TATA TEA: A FINANCIAL ANALYSIS

MANAGEMENT ACCOUNTING

Submitted to Ram Kesh GuptaChrist University Institute of Management, Bangalore

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By:

Name.1 (Registration num.)Name.2 (----------------------)Name.3 (----------------------)Name.4-6 (--------------------)

Table of Contents

1. INTRODUCTION 4

2. KEY FINANCIAL TRENDS 5

3. PERFORMANCE EVALUATION USING RATIOS 7

4. PERFORMANCE EVALUATION USING COMMON-SIZE STATEMENTS 10

5. ANALYSIS OF THE CASH FLOW STATEMENT 12

6. QUALITY OF EARNINGS 13

6.1 DEPRECIATION AND AMORTIZATION........................................................................................................................................................................................136.2 DOUBTFUL DEBTS................................................................................................................................................................................................................ 146.3 INVENTORIES...................................................................................................................................................................................................................... 146.4 GOODWILL......................................................................................................................................................................................................................... 146.5 EXTRAORDINARY OR EXCEPTIONAL ITEMS.................................................................................................................................................................................146.6 PRIOR PERIOD ITEMS........................................................................................................................................................................................................... 146.7 DISCONTINUING OPERATIONS................................................................................................................................................................................................ 146.8 CHANGING IN ACCOUNTING POLICIES......................................................................................................................................................................................156.9 OTHER INCOME LEVELS......................................................................................................................................................................................................... 15

7. ANALYSIS OF THE DIRECTOR’S REPORT 15

7.1 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A)................................................................................................................................................................167.2 ADDITIONAL INPUTS FROM THE CORPORATE GOVERNANCE SECTION.............................................................................................................................................177.3 INFERENCES FROM CORPORATE ANNOUNCEMENTS....................................................................................................................................................................187.4 SOME INFERENCES FROM THE AUDITOR’S REPORT.....................................................................................................................................................................18

8. ASSESSMENT OF TATA TEA BY THE STOCK MARKET 19

8.1 MARKET ASSESSMENT.......................................................................................................................................................................................................... 198.2 OUR RECOMMENDATION...................................................................................................................................................................................................... 20

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9. OVERALL EVALUATION 22

10. REFERENCES 22

11. APPENDIX 23

Foreword:

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Regards,

Group Number-------

Members Names----------

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1. Introduction

Financial analysis is a method used by investors, creditors, and management to evaluate the past, current, and projected conditions and performance of a firm. Financial ratio analysis, which is the calculation and comparison of ratios that are derived from the information in a company’s financial statements, is the most common form of financial analysis. There are essentially two uses of financial ratio analysis:

1. To track individual firm performance over time, and 2. To make comparative judgments regarding firm performance.

Firm performance is evaluated using trend analysis – calculating individual ratios on a per-period basis and tracking their values over time. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations, and attractiveness as an investment. In this role, ratios either serve as red flags for troublesome issues or as benchmarks for performance measurement. I have chosen to analyze the performance of Tata Tea for my project. In addition to trend and ratio analysis, I have also analyzed the text of Tata Tea’s 2009 annual report and the performance of Tata Tea’s share price over five months to establish its quality of earnings and get a better understanding of the company’s overall performance as a corporation.

The tea industry in India is about 170 years old. India is the largest producer of tea in the world (accounting for 31% of the global tea production) and is among the world’s largest exporters. India produced 981 million kilograms of tea during 2008, which was about 4% higher than the previous year’s production of 945 million kg. Exports during the year (196 million kg) were about 9.6% higher than the previous year. Some salient facts about the Indian tea industry are listed below [1]:

The total turnover of the Indian tea industry is around INR 10,000 crores Tea production has grown over 250% since independence The total foreign exchange earned per annum is around INR 1847 crores Tea is a labour-intensive industry employing around 1.1 million workers

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Tata Tea Limited is currently the second largest tea company in the world with a presence in over 70 countries. It was established in 1962 as Tata Finlay limited as a joint venture with James Finlay & Co. Ltd., Glasgow, U.K. The company changed its name to Tata Tea Limited in the year 1983. Its headquarters are in Kolkata and it owns 27 tea estates in the states of Assam, West Bengal, and Kerala. The company, which has been accorded “Super Brand” recognition in India, has five major brands in the Indian market, namely Tata Tea, Tetley, Kanan Devan, Chakra Gold, and Gemini. Tata Tea has subsidiaries in Great Britain, U.S.A, and India. The company also has a substantial interest in the Sri Lankan tea industry through Watawala Plantations and Kanan Devan Hills Plantation Company as its associate companies.

