for investment through UTI.

UTI AMC has big business in PMS where it manages the funds of Employees Provident Fund Organization (EPFO), Postal Life Insurance (PLI), National Skill Development Fund (NSDF) etc. UTI manages the largest share of the funds of EPFO. SBI is the second AMC who manages the funds of EPFO. Earlier it was only SBI who was managing the funds of EPFO but it was performing very badly (not being able to beat the bank FD rates). I think the likes of EPFO may opt for an independent AMC like UTI rather than corporate owned AMC like HDFC AMC where there is a clear case of conflict of interest as they may be biased in their EPFO fund investment strategies.

Summary of Analysis levels Involved in the study of UTI AMC:

1. Level 1 (Lower relative valuation) – Low valuation (18 PE and 2.4 times book value) keeping in view the established brand, expertise, market share. Underlying performance metrics are not that weak as compared to other two listed players. It is more the result of market perception.

2. Level 2 ( Industry level growth and restructuring)- Mutual fund industry will grow fast in India as people are getting aware of the financial assets and planning for the same quite early.

3. Level 3 (Forecasting of management decisions which may result in massive future growth and value unlocking) – However, the most value will come from the actions of the management in shedding the Government control, PSU work culture and becoming more professional, TR Price acquiring majority shareholdings or some other private player coming by acquiring the share of other PSU investors. 

This one is a Tier 2 grade stock as of now but once it implements dividend policy distributing liberal dividends, management becoming more independent and professional in approach and any stake sale by 4 PSU shareholders this will be transformed into Tier 1 quite fast and aggressively. 

(This study is a business analysis of UTI AMC. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).

 

Newsletter Club of this Blog

Dear all, Off late receiving many queries regarding lesser stock ideas/studies being posted at this Blog in the last 5-6 months. Actually as I have shared earlier, we have started a monthly newsletter of this Blog in Sep-2020 and most of the stock analysis reports and ideas are being shared with the Newsletter club. The main focus of the Newsletter is on the education and learning part related to equity research covering financial and fundamental analysis. In case anybody wants to join the club please send an email at oscillationss@yahoo.in giving brief introduction. I am sharing the names of some of the stock ideas shared with the Club since Sep-2020:

Apart from the above stocks, we are investing in many other promising stories. Also, we continue to buy many of our old stock picks whose studies have been shared at this blog like HCG, MCX, Godrej Agrovet, Zydus wellness, ABFRL etc. while many of the stocks advised in the last one year have performed well hence we are not adding them anymore like Tata power, Borosil Renewable, Laurus Labs, BEL,BEML etc. I am also receiving regular requests for sharing the performance of all the stocks shared at this blog in the last 4-5 years and the future course of action for these stocks. I have started the work on the same and will share the same very soon. 

Thanks very much for your support.

Tata Coffee Ltd: The Arabica has Matured with Intense Flavors

Grade: TIER 1

(This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)

Coffee: A global Drink

1) Coffee truly is a global drink and a global commodity. However there are disputes related to this being second most traded commodity after oil. Many argue that this is not the case as agro commodities like Wheat or rice are having much bigger trade value. But I think, Coffee may be a big trade commodity if we take into account only the international trades as other agro commodities like wheat or rice are mostly traded in the production country and international trade may be much lower than the total production. Even on standalone basis the value of international trade (exports) is significant at USD 30 billion.

Coffee generally is of two types-Arabica and Robusta. Arabica is of premium quality with half of caffeine levels as compared to Robusta. So it has much deeper, smoother and sweeter taste with notes of chocolate and hints of other fruits flavor. So Arabica has much higher and intense flavors. Robusta is much stronger in taste with almost twice the caffeine levels. So due to higher caffeine levels, it is much bitter and harsher in taste with notes of grains. Robusta is much easier to cultivate, has almost double the yield and less prone to insect attacks (due to high caffeine) so all these factors makes it to cost lower. But Arabica beans are sold at double the price. The instant powdered coffee we find in all the retail stores is all robusta coffee. In order to drive up the profits, producers are using more and more of robusta coffee whether it is instant coffee or a coffee retail chain.

