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Soft commodity prices have been climbing steadily over the last one year and now have started to make a dent into the profitability of FMCG companies. But what about a commodity company with a significant exposure to the FMCG business?

Tata Coffee is one such company. In fact, it has a presence across the entire coffee value chain—right from plantation to processing, roasting and consumption.

Plantations: a valuable asset

(Source: Company records)

Besides, being a cultivator of coffee, tea and pepper, Tata Coffee owns roasteries and facilities producing instant coffees. It generates around 85% of its revenue through exports. Tata Coffee is a supplier of beans to over 140 Tata Starbucks outlets in India. It owns the US’ fourth largest coffee brand, Eight O’ Clock (EOC), through its 50.08% subsidiary.

Nearly 86% of the company’s revenue comes from Coffee (which includes Eight O’Clock, plantation revenue and instant coffee revenue) while the rest comes from tea, pepper and allied products.

Subsidiaries of Tata Coffee

(Source: Company records)

Note: Consolidated Coffee Inc (CCI) is the holding company of Eight O’ Clock Holdings Inc. and Eight O’ Clock Holdings is the holding company of Eight O’ Clock Coffee Company.

Eight O’ Clock accounts for ~57% of Tata Coffee’s revenue and offers a hedge against any slump in the commodity prices. On the other hand, Coffee cultivated at its various estates finds a huge export market. Tata Coffee is the sixth largest coffee producer in the freeze-dried category globally.

The company has three instant coffee manufacturing plants aggregating to a total capacity of 13,400 MTPA. Out of this, two are located in India and one in Vietnam. The company commissioned a 5,000-MTPA Freeze Dried Plant in Vietnam in Q1FY20. This is considered to be an important development for the future of the company.

Of late, the stock of Tata Coffee has been buzzing on the bourses and bucking the multi-year downtrend.

Tata Coffee: Bucking the trend

Data as on May 10, 2021
(Source: BSE India)

Why is the stock of Tata Coffee buzzing?

Coffee prices have been on a roll in the international market. Brazil, which is by far the largest producer of Coffee, is staring at production losses owing to unfavourable weather conditions. The International Coffee Board made a downward revision in its supply forecasts for the plantation year 2021/22, in its April 2021 report. Rabobank also believes the potential lower Arabica crop in Brazil is likely to create a major supply deficit.  

Coffee prices are heating up

(Source: International Coffee Organization)

Now that the global economy is expected to recover from the COVID-19 shocks, any concurrent revival in coffee consumption will be a positive for coffee prices.  After all, out-of-home coffee consumption hasn’t entirely recovered yet. Brazil accounts for ~35% of the global coffee production, while Vietnam and Columbia constitute ~18.5% and ~8.5% respectively. India’s share in global coffee production is ~3.0%.

Global coffee production and consumption trends

Figures in million bags of 60 Kg
(Source: International Coffee Organization)

How is Tata Coffee placed for the 2021/22 season and beyond?

Improving coffee prices, vertically integrated product portfolio and strong presence in the key global coffee markets bode well for Tata Coffee. Recently, the company launched an e-commerce platform, Sonnets by Tata Coffee, to sell some of its single-origin premium coffees.  It remains interesting to see how this shapes up in future.

Tata Coffee: recording higher profit growth

(Source: Company records)

Farm digitization—a revolutionary step for risk mitigation and productivity enhancement

Tata Coffee has partnered with TCS for digital farming initiatives. This has helped the company develop capabilities to optimize resources, increase productivity, improve quality of produce and reduce wastages. Digitization of farms is expected to immensely help mitigate weather-related risks, improve disease management response and optimize the asset yield.

What are the company’s focus areas for the future?

  • Concentrating on consumer experience to do away with commoditization of business
  • Increasing its presence in the premium differentiated coffee segment
  • Bringing about further quality improvements in coffee production
  • Adhering to environment-friendly manufacturing
  • Optimizing the time taken in processing
  • Focusing on new product development in the instant coffee segment

A few months ago, some media reports suggested a potential acquisition of V.G. Siddhartha’s (Café Coffee Day) 12,000-hectare coffee plantations by Tata Coffee made rounds. This was said to be a move to increase the land bank of Tata Coffee and increase the owned plantations. However, nothing concrete has emerged on this front thereafter. If the company resorts to any such acquisition, it can have positive/negative impact on its business, depending on the price it pays for such an acquisition.

In a nutshell

Tata Coffee isn’t just a plantation company; it has a strong presence across the value chain of coffee. It has been working on product premiumization and improving consumer experience. The current strength in coffee prices has offered tailwinds to Tata Coffee.

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Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances.  Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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