In 1991, Tata Tea acquired 52.5% shareholding in consolidated Coffee Ltd (Tata Coffee Ltd.). Tata Tetley was established in 1993 by a joint venture with Allied Lyons PLC. In 2000, Tata Tea acquired the Tetley Group Ltd., U.K. In May 2007, Tata Tea signed a Joint Venture agreement with Zhejiang Tea Import & Export (ZTIE) Company to manufacture and market Green Tea Polyphenols and other value-added tea beverage products. Tata Tea added the “Himalayan” mineral water brand to its beverage portfolio in 2007 by acquiring the of the Mount Everest Mineral Water (MEMW) corporation. The company has a research centre at Teok (Assam) and a product development centre at Bangalore.

2. Key Financial Trends

As per the company’s annual report, Tata Tea recorded improved operations during fiscal year (FY) 2009 with total income increasing by 21% to INR 1524.64 crores compared with INR 1263.29 crores in the previous year. The growth in total income was driven by strong performance in the branded tea segment and was achieved by a combination of higher unit realization and volume growth. Profit before tax and Exceptional items improved by about 4% to INR 238.65 crores compared with INR 229.65 crores in the previous year. However, Tata Tea had earned an exceptional income of INR 156.21 crores in the previous year from the sale of its North India Plantation Division (NIPD). As a result, the provision for taxation in the current year was lower at INR 70.00 crores as compared to the previous year’s number of INR73.00 crores. The profit after tax at INR 159.06 crores was lower than the previous year’s value of INR 312.86 crores, mainly due to the profit on the sale of NIPD.

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2005 2006 2007 2008 2009

Net Sales 886.33 968.2 1054.47 1134.70 1361.53Operating Expenses

809.39 830.15 915.73 977.68 1270.94

Operating Profit

76.94 138.05 138.74 157.02 90.59

Interest Expense

13.98 16.43 45.44 65.67 81.63

Total Assets

1240.34 1402.61 2340.72 2561.55 2554.32

Reported Net Profit

128.92 186.93 306.57 312.86 159.06

Total Debt 191.37 241.35 797 757.5 755

Table 1 (values in crores)(source: Capitaline)

Figure 1: Net sales, operating expenses, and profit trendY-axes shows values in crores

Table 1 shows an increasing trend in net sales. The operating and net profits show a steady increase except in the year 2009. Although sales have steadily increased over a period of time, there has been a drastic increase in the operating expenses of the firm in 2009. This can be mainly attributed to a large amount of raw material purchase and the prevailing high input prices during the year. Figure 1 summarizes the trend in the net sales, net expenses, debt, and profit after tax.

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3. Performance Evaluation Using Ratios

The following table (Table 2) lists the key financial ratios for Tata Tea from FY2009:

Ratios Formula 2009 2008 2007 2006

Profitability ratios

Profit margin = (PAT/Net sales) 0.117 0.276 0.291 0.193

Asset turnover = (Net sales/Avg. total assets) 0.443 0.391 0.483 0.610

Fixed asset turnover = (Net sales/Avg. fixed assets) 14.288 6.713 4.307 3.577

Return on assets = (PAT/Avg. total assets) 0.052 0.108 0.140 0.118

PAT = (PAT/Net sales) x (Net sales/Avg. total assets) 0.052 0.108 0.140 0.118

Return on equity = (PAT/Avg. shareholder's equity) 0.088 0.187 0.227 0.169

Earnings per share = (PAT/Weighted number of equity shares) 25.721 -- -- --

Operating profitability ratios

Operating profit margin = (NOPAT/Net sales) 0.048 0.142 0.161 0.130

Operating asset turnover = (Net Sales/Avg. operating assets) 1.451 1.444 1.735 3.439

Operating return on assets = (NOPAT/Avg. operating assets) 0.070 0.206 0.280 0.447

Liquidity ratios

Current ratio = (Current assets/Current liabilities) 1.811 1.484 1.091 1.126

Quick ratio = (Current assets – inventories)/(Current liabilities) 1.178 1.121 0.583 0.613