Across the globe, Arabica accounts for some 75% production share while Robusta is 25% share. Brazil leads the globe with Arabica production (70% of its total coffee production) while Vietnam is the leader in Robusta (95% of its total coffee production). The global coffee production data is as follows:

2) Europe accounts for some 35% consumption with nil production. Europe and North/South America account for some 65% of total global coffee consumption. Europe and USA are fairly stable in coffee demand so now it is India and China which are the new coffee hot spots. India’s coffee consumption is concentrated to southern India but off late with the growth in coffee retail chains like CCD and Starbucks a strong coffee culture is happening in India which is going to enter their houses also. With the availability of premium coffee beans and electric roasters and coffee makers the home consumption is going to increase significantly in India.

As of now, India exports around 70% of its production of 3 lac-3.5 lac MT. Karnataka accounts for 85% of Indian production while the rest comes from Kerala. So with rising consumption in India, India has sufficient local production to cater to the demand. And now the trend is clearly towards coffee consumption in India and this will grow much faster than tea. In fact I feel we may see coffee plantations growing up in India even in the Himalayas where the black pepper plantations may bend towards coffee. So i think slowly more and more Indians are moving towards coffee. I like it when in movies and TV Shows they show actors holding a large coffee mug (though may be empty) because this is subtle marketing and it hits the cords more effectively...though i am not sure whether it is deliberate or not but if it is not then i think coffee marketing companies should think over this seriously.

3 Coffee beans (though Coffee beans are not really “beans” but seeds of the fruit of the coffee tree) are just like any other agriculture commodity with limited pricing power but when we move up the value chain the dynamics of this industry changes to one with premium pricing power with premium brands like that of Starbucks or Cafe Coffee Day (CCD). So the value proposition changes relevant to the type of producer like a plantation company is prone to boom and bust cycles of all commodities and Coffee is not an exception. Right now, coffee industry is witnessing bust cycle and prices are trending lower.

In last 10 years or so, the cost of inputs for coffee production has increased by some 250% however the prices have been increased only by 175% so there is a clear over supply of coffee beans in the global market. But coffee production is not that easy to start and stop. Unlike other commercial crops like Wheat/rice where crops are planted every year the plantations like Tea, Coffee etc. take much longer time to start producing and in the subsequent years it is not beneficial to stop production as massive investments have been made in the initial unproductive years.

It takes four to five years for a coffee tree to start producing coffee fruits, while the land on which it grows will produce fruit for about 25 years. Hence apart from routine inputs in the form of fertilizers maximum annual costs are in the form of labour only.

The likes of Starbucks and other retail chains brought a revolution in coffee drinking habits of the people and this spurred the demand for coffee across the globe especially in Europe and USA and more and more farmers started cultivating coffee as prices were at life time highs. This started in Mid 90’s and culminated around 2007-08 and since then global supply has outpaced demand by fair margin putting pressure on the prices.

In the last 4-5 years, Brazil and Vietnam are producing more and more coffee even when international coffee beans prices are lower. In fact, in dollar terms the cost of producing beans is higher than the prices but still the poor farmers of Brazil and Vietnam are being able to support even with these lower prices is only due to the fall in currencies of these countries to Dollar. Fall in currency has enabled these farmers to earn something more than their cost of production. However, Brazil is mainly responsible for this supply glut in the global markets.

As Brazil produces massive 35% of the global production (25% of global export market), so it is the main force behind the rise and fall of global coffee prices. No other country has this much power in controlling the coffee prices. Here, Brazilian currency Real has major impact because Real is falling as compared to USD every day and this is making Brazil coffee suppliers to sell more and more coffee even at lower prices in Dollar terms because they are getting more Real for every ton of coffee sold in international markets. The exchange rate of USD to Real was 1.68 Reals in 2011 but the same now is 5.3 reals!!! More than 3 times fall. The weak real is putting more pressure on the global coffee prices.

4) So even when coffee prices are ruling at 13 year ($1 per pound) low Brazil farmers were still able to extract something but the situation is grim across the world for coffee producers. Coffee producers across the globe are abandoning their coffee farms or turning to other crops like Cocoa in Colombia which is the supplier of world’s best quality coffees. So sooner or later coffee production is going to come down and this will raise the prices to more reasonable levels.

But I feel there is another crisis which may come with current situation. The countries where coffee farmers are abandoning their farms are some of the best quality coffee producers like Colombia, Guatemala, Kenya which means this will reduce the supply of premium quality Arabica coffee and this may result in very high prices for premium coffees and very low prices for Robusta coffees.

