Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages

Financial Reporting & Analysis FI-FI755 - Project

Financial Statements Analysis of a Company Tata Global
Beverages
By: Harmandeep Singh Bhandal
Roll No. 1516020
PGPEM 2015-17.

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages

Background of the Project:

Tata Global Beverages (TGB) (as taken from www.tataglobalbeverages.com).

Tata Global Beverages focuses on branded natural beverages tea, coffee and
water. With a long history and experience in the beverages market, and a heritage of
innovation and development, the Company has evolved from a predominantly
domestic Indian tea farming entity to a marketing and brand-focussed global
organisation.
Tata Global Beverages is the 2nd largest player in branded tea in the world. It has a
strong portfolio of brands, including Tata Tea, Tetley, Jema, Vitax, Eight OClock
Coffee, Himalayan, Grand Coffee and Joekels. Around 250 million servings of our
products are consumed everyday, bringing many magical beverage moments to
consumers across the world.
Over 65% of our consolidated revenue originates from markets outside India and
more than 90% turnover is from branded products. The business has diversified and
expanded significantly over the last decade, with the Company now employing
approximately 3,000 people, and having a significant brand presence in 40 countries
worldwide.
For the purposes of this report, only the standalone financials of the company have
been evaluated.
AV Thomas & Company (AVT)
AVT is a Kochi based commodities company mainly focussing on tea. Its other
operations include spice and food products trading. After TGB, AVT is the largest
standalone tea company in India.

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages

Executive Summary

Financial figures of TGB and AVT were taken and compared for defined financial
ratios. A DuPont chart was then created and recommendations given.
The source of the data are as follows:
1. Information about the companies http://www.tataglobalbeverages.com,
http://www.avthomas.com
2. Sources of financial information Annual reports of the respective companies.

The study shows that AVT is far ahead in terms of ROE, ROTA and Fixed Asset
Turnover ratio on the asset side and has better inventory management operations.

A key reason for this is that TGB is sitting on a huge cash corpus (general reserves
& surplus) which inflate its equity and bring down the returns ratios.
The final recommendation provided has been that TGB should reduce the size of its
equity by taking its cash corpus (general reserves and surplus) and consider
investing elsewhere.

1. Revenue

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

technology for a new product. INR 23.69 Crs

provision in respect of obligations arising in

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages
The operating revenue of the company has
grown from 89% of total revenue in 2008-09
to 94% in 2014-15 basically on the account
of inclusion of more brands and higher sales
volumes across markets. 2014-15 YoY
operating revenue growth was 8% over
2013-14 to 2014-15 and the company overall
has grown by 11.3% CAGR over 2008-2014.

the subsidiary.
2011-12: Exceptional income of INR 83.12
Crs arose primarily for the profit on the sale
of non core investments.

2009-2010: INR 240.12 Crs was gained as

profit from the sale of non core trade
investments, classified as Exceptional
Corresponding other income dropped from Income.
11% to less than 5% of the total revenue. It
has declined by 16% over previous year and
has had a CAGR decline of -1%.
2867.84

Sales & Services

2682.96

2884.52
2014-15

2326.10
2012-13

Other Income

2013-14

2035.29
2011-12

2009-10

2008-09

2010-11

1697.92

1792.62

1836.84

1361.53

1524.64

2439.07

2129.38

1914.29

3039.68

Total Revenue
25%

500.00
450.00

20%

I 400.00
N 350.00
R 300.00

15%

250.00

10%

C 200.00
r 150.00
s 100.00

5%

50.00

0%

0.00
2008-09

2009-10

2010-11

2011-12

2. Proft After Tax and percentage of

revenue
The PAT margin has been varying primarily
due to the following reasons:
2014-15: Exceptional income provision of
INR 68.92 Crs as carrying value for its China
business which is a subsidiary company
under joint venture control. INR 38.24 Crs
towards diminution in its investment owing to
delays in startup and stabilization of

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

2012-13

2013-14

2014-15

Overall, the company since its change of

name from Tata Tea to Tata Global
Beverages has maintained a satisfactory
level of growth, although a large part of
the profits in some years have come from
sale of assets (exceptional income).

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages

DuPont Analysis of TGB vs AV Thomas

TGB

AVT

ROE (Post-tax)
11.6%

20.9%

ROE (Pre-tax)
13.95%

30.72%
Financial
Leverage

Impact of leverage
1.70%

0.25%

0.07
ROCE
15.01%

0.09
Cost of Debt

30.47%

6.68%

9.40%

ROTA
12.37%

21.70%

Asset Turnover
Ratio
0.83

Fixed Asset TO
1.16

19.31

Current Ratio
1.61

2.89

Profit Margin

3.26

14.9%

Current Asset TO
2.95

3.92

Inventory TO
3.13

11.03

Debtors TO

6.7%

Raw
Materials/Sales
64.9%

47.4%

Employee
Cost/Sales
5.6%

3.4%

SGA to Sales

Payable Days
30.81
28

13.39

19.4%

11.4%

30
Collection
Days
12

27

Depreciation to
Sales
0.7%

0.4%

Inventory Days

Finance Cost to
Sales

116

1.2%

33

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

0.0%

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages
An in depth financial benchmarking of Tata We can analyze this by looking at various
Global Beverages versus AV Thomas, a well asset related ratios on the next page.
known Tea company reveals the following:
1. AVT performs far better on returns
ratios namely ROE, ROCE and ROTA.
2. On the business operations side, TGB
performs better in terms of profit margin.
3. However, AVT is performing better in
terms of operations given that its
employee cost, SG&A and raw
materials as a percentage of revenue
are much lower than TGB.
4. This is surprising as per the comparison
in the below pictures.