Debtor turnover = (Net sales/Avg. Debtors) 17.530 17.680 18.326 24.327

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Inventory turnover = (Cost of goods sold/Avg. Inventories) 5.133 5.094 5.499 5.187

Avg. debt collection period = (360/Debtor turnover) 20.537 20.362 19.644 14.799

Avg. inventory holding period

= (360/Inventory turnover) 70.138 70.666 65.469 69.403

Operating cycle =Avg. debt collection period + Avg. inventory holding

period90.675 91.028 85.113 84.202

Solvency ratios

Debt-to-equity ratio = (Secured + Unsecured loans)/Shareholder's equity 0.420 0.420 0.516 0.208

Liabilities to equity ratio = (Debt + current liabilities)/Shareholder's equity 0.592 0.565 0.664 0.358

Interest cover = (PBIT/Interest expense) 3.935 7.031 9.102 16.201

Long-term debt-to-equity ratio

= (Any long-term debt in B/s)/Shareholder's equity0.164 INR 325 crores worth of debentures

9.4% interest due at the end of the 1st year

Financial leverage = (PBIT/PBT) 1.357 1.170 1.130 1.071

Capital market ratios

Price-to-earnings ratio = (Avg. stock price/Earnings Per Share) 22.744Share price = INR 585.65 as per page

41

Dividend yield = (Dividend per share/Avg. stock price) 0.661Dividend/ share = INR 17.5

(page 17)

Book value = (Shareholder's equity/Weighted number of equity shares) 290.964 -- -- --

Price-to-book ratio = (Market price per share/Book value per share) 2.013 -- -- --

Return on capital employed = (PBIT/Capital employed) 0.126 0.180 0.177 0.190

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Interpretation:

The profit margin, return on assets, and return on equity have significantly reduced in FY09 as compared to the values in FY08. The average fixed assets turnover has significantly improved, but this is due to the sale of Tata Tea’s NIPD (a profit of INR 161.69 crores as

per the cash flow statement for FY08) that have brought its fixed assets down. Tata Tea had much higher average inventory in FY09 as compared to FY08 (INR 243.465 crores vs. INR 187.92 crores), which could

possibly be attributed to lower demand due to the global recession. This caused the current assets in FY09 to be higher than FY08 and helped improve the current ratio and inventory turnover ratio. If I remove inventories from current assets, then I see that the quick ratio is almost the same as the FY08 value. Tata Tea has also reduced its current liabilities (by significantly reducing its provisions), which has helped improve the current ratio.

Tata’s justification for a lower profit in FY09 as compared to FY08 has been that it reaped an unexpected windfall of INR 156.21 crores in the FY08 financial year. However, the FY07 data shows that Tata Tea’s profit for the year was commensurate with its profit in FY08 (INR 349.62 crores in FY07 vs. INR 385.86 crores in FY08), and I am not told if there was any exceptional income in FY07 that contributed to this profit. So I need to analyze the FY07 annual report before I can accept Tata Tea’s explanation.

Tata Tea’s liquidity ratios have more or less stayed the same although its debtors and inventories have increased (again possibly due to the downturn and tightening of credit), which is a commendable feat.

Tata Tea’s current liabilities have increased over the previous financial year, and as a result, its liabilities-to-equity ratio has increased. Its debt-to-equity ratio has stayed the same since its loans and advances are still almost the same as what they were in FY08.

Tata Tea’s interest cover ratio has drastically increased over the last year, which is a sign of concern for its creditors. This is due to its large reduction in profit over the last year. As a result, Tata Tea’s financial leverage ratio has increased.

Lastly, I do not have enough data to compute the capital ratios for the previous years, but due to the reduction in profit, I see that the return on capital employed as decreased.

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4. Performance Evaluation Using Common-Size Statements

The following table (Table 3) shows the common-size profit and loss statement for Tata Tea:

   Year 2009 2008 2007 2006 2005INCOME :Net Sales 100.00 100.00 100.00 100.00 100.00Total Expenditure 92.56 71.06 65.90 59.54 57.83Operating Profit 23.59 33.91 30.38 19.55 14.53Interest expense 6.00 4.82 3.34 1.21 1.03Depreciation 0.78 0.75 1.36 1.43 1.62Profit before interest and tax (PBIT) 22.81 33.16 29.02 18.12 12.92Profit Before Tax (PBT) 16.81 28.34 25.68 16.92 11.89Tax 5.28 5.37 2.95 3.20 2.83Reported Net Profit (PAT) 11.68 22.98 22.52 13.73 9.47Total Debt 55.45 55.64 58.54 17.73 14.06

