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Domestic brokerages put 'buy' tag on Tata Tea

NetScribes/Rajiv Banerjee

The Union Budget was sweet music to Tata Tea's ears. Riding the positive sentiment that followed, domestic brokerage houses KR Choksey Shares and Securities, Anand Rathi Securities, and Dalal & Broacha Stock Broking have put a buy tag on the scrip.

This Budget, the major pluses for Tata Tea were the increase in import duty from 35 per cent to 70 per cent, and the enhanced deductions for development allowance from 20 per cent to 40 per cent.

While the import duty hike would ease the pressure of dumping by other tea producing nations like Sri Lanka, the enhanced deductions would improve the company's bottomline.

Dalal & Broacha, in its post-Budget report, has counted even the cut in dividend tax from 20 per cent to 10 per cent as a gain for FMCG companies like Tata Tea, which have high payout ratios. Based on these considerations, the Dalal & Broacha report states: "We expect Tata Tea to have a good run on the stock market for the next 12 months."

The post-Budget report by Anand Rathi Securities states: "The increase in import duty on tea and coffee would negate the effect of free import post quantitative restriction. This, and enhanced deduction in the form of increased development allowance will improve Tata Tea's earnings."

On the BSE, the scrip closed at Rs 240.15 on Monday, down Rs 20.05 from the previous close. A total of 887,725 shares were traded at the counter. The scrip, which rose 13.3 per cent on the news of the Budget sops, has been pushed downwards since by the cascading effect of the tech sector hammering. Analysts said that the downside opens up an opportunity to enter this fundamentally sound stock.

"Tata Tea, at its current market price, is trading at an estimated EPS of Rs 18.03 and a price-earnings multiple of 13, thus making it an attractive stock in the FMCG sector," said an FMCG analyst at a leading brokerage in Bombay.

Though the company's performance in the December quarter was poor, analysts expected the company to perform well in the fiscal's last quarter, as the price of tea - which was suppressed in the last quarter - is looking up again.

Milind Karmarkar, head of research at Dalal & Broacha, said that the FMCG counter has always been a defensive one, where investors are expected to be patient as far as returns are concerned.

"The FMCG counters are different from the technology counters, which see a lot of volatility. As a long-term buy, Tata Tea is a safe bet. One can expect upsides in the long term with a limited downside," said Karmarkar.

Karmarkar said that the £271-million Tetley acquisition would help unlock hidden value in Tata Tea. A special purpose vehicle called Tata Tea (GB) Ltd holds the Tetley brand.

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