Tata Coffee and seasonality factor pulled Tata Global Beverages earnings down in Q4: Ajoy Misra
Your branded business continues to grow. What is aiding that and what is the average volume growth which you have witnessed?
The India branded business continues to show good growth. We have grown between 6% and 7% in India. All our brands under the umbrella Tata Tea brand by and large are doing well. It has been a good year in that sense and it is driven by volume increases. That is a good news meaning there is good underlying growth happening here.
In terms of coffee, 8 o’clock Coffee in the US showed good growth. Our growth in the branded business got affected a bit by the challenges in the UK market. Those are our major brands that have played out in the year. There are some smaller brands such as our water brands which play with Nourishco, our joint venture with Pepsi, which is Himalayan and Tata Gluco Plus and Tata Water Plus. They have had a good year.
Why is Tetley facing some problem in the UK market? It has presence not only in UK but Canada too from where you do get a decent chunk of your revenues?
The category of black tea has gone into after a period of stagnation has gone into decline and that declines has accelerated and therefore showing growth out there is a challenge. However, what we have done is over the last three-four years we have made an entry into the non-black tea categories which are small but they are showing growth and as we change our mix from predominant dependence on black tea to green tea specialty teas like decaffeinated tea, fruit and herbal teas, red bush teas these are categories that are growing and we actually even in the last year when we have been under strain overall all of these categories we have grown market share.
It is just that the proportion of in value of these non-black categories is still small but we are changing the mix every quarter almost with the new innovations that we are launching. We hope and we do plan to see growth coming back in the Tetley markets. Of course, Tetley is also a significant brand in Canada. We have number one market share leaders there and we have grown there. It is a mixed story.
Speaking about changing product mix, how did your innovative products contribute to the overall financials and what percentage of the total revenue is now coming from the so called premium category?
In the green tea category, we looked to do something differentiated which would give Tetley brand the right to grow faster in a growing category. We were the first tea company that innovated fortification of tea with vitamins. We managed to clear all compliance that are required in UK and Europe in terms of the formulation of the product.
We have launched super green teas as a new category of green tea offering fortified with vitamins B6, vitamin C, and vitamin D with all the attendant benefits that these vitamins give and that has been a fantastic hit for us and has shown us very good growth not just for its rub off has not just been increased sales in green tea but a rub off across the Tetley brand which we have seen and this we had launched a year and a half back and much of the Tetley’s story of gaining market share quarter by quarter for most of this period has been because of innovations line super green teas launching Tetley into the fruit and herbal category and some of these new offerings have been some very good for the brand.
What is the percentage of revenues from premium brands? How do you see that segment growing going forward?
Right now, in value terms, these innovative new non-black tea categories are small. In UK revenue context, they would be high single digit in percentage terms. How much would they contribute in terms of sales? Going forward, our attempt is to accelerate this number significantly.
After many quarters of double digit EBITDA margins, what hit you in Q4 and will the weakness persist?
In the consolidated picture, the problem in Q4 has been our unbranded business, namely Tata Coffee which has had a very bad fourth quarter. It is a subsidiary of TGB and has pulled it down. However, the India business has actually improved margins.
The second thing about Q4 is that our businesses has got a seasonality element and it needs to be seen vis-à-vis quarter four previous years and not quarter on quarter from the previous quarter.
The non-branded business performance has been extremely disappointing. It declined 8% in FY18. What is the reason behind this and do you think things will improve going forward?
The non-branded business has had a year of “perfect storm” and that normally does not happen in a year when terminal prices tank. This was a year when we had un-seasonally harsh weather that hit our coffee plantations. Also, our tea plantations got hit by an unusual degree of pest attack. Plus, the instant coffee business did not quite meet its target.
In all aspects of the business, — plantation business, extraction business and B2B business — a mix of some of the reasons contributed to it.
Tata Coffee has been a pain point. Has the pain bottomed out?
I would say so. Also, we have invested in setting up a plant to increase our capacity for producing instant coffee. We are putting this plant up in Vietnam and it is making very good progress and with increased sales coming from instant coffee, we would be de-risking, going forward with our dependence on terminal prices and plantations. Obviously, we feel optimistic.
The other fear in the market is that of falling coffee prices, seeing Arabica and Robusta harvest in Brazil while India is still struggling with un-seasonal rains. Would tea and coffee prices be a worry for you?
For Tata Global Beverages there is a plantation part of the business which has a different kind of dependency on terminal prices and we have a branded coffee 8 O’ Clock Coffee where lower coffee prices is always good news. At Tata Global Beverages, we see both sides of the picture and one does not get nervous and overdependent on speculating on what is likely to happen because we need to play both parts of the coffee business.
You had spoken earlier on about looking at interesting acquisitions. Is Hector Beverages, Paper Boat on your radar?
We are always open and are studying inorganic opportunities to give us growth and of course, we are focussing a lot on India. We continue to explore many interesting and relevant opportunities. There are speculations about a certain company at this point in time because we did not disclose which companies we are looking at but certainly we are looking at inorganic opportunities to fund growth, to fuel growth.
You have been on a quest to make your balance sheet leaner. After Russia, China are you looking at Eastern European portfolios. What can we expect in terms of getting rid of your small expansions which may not really move a lot for your bottom line?
We will continue to look to balance out our portfolio of businesses and we want to bring focus into the key geographies and key power brands and therefore, if there are any subsidiary businesses of ours or smaller businesses or loss-making businesses, that we think cannot be turned around quickly. We will not shy away from looking at restructuring opportunities or bringing back focus into our key markets and key brands.