The following table (Table 4) shows the common-size balance sheet for Tata Tea:

   Year Mar 09  Mar 08  Mar 07  Mar 06  Mar 05 SOURCES OF FUNDS :Share Capital 2.04 1.98 2.17 3.30 3.65Reserves Total 57.18 55.67 54.51 64.87 64.46Secured Loans 14.66 17.33 9.07 13.77 11.65Unsecured Loans 10.19 6.87 20.19 0.40 0.78Current Liabilities 10.22 8.37 8.37 10.26 11.70Provisions 4.91 8.89 4.65 5.73 5.57Deferred Tax Liability 0.80 0.89 1.03 1.68 2.20

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Total 100 100 100 100 100APPLICATION OF FUNDS :Fixed assets (net) 3.42 3.13 9.05 14.69 36.26Investments 68.25 70.10 75.12 64.97 0.00Inventories 9.58 6.26 6.61 8.19 3.52Sundry Debtors 3.02 2.03 2.38 2.95 5.55Cash and Bank 1.50 0.45 0.79 0.39 10.15Loans and Advances 13.30 16.87 4.43 6.47 39.05Deferred Tax Assets 0.68 0.64 0.69 0.36 1.33Miscellaneous Expenses not written off 0.25 0.52 0.92 1.98 4.14

Total 100 100 100 100 100

Interpretation:

I can clearly see that Tata Tea’s expenses as a percentage of its sales have significantly increased in FY09. The profit and loss statement shows that Tata Tea incurred an operating expense of INR 1260.29 crores in FY09 as compared to INR 967.51 in FY08. Most of this expenditure was due to Tata Tea’s purchase of raw materials (INR 790.47 crores in FY09 vs. INR 575.73 crores in FY08)

As mentioned earlier, all the profit numbers (PBDIT, PBIT, PBT, and PAT) have decreased as a percentage of sales. This is due to the reduction in profit.

The common-size balance sheet shows that there is a significant increase in the contribution of inventories to fixed assets in FY09. We conjecture that a significant portion of the raw materials purchased by Tata Tea are lying in their inventory (INR 291.1 in FY09 vs. INR 195.83 in FY08). Tata Tea probably purchased the raw materials in anticipation of a large demand but was unable to ship its final product due to the worldwide recession. As a result, this additional expense also played a part in reducing Tata Tea’s profit.

The contribution of sundry debtors to fixed assets has increased over its value in FY08, probably due to a tightening of credit due to the global slowdown.

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Figure 2 shows expenses, debt, and profit as a percentage of sales.

I also noticed that Tata Tea is listing a revaluation reserve of INR 21.86 crores in its reserves and surplus. This is a questionable amount and should probably be removed in the calculations of all financial ratios.

5. Analysis of the Cash Flow Statement

The cash flow statement has been prepared under the ‘Indirect Method’ as set out in the Accounting Standard on Cash Flow Statements (AS-3) issued by Companies (Accounting Standards) Rules, 2006. While the net profit before tax and extraordinary items has been cited as INR 229 crores, the net cash flow from operations has been given as INR 5.91 crores. In comparison to the previous year’s figure of INR 88.12 crores, the cash flow from operations has decreased by 93%. As mentioned earlier, the profit after tax has declined from INR 312.86 crores to INR 159.06 crores as well. As per the Director’s report (discussed later), this loss is attributable to the profit on the sale of Tata Tea’s NIPD in FY08. However, Tata Tea has substantially increased its purchases of raw materials in FY09, which is partially reflected in its increase

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Figure 2: Expenses, debt, and profit as a percentage of sales

in sales and increase in closing inventories. I infer that the difference in cash flow due to operating activities has been due to the sale of Tata Tea’s NIPD and increase in its purchase of raw materials.

There has been a significant increase in Tata Tea’s investment income due to substantial sales of current and long-term investments. Apart from making some modest new investments and spending on new business initiatives, Tata Tea has also drastically decreased its outlay in subsidiaries. These actions indicate that the company as a whole is following a strategy of reducing its investments, which is not a positive sign for the future. In case of financing activities, the company has had a higher cash outflow in FY09 than FY08 due to lack of issuance of shares, lack of proceeds from long-term borrowings, and a significant increase in the proposed dividend to its shareholders.

