Morgan: UW on TGBL on cyclical headwinds

Updated: Jul 4 2014, 14:15pm hrs
Nestle and Green Mountain (GMCR) have announced a multi-year agreement to sell branded Coffee-Mate K-Cups for GMCRs Keurig system.

Interestingly, nearly of the Keurig users already cream their coffee with Coffee-Mate and who we believe can be potential first-movers into Nestles product. This is a clear negative for Tata Global Beverages' (TGBL) subsidiary Eight OClock Coffee (EOC). In F14, EOC contributed 23% to consolidated Ebitda.

According to IRI data, EOCs exit market share has fallen by over 5 ppt in whole bean coffee over the last two years. During this time, whole bean coffee has been the worst-performing coffee segment in the US as the single serve category is rapidly gaining share. EOC, the second largest player in whole bean segment, has also now become one of the top six players in the Keurig business (arrangement with GMCR). However, with Nestles entry, we think EOC will likely find it difficult to maintain revenue growth and profitability trends hereon.

Nestle and GMCR will launch the (first ever) 2-in-1 K-Cup packs, which combine roast and ground coffee with branded creamer, in two flavours (original, French vanilla) in fall 2014 on Keurigs website, and in multi-channel stores nationwide from spring 2015. We remain UW on TGBL. With cyclical tailwinds turning into headwinds, earnings growth in F15e is likely to stay muted.

Morgan Stanley