But still, even now people can create the demand for premium quality coffee as prices are low. Low quality coffee does not make people to consume more coffee but a cup of premium Arabica coffee can make people to consume 3 cups in place of 1 cup of coffee and this may create or raise the demand for premium coffee which is not within our reach mainly because of low quality instant coffee used by most people so far. They are no aware of the fine taste of a premium coffee.

Amid all this mayhem in global markets, India is facing shortfall in its coffee production due to pest attacks, climate issues. But this year is going to be good for Indian coffee production and production will be higher. Also, Global coffee beans prices has firmed up recently due to harvesting and supply chain issues faced by farmers across the globe due to covid restrictions. So I think we may be near the end of bust cycle of coffee and prices may start firming up from now on as supply is going to shrink especially for premium Arabica coffee the prices may go up much higher. So this year should be good for Indian Coffee plantation industry including Tata Coffee Ltd.

5) But things are different for instant coffee or retail coffee chain branded players like Nestle, Bru or Starbucks. As for these retailers, the low prices of coffee beans are good as the prices of their end product are driven by suppliers not by consumers as demand is stable at current price. This is because they are not selling a homogenous commodity but a branded product with distinct attributes, quality and taste so producers are price settlers.

Tata coffee Ltd: Indian Coffee story

Tata coffee is India’s largest coffee producer. Indian coffee production is mainly about small farmers holding small land holdings and instances of large corporate producers like Tata coffee are very few. Tata coffee deals in coffee in all combinations- it has plantation business producing raw coffee beans, it has instant coffee production capacities, It has retail presence in USA through Eight O’ clock coffee brand, sells instant coffee in India under “Tata coffee Grand” band, it supplies roasted coffee beans to all Starbucks chains in India, it has also developed Indian coffee blend for Starbucks chains across the globe.

 

Tata coffee owns around 8000 hectares (around 20000 acre) of Coffee plantations in southern India. If we take Rs. 4-5 lac price per acre then the valuation of these coffee plantations will be around 800-1000 cr. However, normally prices for Coffee estates are in the range of Rs. 10 lac to Rs. 20 lac per acre especially in tourism heavy areas like Coorg where Tata coffee owns around 11000 acres and this will make the valuations anywhere near 2000 cr to 3000 cr!!! And we are still left with 2400 hectares (6000 acres) of tea estates. Recently Tata Coffee was looking to acquire 12000 hectares of coffee plantations owned by troubled Café Coffee Day for Rs. 1200-1500 cr (while CCD is asking for some 2000 cr) which supports our calculation of minimum 1000 cr value for coffee plantations. Tata coffee has entered into partnership with group hospitality company Indian Hotels for managing its coffee heritage resorts for hospitality business. This also have the potential for a good business going forward and this will further establish the valuation of its coffee plantations.

Its recent expansion (invested some 400 cr for new Instant coffee plant) in Vietnam has started performing this year and mainly due to operation of its Vietnam plant  its PAT for the first half is Rs. 59 cr vs 47 cr even during covid crisis which is an indication towards things to come in the near future.

Merger with Tata Consumer to unlock big Value and Synergy for Both

Tata coffee has 50.08% holding in Eight O'Clock Coffee (ECL) which is a famous American retail coffee brand (Arabica roast and ground coffee) dates back to 1859. Before Vietnam plant, ECL was accounting for 60% of the total turnover- 1120 cr out of 1966 cr in 2019-20. ECL’s net profit in 2019-20 was 117 cr but due to its 50% share only 58 cr accrue to Tata coffee. But after Vietnam plant, NP will grow much faster as the same is 100% subsidiary of TCL. Its NP for the first half this year is 59 cr and I think the same may touch 150 cr this year.

CCL Products India Ltd. (Market value 3200 cr, PE 20) is another listed coffee player but it is more of a wholesale producing instant coffee and does not own plantations but still its valuation is same as of TCL. But I think both can’t be compared- Tata coffee also has large Instant coffee business but it has much higher brand strength in both B2B and B2C. In B2C it has a great brand in Eight O’clock coffee which is growing fast in USA now so it should be valued as an FMCG brand. In 2006, Tatas paid $ 220m (Rs. 1000 cr as per 2006 exchange rates and 1600 cr as per current exchange rates for ECL acquisition. Tata coffee contributed 50% of the amount ($110m). At that time, ECL was having revenues of $110m and the same right now is around $160m so as we can see not that much high growth by ECL. And this may be one of the reasons for the underperformance of Tata coffee because biggest revenue contributor was not growing that much. But ECL once was top coffee brand in USA and Tatas are now working on revamping the brand and supply chain and this should show the impact pretty soon.