I therefore deduce that while the company has decreased its investments, it has had an overall outflow of cash from its financing activities. Further, Tata Tea has utilized most of its cash flow from investments in paying dividends to its shareholders and to fund financing operations. The overall decrease in cash flow due to operating activities can be attributed to the sale of Tata Tea’s NIPD and increase in purchase of raw materials. Since the purchase of raw materials will result in extra sales next year, we anticipate that the cash flow from operations in FY10 will be higher than the current value.

6. Quality of Earnings

Earnings are said to be of high quality if: They can be easily distributed as cash; They are derived primarily from continuing operations that are not volatile from year to year The methods used in determining profit are conservative

On the basis of our analysis, I found the quality of earnings at Tata Tea to be very good. Given below is the analysis which helped us reach this conclusion:

6.1Depreciation and Amortization

Depreciation on fixed assets including assets created on lands under lease is determined as per the straight-line method in accordance with Schedule XIV to the Companies Act, 1956. Any impairment loss is ascertained as per Accounting Standard of the Companies (Accounting Standards) Rules, 2006. Expenditure on software and related implementation has been capitalized and amortized as per the straight-line basis

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over a period of five years. This is acceptable as these provide enduring economic benefits to the company. Any subsidy received by the government in return for the acquisition of fixed assets has been deducted from the cost of the respective assets.

6.2Doubtful debts

Debts considered doubtful have reduced from 7.98% of the total debts in FY08 to 5.65% in FY09. This reduction shows a more secured debt recovery and a better quality of earnings.

6.3Inventories

Inventories are stated at lesser of cost or net realisable value. Costs are determined as per the weighted average method for all categories of inventories other than those bought in auctions, in which case cost is taken as the actual cost for each lot. This shows a conservative approach in cost determination of inventories.

6.4Goodwill

The financial statement shows an increment of goodwill on consolidation due to increase of holding by the Tata Tea group in MEMW, Consolidated Coffee Inc. and Tata Tea (GB) Ltd. amounting to INR 92.48 crores. An impairment loss of goodwill of INR 5.20 crores was caused due to amortisation of certain intangible assets, included as goodwill, under India GAAP by an overseas subsidiary. Therefore, the methods used here is amortization of goodwill and not the more conservative full-write off method.

6.5Extraordinary or Exceptional Items

They represent the incomes or expenses arising from transactions that are not part of the regular operational activities and are not expected to recur in the future. Tata Tea had an exceptional income of INR 156.21 crores during FY08 as a result of the sale of its NIPD. FY09 showed an exceptional income in the form of exchange gains of INR 813.91 by its subsidiary company in UK. However, profit before tax and exceptional items showed an increase by 3.9% and in context of the existing state of the economy shows a good quality of earnings.

6.6Prior Period Items

The financial statement does not show any income or expense caused due to errors or omissions in the financial statements of the past years. This also reflects a good quality of earnings.

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6.7Discontinuing Operations

The company had disposed off NIPD last year which was duly recorded in the financial records for FY08. No such transaction is observed in this year’s operations. Further, the operations that have been reflected in its consolidated statement belong to the same or closely linked domains. If at all, they lower the overall profits of the company – as observed in accounting for losses of INR 27.97 crores by MEMW. This again adds to the quality of earnings of the enterprise.

6.8 Changing in Accounting Policies

The only change in the accounting practice is seen in its subsidiary - Tata Tea (GB) Ltd. in the form of a slight shortening of the current economic year. This was done in order to bring its financial year in synchronization with the parent company’s financial year. This change is a common practice and was not done with the aim of ballooning profits. Hence, it reflects positively on the quality of earnings.

6.9Other Income levels

The amount of income from non-operating sources shows a decline from 1.65% in FY08 to 1.3% in FY09. Further, it shows that the contribution of these sources to the total income is consistently small over a period of time. This suggests a very high quality of earnings of the company.

7. Analysis of the Director’s report

Given below are some of the salient observations accompanied by inferences that could be drawn from some of them: The company had been granted an exemption by the Ministry of Corporate Affairs (subject to certain conditions) from attaching the

individual accounts of each of its subsidiary companies to its accounts. However, the Directors decided to voluntarily attach the consolidated accounts of Tata Tea (GB) Ltd. with the accounts of the Company as part of its unabridged Annual Report. The consolidated accounts of Tata Tea (GB) Ltd. attached with these accounts were prepared as per UK GAAP.

