We upgrade the stock to buy (from reduce) with an unchanged target price of R150. We ascribe 30/share to Tata Global Beverages’ (TGBL) share of Starbucks JV; we see the Starbucks JV as a successful, value-creating venture in the medium term and our valuation is based on a long-term DCF model.
The business is still in nascent stage and is a negative contributor to consolidated earnings. R9/share value ascribed to TGBL’s investments in some of the listed companies of the Tata Group; we have applied a 30% holding company discount. R11/share ascribed to the company’s ex-India core business; we have been very conservative in ascribing value to this piece.
We have ascribed a PE multiple of 8X on FY2017E EPS and have not assumed any material improvement in performance of these businesses. This leaves us with an implied residual value of R65/share for TGBL’s standalone (primarily India tea business) or an implied PE of 11X FY2017E. We find these levels fairly attractive.
The sharp recent correction has driven TGBL to levels where the attractive India tea business is finally available at reasonably inexpensive valuations (11X FY2017E EPS). We continue to see TGBL’s portfolio as a mix of some challenging (UK, Russia, other parts of Europe, China, Middle East, etc.) and a few good/exciting (India tea, Starbucks) businesses.