I have not done its valuation exercise comprehensively but 50% stake should value around 1500 cr Rs. (at 20-25 PE). 1500 cr value for 50% stake in ECL is still at the lower end as it would make for just 2 times returns for Tata coffee in ECL in last 14 years. US is still and will be the biggest coffee market globally (70% consumption at home which augurs well for ECL) and that’s why ECL is critical to Tata group and they are restructuring its business in USA and this year the growth is good in ECL and looks like the strategy is working. Total Income of Eight O'Clock Coffee Company for the Six months ended September 30, 2020 was USD 87 .81 Million compared to USD 76.48 Million for the corresponding Six months of the previous year. Further, I think as demand for premium coffee will rise in India for home consumption there is a possibility that Tata may introduce ECL in Indian market. And I feel Tata should make the first move rather than waiting for other brands like Nestle. Recently, many brands have started offering premium coffee beans in India for home consumption like Blue Tokai which are witnessing high demand. Though Tata Coffee has also introduced their single estate coffee brand “Sonnet” but still I feel ECL is an established brand and have time tasted blends for USA market and these blends should do well in India markets with some tweaking for Indian tastes (though I think there is nothing like Indian taste in Indian coffee as of now). ECL can benefit from vast supply chain and distribution reach of Tata consumer which is way bigger than ECL in USA.

Balance 50% holding in ECL is with Tata consumer which is also the holding company of Tata coffee (57% holding) and that’s why I feel Tata coffee may be merged with Tata consumer and at that time there will be value unlocking for plantations of more than 25000 acre (coffee and Tea) which are not valued much in the current valuation but for merger they should get the valuation of around 1000 cr.

Tata consumer is already doing the distribution and marketing for “Tata coffee Grand” brand owned by Tata coffee Ltd. Tata group is on a great value accretive restructuring path simplifying ownership, supply chain and management structure and there is no reason for Tata consumer to leave Tata coffee alone when they have already restructured the FMCG brands of Tata chemicals.

Tata Starbucks- Emerging Giant of Indian retail coffee

Tata coffee is the exclusive supplier of coffee beans to Tata-Starbucks (50:50 JV) in India and has also started supplying the same for their global business and this is going to make a mark for Indian coffee blends in the global market just like Indian single malt whiskies by Amrut/Paul John/Rampur. Tata Coffee has revamped its plantations into 8000 micro grids to cater to the premium beans requirements of Starbucks. Growth of Starbucks in India means growth for Tata coffee. It is for the first time in the history of Starbucks that they are procuring coffee from the roasting facility owned by its partner. This shows the expertise of Tata coffee in producing premium quality coffee. This localization also saves the costs for Tata-Starbucks as they are not required to import costly coffee. Coffee drinking in India is moving beyond south Indian states and coffee retail brands are going to see big growth in the future and Starbucks should be the leader of the pack. Tata-Starbucks turnover last year was 540 cr and it is already profitable and Starbucks is very aggressive about Indian market growth.

Indian coffee market is still in its infancy just like China. Just like India, China was a country of tea drinkers. But Starbucks happened to china in 1999. Starbucks has succeeded in blending coffee culture into Chinese culture and it has done the same by relentless attention on details in creating Starbucks a place where Chinese people love to enjoy best coffee, sit, relax and enjoy with their friends. Starbucks has focused on integrating local customs and designs in its cafes. Starbucks were aware of the growing middle class in China and its powerful impact on demand and need for new recreational places. Coffee is a western drink but young Chinese considers coffee culture sophisticated and to influence. It is normal for people in China these days to have business meetings and even job interviews at Starbucks. So with great execution, Starbucks has been successful in creating its cafes as place to go after home and office. The same thing happened in Japan which was another tea drinking nation and now a big coffee nation with Starbucks having more than 1000 stores. Starbucks is having some 4400 stores in China, the largest outside USA and it is betting big on China as next big market after USA. Its China revenues are around 6000-7000 cr which are only going to grow bigger in the next 2-3 years as Starbucks is looking to double the store count.