To bring Tata Tea (GB) Ltd. annual report in conformity with the parent company, the performances were measured for a slightly shorter time period (51 weeks) compared to 53 weeks during the previous year.

Total income from operations increased in FY09 in comparison to FY08. However, the profits have been reduced in the year FY09. This is primarily because last year the company had an exceptional income of INR 156.21 crores through sale of its NIPD.

Tata tea brand remains the market leader in terms of volume as well as value in India.

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The consolidated performance of the company shows an income increase by 12%. This year showed an exceptional income in the form of exchange gains of INR 813.91 by its subsidiary company in UK. However, last year’s consolidated exceptional income was INR 1256.31 crores (through sales of NIPD and Energy Brands Inc.).

The company announced a dividend of INR 17.50 per share on the paid-up equity share capital of the company. This is half the value of the dividends of INR 35 announced last year. However, last year’s dividends also included a “special one-time dividend” of INR 20. The company in this way distributed 79% of its stand alone profits.

A joint venture started in the form of Zhejiang Tata Tea Extraction Company Limited, China, for setting up a manufacturing and marketing facility in China for Green Tea Polyphenols, tea extracts, instant tea and other value added tea beverage products. The project is in the final phase of completion and is a subsidiary of Tata tea. In light of the growing demand of the said products, especially in US and European market, the investors can expect good returns from investment in this project.

Mount Everest Mineral Water (MEMW) Ltd., a subsidiary of Tata tea, suffered losses of INR 27.97 crores attributed to considerable expenses made during its launch and promotional campaign. MEMW had losses of INR 1.55 crores during FY08.

Tata Tea has taken a number of measures to reduce the energy consumption levels in its business units. These have shown a reduction of generator usage by up to 53% and lighting expenses by up to 80%. The full effect of these measures is expected to be reflected in next year’s revenue statements.

The company is involved in a number of R&D agreements with various national and international institutes of scientific excellence aimed at improvement of capabilities.

7.1Management Discussion and Analysis (MD&A)

MD&A is an unaudited section of the report that provides an overview about how the company fared in a given time period. It is also useful for understanding the targets for the coming year and approaches to new projects. It also helps draw an inference about the management style of the organization. On studying the MD&A section of the financial report, the following salient points were observed:

7.1.1 Operations

The report states that rapid changes in input prices and exchange rates have put Tata Tea’s margins under pressure but the company has implemented strategies to recover lost margins and has re-structured its operations to focus on its supply chain process and to improve its operational efficiency.

Business break-up: 78% sales from tea, remaining from coffee and other products

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69% business outside India 89% business is sale of branded products and the rest through plantation and extraction business

Tata Tea sold some holdings for cash and cash equivalents last year. However, returns in the form of interest income from these balances have fallen. This is because world over interest rates have taken a fall.

Sharp changes in input prices and exchange rates have affected profit margins. The dollar ($) exchange rate swerved between INR 40.21 and INR 50.71 and the pound (£) exchange rate between INR 79.55 and INR 72.51. Tata Tea used hedging to cover exposures. Due to this, they had an exceptional profit of INR 814 crores by inter-conversion of $ and £. Of this gain they have fully realized INR 471 crores by fully converting $ reserves into £ reserves.

7.1.2 Business expansion activities

The management sees future opportunities through aggressive expansions into new categories, product portfolios and markets. Branding: Investments to increase brand appeal on global and regional levels were successful. For example, Tata Tea’s 2007-2008

“Jaago Re” campaign was a huge success with over 6,20,000 citizens registering to vote. Innovation: expansion of Himalayan water in India, launch of Tetley Iced Tea following successful market testing in Canada, launch of

Tion juice drink in India, launch of Tetley Red tea and Good earth organic coffee in the United States

7.1.3 Internal control and governance

Creation of an Executive Office based in the UK responsible for strategy building Reporting systems were redesigned to allow the Tata Tea Group to be viewed as one consolidated entity The internal audit teams of the individual companies were combined into one Group team

7.2Additional Inputs from the Corporate Governance section

Salient features include Tata Code of Conduct, Tata Business Excellence Model, Tata Code for Prevention of Insider Trading and Code of Corporate Disclosure policies

