TATACOFFEE to benefit from a global shift towards instant coffee
While competitors will be exposed against a global price rise and India specific challenges, TATACOFFEE benefits from a de-risked profile thanks to captive plantations and a focus on value addition.
TATACOFFEE is Asia’s largest fully integrated coffee company and the 2nd largest exporter of instant coffee. The company has c. 10,000 MT of Arabica and Robusta capacity in South India and 19 coffee estates spread across 18,251 acres.
The global coffee market is anticipated to reach $144.68bn by 2025, growing at a 7.6% CAGR during 2021-2025. The global instant coffee market was valued at $12bn in 2020 and is expected to grow at a CAGR of 5.1% during 2021-2026. Instant coffee demand has grown significantly from 20% in 2017 to 35% at present.
Global coffee industry tumbling with a bad crop season
In January 2022, coffee prices reached a new multi-year high as the monthly average of the ICO composite indicator climbed up to 204.29 US cents/lb. The Brazilian frost brought supply shortages which caused Arabica prices to shoot up to INR12,500-13,000 per 50 kg bag from INR9,000-9,500 in the last season. The prices of Robusta have however been relatively stable at INR6,000 per 50 kg.
Indian coffee industry is in a better position albeit dealing with its own challenges
India is the 6th largest producer of coffee, accounting for 3.14% of global production. Indian coffee board estimates total production of c. 334,000MT this year, of which 29% will be Arabica. There is a drop of 30% for Arabica and 20% for Robusta due to excessive rainfall, bean splitting and berry dropping. Production cost has been rising by 10%-15% annually for some time now and yield/acre has declined by c. 50% for Arabica and c. 21% for Robusta due to natural oddities and white-stem borer disease.
Growing instant coffee operations in line with global demand
Product portfolio comprises Green Beans (12% revenue vs. 21% in 2016-17), Pepper (3% revenue), Tea (9% revenue), Instant Coffee (60% revenue vs. 49% in 2016-17) and allied services (16% revenue). In FY 2020, the company commissioned a 5,000MT freeze-dried instant coffee plant in Vietnam, somewhat de-risking them from Indian production challenges. Other units in South India have a capacity of 8,400MT. The company is also the exclusive producer of single origin coffee for Starbucks India and manufactures ‘Tata Coffee Grand’, a filter coffee variant. A new product line ‘Sonnets’, produced from high quality Arabica beans, was launched in 2021. Eight O’clock (EO’C), the company’s US arm is the 5th largest coffee brand in US. EO’C accounts for c. 57% of co’s revenues.
Stable financials and strong cash flow generation de-risk the investment profile
Revenue has witnessed a CAGR of c. 8.9% during FY 2017-2021 helping the company deliver a lofty 11% ROCE and 9.4% ROE on average. Leverage seems fairly accommodative with Debt-to-equity ratio of 0.71x and Debt-to-assets ratio of 0.29x resulting in an interest coverage of 6.24x as at September 2021. Cash generation appears strong with FCFF generation of c. INR133cr.
TATACOFFEE released its Q3 2021 results recently with 9M revenue of INR1,707cr, 3% increase on Y-o-Y basis. Interest coverage marginally improved to 7.3x. Growth was subdued across the Tea division due to lower crop compared to Q3 2021.
Valuation on absolute and relative terms looks fairly attractive
TATACOFFEE currently trades at 18.5x P/E and 9.2x EV/EBITDA on FY23F. Close comps CCL Products (NSE: CCL) trades at 21.8x P/E and 14.4x EV/EBITDA while Tata Consumer Products (NSE: TATACONSUM) trades at 48.3x P/E and 28.6x EV/EBITDA on FY23F albeit not a like-for-like comp. Downside risk factors include declining yield, rising costs and high business volatility which are not unique to TATACOFFEE. Promoters hold 57.58% shareholding while another 2.26% is held by LIC.
While competitors will be exposed against global price rise and India specific challenges, TATACOFFEE benefits from a de-risked profile thanks to focus on value addition and captive plantations giving it a cost advantage. Relatively stable financial trend despite industry challenges gives comfort around forward-looking performance. We are LONG.
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