So India is going to follow the footsteps of Japan and China in adopting the coffee culture and Tata coffee as a supplier of premium coffee beans will be one of the major beneficiary of this shift. Starbucks has worked out a great marketing strategy for Chinese market and developed and created products keeping in view the Chinese tastes. Chinese are much more serious about their culture and family value and social status. So Starbucks did some great marketing there- No aggressive Coffee promotions to avoid being treated as a threat to their tea-culture, blended Coffee culture with tea culture initially, engaging annual family programs etc. Starbucks is a giant success in creating great and innovative coffee products and it is doing this for decades. Starbucks had partnered with local partners for China market in order to address the complexity of massive china market. The same thing it has done for Indian market which is going to as massive as China and after a lot of search it partnered with India’s most trusted and iconic brand Tata. The selection of Tata itself shows the brand strength, trust and customer loyalty it has in Indian market. If you ask any Value investor- China was not a market where Starbucks could achieve any sort of success but with their superior executing skills they have made it their biggest outside USA and may one day even bigger than USA. So I have no doubts that they will do the same in Indian market also.

As of now, Tata-Starbucks operates 200 stores in India across 13 cities. Tata’s stake is owned by Tata consumer product ltd (TCPL) and as of now they have invested around 300 cr in the JV.

But if you ask me the creation of a coffee culture by Starbucks in India will have multi-dimensional impact on coffee demand in India not just for retail chains of Starbucks but also for home consumption and Tata coffee is going to be the major beneficiary here also as it is focusing on developing premium Coffee products for Indian markets. Recently it has launched premium single estate retail coffee brand “Sonnet” which is available online.

Tata Coffee being an integrated coffee player is going to be a major beneficiary of coffee industry growth in India as it can restructure its product offerings as per the requirements of the market like it can shift the export of its premium quality coffee beans to meet the higher demand of Starbucks outlets in the future. For any premium coffee retail brand like Starbucks the supply of uniform premium quality beans is the foremost requirement and Tata coffee can maintain this supply through premium coffee produced in its coffee plantations.

Troubled Cafe Coffee day- An opportunity for Tatas to acquire assets and Relative strength

Troubled Cafe Coffee Day enterprise is looking to sell various assets/businesses to pay off the debt. Promoter family is also selling their assets to reduce the debt at promoter level. Tatas are interested in their Coffee plantations spanning 12000 hectares and Coffee vending machine business. Talks were at advanced stage and are taking time due to issues related to valuations and some creditors asking for more. I think we will see something on this very soon... may be within a month or so. Tata coffee and Tata consumer will do anything to acquire these assets. The acquisition of coffee plantations will make Tata coffee a substantial player in Indian coffee beans market and it will be an integrated coffee player- all the way from plantations to retail sale and coffee chains.

Some analyst friends have questioned this asset heavy approach but I think owned plantations are a key to ensure and control the coffee bean quality and Tata coffee is eyeing premium-ness in its products now. India is going to witness a coffee culture at home and out of home and this will create massive demand for quality coffee beans and that’s why having its own plantations will ensure the supply without any worry of the beans prices. Now, Tata coffee wants to be established as a premium brand. Brand strength and loyalty in B2B is more strong and relationships like supplier of Starbucks are tough to create and are long lasting (Just check the valuation of recent IPO of Mrs Bectors).

Tata coffee was in restructuring mode for last 5-6 years and the stock has not performed at all during this period. It is still available at 2014 valuations. So it has gone nowhere. I think as of now, market has valued it as some sort of plantation company but the share of plantation business and its impact on NP has come down to great extent in the last 4-5 years and now it is more of coffee product company so its re-rating catalyst are just nearing now and it may get the re-rating quite fast just like the same has happened in many tata group stocks- Tata consumer, Tata Motors, Tata communications, Tata chemicals and Tata power (we hold all).

I think things are nicely shaped for Tata coffee to witness a high growth phase and at a valuation of 2000 cr I think market is not valuing its various businesses adequately.

Summary of Analysis levels Involved in the study of Tata coffee:

1. Level 1 (Lower relative valuation) - Current stock price is not reflecting the value of its coffee and tea plantations, value of its overseas subsidiary Eight O’clock Coffee.

2. Level 2 ( Industry level growth and restructuring)- Tata coffee is going to see massive growth in its premium coffee beans and instant coffee business due to growth of coffee demand in India both for home consumption and Coffee retail chains.

3. Level 3 (Forecasting of management decisions which may result in massive future growth and value unlocking) - (a) Merger of Tata coffee with Tata consumer products Ltd (b) Acquisition of Coffee plantation assets of CCD.

(This study is a business analysis of Tata Coffee Ltd. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).