AVT Gold Cup

INR 340 / kg

Tata Tea Gold

INR 428 /kg

So, while TGB tends to operate on larger

volumes and has higher percentage costs
in terms of employee, raw materials,
SG&A etc, it still manages to get a higher
profit (EBIT) margin as compared to AVT.
TGB had an EBIT margin of 15% in 201415 as compared to 7% for AVT.
Ofcourse, the provisions made by TGB in
its Exceptional Income as provided

Tata Tea Agni

INR 212/kg

AVT Darbari
INR 295 / kg

5. TGB being a much larger company, on the previous page would have made for
ofcourse is able to command a lower a higher returns of equity as well.
rate of interest which is shown by its
lowered cost of debt.
6. However, TGB is still giving a higher
interest cost, which is understood given
it is still paying off the acquisition of
Tetley
and
other
international
acquisitions.
7. A important aspect to note is that TGB
spends a much higher percentage of its
revenue on marketing and distribution
activities (19% as compared 11% for
AVT).
8. So, while TGBs products are slightly
premium
priced,
the
increased
expenditure towards marketing and
distribution tends to result in higher
volumes, higher profitability but lower
return on equity.

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages
Asset Turnover Ratio
TGBs Asset turnover ratio is 0.83 while AVT
is 3.26. Clearly, AVT comes with a lower
asset base earning higher revenue.

that TGB is able to extract its cash from

distributors/retailers much more efficiently.

Fixed Asset Turnover Ratio

TGBs fixed asset turnover ratio is far lower
at 1.16 as compared to AVTs 19.31. This
clearly shows the efficiency with which
assets of AVT are being utilized as
compared to TGB.

Current Asset Turnover Ratio

TGB stands at 2.95 while AVT stands at
3.92.

Inventory Turnover Ratio

With TGB standing at 3.13 while AVT at
11.03, it clearly shows that TGB is
maintaining a much slower renewal of its
inventory.

Days of Inventory
TGB is far from ideal for a brand company. It
maintained 116 days of inventory versus
AVTs 33 days.

Current Ratio
Both TGB and AVT are healthy here, with
TGBs current ratio being 1.61 and AVT
being 2.89.
TGBs lower current ratio calls for evaluating
its working capital management. We have
already seen that its inventory days are far
higher than satisfactory.
TGBs Payable days are slightly lower than
AVT (TGB being 28 days while AVT being 30
days).

Debtors Turnover Ratio

This is one area where TGB clearly stands
out. Being a bigger brand, it is suspected

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

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Financial Reporting & Analysis FI-FI755 - Project Financial Statements

Analysis of a Company Tata Global Beverages
We will now tweak a few
aspects of TGBs annual
numbers to see what
effect they have on its
Return on Equity.

Z Score:
TGB

1. Inventory On
tweaking
inventory
carrying days to
30 days, we see
a considerable
reduction in
inventory cost
and related
lowering of
interest costs as
well.

1.20
1.40
3.30
0.60
1.00
Total

AVT

0.11
0.67
0.12
11.25
0.79

0.54
0.70
0.22
85.97
0.18

TGB
0.13
0.93
0.41
6.75
0.79
9.01

AVT
0.65
0.98
0.72
51.58
0.18
54.11

The Z Score of the two companies shows the same story as

DuPont analysis.

This increases the inventory turnover

ratio drastically.

Coming to the business aspects, TGB should

reduce the following cost headers:
4. Raw material cost TGB stands at
65% as compared AVT at 47%.

2. Changing the long term debt and

corresponding assets, though
improve the ratios, they do not have a
substantial impact.

5. SG&A Cost TGB stands at 19%

compared to AVT at 11%.

AVTs return on equity still remains higher

than TGB.
.
A reason for this is that TGB is sitting on a
huge cash pile of INR 2,438 Crs (80% of its
annual revenues) as compared to AVT INR
139 Crs (21% of its annual revenues).
Ideally, TGB should reduce its General
Reserve to invest into other businesses. This
will reduce its equity and automatically
increase its ROE.
3. Reducing the General Reserves by
INR 1200 Crs jumps up the ROE (Pre
Tax) from 13.95% to 30.31%, which
is comparable to AVT.

Submitted by: Harmandeep Singh Bhandal

Roll No.: 1516020

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