A qualified and independent audit committee was set up in compliance with the requirements of Clause 49 of the Listing Agreement with Stock Exchanges read with Section 292A of the Companies Act, 1956

Have a “Whistle blower” policy in place under which all employees have free access to the audit team to report any concern regarding unethical behaviour or fraudulent activity of any employee – safeguards provided to prevent victimization of the employee

Tata group companies (9 in number) own 35.322% shares of Tata tea – maximum ownership is held by Tata sons with a 22.78% share

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7.3Inferences from Corporate Announcements

Based on the analysis of major corporate announcements made by the board from 1 Jan 2007 to 19 Aug 2009, I observed the following which could be of interest to a potential investor in the company: Tata Tea announced it had purchased 29,38,713 fully paid equity shares of Rs 10 in Rallis India by way of inter-se (meaning between or

amongst ourselves) transfer from Tata Chemicals. The company concluded the transaction on 19 August 2009 as an ‘off market’ spot transaction at a price of INR 850 per share. Rallis is one of the several companies owned by Tata Sons. It is to be noted that on the same day, Tata Chemicals had become the single largest stakeholder in Rallis India by increasing its share to 45.20% by purchasing 35.68% (42, 75,869) shares at INR 850 piece. This means that Tata tea is now a 24.52% stakeholder in Rallis India. Therefore, in effect, cash has been transferred in exchange of equity between these three Tata Son companies and could be seen as an attempt to invest excess cash holding in one company to help the business of another sister company.

The board of Tata Tea had approved the execution of Share Subscription agreement between the company, MEMW, Foresight Holdings and promoters of MEMW for the issue and allotment of 50,99,396 equity shares of MEMW at a price of INR 140 per share on preferential basis. The board also approved the execution of Share Purchase agreement between the company, Foresight Holdings and MEMW at a price of INR 140 per equity share (01 June 2007). Share subscription agreement is an agreement to purchase a given number of shares at a specified price at a later date. Often, a down payment is required, and typically the payments are on an instalment basis. It is a legal contract that is reflected in a debit owner's equity contra account. Subscribed stock is credited as the capital is contributed [2].

Tata Tea formed a joint venture with China's Zhejiang Tea Import and Export Company to produce and sell tea beverage products. Tata Tea would own 70% of the joint venture. The cost of the project was estimated at Rs 70 crores ($17 million) and would be funded through a combination of equity and debt instruments (8 May 2007).

Tata Tea has acquired an additional 6.81% stake in Tata Coffee as per the rights and unsubscribed portion of rights in terms of the letter of offer on 4 January 2007. Post-acquisition, Tata Tea shareholding has increased to 57.48%.

7.4Some inferences from the Auditor’s Report

In general, the auditor report describes the auditing system in Tata tea to be in conformation with the established rules and regulations. Based on their observation and limited analysis of Tata tea’s record, they have accepted the reported values. However, there were two comments in the

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audit report which could be of interest for a potential investor: No tax dues which are more than six months old as at the balance sheet date – suggest a good cash flow and compliance with rules and

laws The company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities

– again suggests good loan giving practices

8. Assessment of Tata Tea by the Stock Market

8.1Market Assessment

Tata tea is listed in both the major stock markets of the country – BSE and Nifty. Being the industry leader in its domain, its shares have constantly attracted investors who want to maintain stability in the portfolio with assured year-on-year dividend returns. This can be also seen by plotting a correlation between its share’s gains/losses and the Sensex gains/losses. It was observed that both follow a similar trend in terms of gains and losses as shown in Figure 3. It is followed by the latest relevant data of Tata tea’s shares.

Figure 3

Tata Tea Ltd EquityIndustry :Tea - Indian - Large

Latest Data as on 16-Sep-2009

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Latest Equity (Rs in Crores) 61.84Latest Reserve (Rs in Crores) 1,715.62

Latest Book Value (Unit Currency) 287.43Latest EPS (Unit Currency) 26.72

Latest Market Price (Unit Currency) as on 16/Sep/2009 939.35Latest Price-earnings (P/E) Ratio 35.16

52 Week High (Unit Currency) 1,016.5552 Week Low (Unit Currency) 430.00

Market Capitalisation (Rs in Crores) 5,808.94Stock Exchange BSE

Dividend Yield % 1.86

The share shows a large variation between the 52 week high and low values. However, most of this variation has been attributed to the bearish nature of the market in general over the past few months and not to the company’s performance in general. A high P/E ratio value of 35.16 suggests that the stock is expected to show a good earnings growth in the future.

