3Q EBITDA growth of 29% was ahead of estimates – margins have been improving over the last 3 quarters, driven by improving cost management and better product mix. Net profit (pre-exceptional) grew 175% due to decline in interest cost owing to cash inflow from Glaceau sale.
Tata Tea is still looking at inorganic growth opportunities in high-growth beverage segments to enhance its growth and margin profile. However, potential risk from future acquisitions is much lower now given 1) balance sheet is much stronger, owing to cash inflow from Glaceau sale, and 2) management’s indication that it would no longer be buying minority stakes.
Tata Tea is trading at 9.7xFY09E P/E, cheapest in Indian consumer universe. The company is expected to report an EPS of Rs 57.9 and Rs 81.69 for FY08 and FY09 respectively. Citi is Raising target price to Rs1200 based on 15x 1-year forward P/E as we roll forward our target multiple from mid-FY09E.
Britannia Industries Ltd:
Britannia’s 3QFY08 net profit grew a solid 143% yoy, in line with our estimates. The key drivers were 15.7% sales growth and 436bps EBITDA margin expansion. Britannia continues to enhance margins, despite raw materials cost pressures. EBITDA margin turnaround trend, which started in 4QFY07 continues to intensify, driven by improving product mix, and reduction in pack sizes for some brands, effectively hiking per unit prices.
Britannia’s sales growth has slowed to 16% in 3Q from 20-30% over the last few quarters, which is worrying. While so far, Britannia has been able to maintain its market share despite new competition (ITC), its 3Q 16% growth pales in front of ITC’s food portfolio growth of 50%.
Management dispute and laid back attitude of Sr. Wadia maybe the only risk going forward. The company is expected to report an EPS of Rs 78 and Rs 105 for FY08 and FY09. Existing Investors can continue to hold, fresh positions can be taken between Rs 1,200 and Rs 1,350 for a target price of Rs 1,750 over 12 months.