Downgrade Tata Global to underweight on Starbucks JV
Even as TGBL stands to benefit from a cyclical uptrend in its international business, we fail to see any sustainable structural improvements in the tea business and see limited upside in the US coffee business. The stock has doubled year-to-date and outperformed the Sensex by nearly 80% over the same period. It now trades at 21.8x our revised FY14e (versus 17x last five-year average one-year forward multiple). In our view, TGBL’s relative outperformance to the Sensex was driven largely by TGBL’s JVs with Starbucks and Pepsi, the change in management, and earnings rebound from trough levels in FY12.
Although we view the management change and the JVs as incrementally positive, the contribution from these JVs to earnings will be limited, in our view. In addition, there is lack of visibility in the international business for TGBL, and the international business remains vulnerable to input cost pressures. To that extent, the stock move seems exaggerated to us, and we will use this opportunity to book profits in TGBL.
TGBL reported strong Q2FY13 results, delivering adjusted net profit
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