On subjecting Tata tea’s shares to Beta Analysis, it was found that the beta value for the stock relative to BSE Sensex is 0.3658 while the same value relative to NIFY is 0.3805. Now a beta value between 0 and 1 suggests low volatility. In other words, investment in Tata tea’s stock, over a period of time, is comparatively risk free. On the basis of this data, I am assessing Tata tea as a favourable investment option.

8.2My recommendation

To develop an intuitive understanding of how Tata tea’s shares have performed over the past few years, I analyzed its share prices from 1 st

April 2009 to 16th September 2009 (107 data inputs). Thereafter, I tried to analyze what were the variations in the daily, weekly, monthly and yearly returns for the stock. Histograms given in Figure 4 reflect the said analysis. These curves clearly show that these values have an approximate normal distribution – especially the weekly and monthly return values. On undergoing a descriptive statistic test for the said four distributions, the following values were estimated:

Comparisons Daily Returns Weekly Returns Monthly Returns Yearly ReturnsMean 3.355 0 -0.01 0.785

Median 1.4 0.1 0.085 0.84

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Standard Deviation 18.51 3.15 3.31 5.09Range 110.7 20.23 19.41 33.5

In the table I can see that the short term returns for the share are better than the long term returns. This can be interpreted in reference to the Sensex - Tata tea curve and beta analysis. Over a large period of time, the share closely reflects the movement of the share market. Therefore, its net gains get adjusted with the net losses in its value and the investor does not get a very good return. Therefore, I would recommend the share holder, with respect to the current market conditions, to go for short to medium term investment in the share.

Figure 4: Histograms reflecting the pattern of Daily, Weekly, Monthly and Yearly returns

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9. Overall Evaluation

An analysis of Tata Tea’s financial ratios and common-size balance sheet and profit-and-loss statements shows a significant drop in net profit and a significant increase in operating expenses. Tata Tea’s explanation for the drop in profit over the value reported for FY08 was that it had earned an exceptional income of INR 156.21 crores from the sale of its NIPD. However, I observed that though there was no exceptional income in FY07, the profits for the year was close to the profits in FY08. On this basis, I concluded that Tata Tea had probably purchased an excess of raw materials in anticipation of a large demand but was unable to ship its final product due to the worldwide recession. Another reason why the raw materials show a large expense amount was the spike in the labour and raw material prices during this period. As a result, this additional expense played a part in reducing Tata Tea’s profit.

An analysis of Tata Tea’s cash flow statement shows that, while the company has decreased its investments (and has a negative cash flow from investing activities); it has an overall outflow of cash from its financing activities. I concluded that Tata Tea has utilized most of its cash flow from investments in paying dividends to its shareholders and to fund financing operations. The overall decrease in cash flow due to operating activities can be attributed to the sale of Tata Tea’s NIPD and increase in purchase of raw materials. Since the purchase of raw materials will result in extra sales next year, I anticipate that the cash flow from operations in FY10 will be higher than the current value.

An analysis of Tata Tea’s share market returns shows good P/E ratio and EPS values. Beta value for the stock was found to be 0.3658 for BSE. This suggests that the share has a low volatility and is comparatively risk free. I analyzed daily, weekly, monthly and yearly returns for the stock for the period from 1st April to 16th September, 2009. It was found that the returns show almost a normal return, with values in close proximity to zero returns. Further, the short term returns for the share are better than the long term returns. The analysis was followed up by a detailed study of Director’s report, Auditor’s report, and the segment wise Management Discussion and Analysis from the financial report. I also looked at some of the corporate announcements that were made in the past 32 months and tried to link them with some of the results seen in the financial statement. The quality of earnings analysis showed that Tata tea has a high quality of earnings from its operations.

10.References

[1].http://www.teauction.com/industry/indiantea.asp , accessed on September 16, 2009.[2].http://www.answeINRcom/topic/stock-subscription , accessed on September 16, 2009.

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11.Appendix

Graphical comparison of Tata Tea with the overall tea industry using ratios

Profit Margin Return on Assets

Return on Capital Employed

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Current Ratio Debt-to-equity ratio

Asset TurnoverDebtor turnover

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Inventory turnoverAverage debt collection period

Interest cover

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