Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,040
Current market price: Rs789
Nicely brewed
- Tata Tea Ltd (TTL) is transforming itself from just a bulk tea player to a branded/packaged tea player.
- With various TTL brands acquiring strong recognition and respectable market share, we believe that the transformation strategy adopted by TTL is well on track.
- TTL is further derisking its business model by exiting/restructuring its bulk tea manufacturing portfolio.
- Though the transformation strategy is not reflected in the company's profit numbers, the company's profitability in the future will be driven by the better revenue mix, cost cutting and lower interest burden.
- The derisked business model makes us believe that the stock's current valuation is cheap compared to that of its peers in the branded fast moving consumer goods (FMCG) business.
- At the current market price of Rs789 the stock is trading at 13.2x its FY2007E earnings per share (EPS) and at 8.0x its FY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We recommend a Buy on the stock with a price target of Rs1,040