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You are here : IndiaNotes >> Research & Analysis >> Companies >> Tata Coffee Ltd. >> Research

Positional Call: Buy Tata Coffee for upside of 15% in 3 months

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Investment Rationale

TATA COFFEE is Asia's largest integrated coffee company, 3rd largest exporter of instant coffee & foremost specialty coffee in India. The two most commonly grown are the highly regarded Arabica, and the less sophisticated but stronger and more hardy Robusta.

Decline in output estimates of 2016-17 due to the delayed blossom, backing showers & high temperatures:

Coffee production in India is likely to be 3,16,700 tones for the crop year 2016-17, downward by 1.03% from the earlier estimate of expected output drop due to poor monsoon. When compared to the last years actual output, this years coffee production is expected to be lower by 7.05 %. The country had produced a total of 3,48,000 tones of coffee in the 2015-16 crop year (October-September). Production of Arabica is likely to drop to 96,200 tones in the current crop year from last year's 1,03,500 tones, whereas output of Robusta is estimated to drop to 2,20,500 tones against 2,44,500 tones in the given period.

In Karnataka, the production of coffee is likely to decline to 2,26,300 tones in the current year compared to 2,51,520 tones in the same period a year ago. whereas the production in Tamil Nadu is estimated at 16,560 tones compared to 17,295 tones.

Declining prices, low production, and demonetization hit prospects

Declining price, low production, and shortage of currency notes post-demonetization during the harvest season have put coffee farmers in a spot of bother. As on December 2016, price of coffee beans too declined to i130 a kg from i142 a kg during the period, fall in prices was on a par with international markets but it did not fully reflect in the Indian market owing to the fall in rupee. Production in Kerala is estimated at 63,290 tones including 52,500 tones from Wayanad, during the 2016-17 coffee season as against 69,230 tones, including 57,850 tones from Wayanad, in 2015-16, coffee production dipped more than 15 % in the district this season owing to the dearth of backup showers during monsoon. The drought-like situation in the district this year has adversely affected growth of coffee plants & it will reflect in the production of beans in coming years.

Coffee's market worst fears may be confirmed:

Coffee production in the world's biggest producer of Robusta beans, Vietnam will likely fall by nearly a third because of severe drought according to Vietnam coffee trade group. Coffee bean output will contract by up to 30% in next marketing year, mainly due to severe drought which has killed nearly 250000 acres of coffee trees.

Production of coffee beans may decline in other big Robusta-producing countries as well:

Indonesia, which is the third-largest producer of Robusta, has also been hard hit by El Nifio-related drought. Meanwhile, a long-running drought in Brazil's key Robusta-producing region is also expected to limit this season's crop and potentially increase demand for Arabica. Brazil is the second-largest producer of Robusta coffee, and the largest producer of Arabica. Fluctuations in the Brazilian currency due to a political crisis have also helped to push prices up by discouraging farmers from exporting onto global markets. Company plans to set up a state-of-art freeze dried coffee plant in Vietnam with an installed capacity of 5,000 MT per annum.

Company has made steady progress in growing its freeze dried instant coffee business, which is now about 20% of our overall instant coffee portfolio. This move is in line with the company's strategy to strengthen focus on differentiation, premiumisation and customer centricity.

Company's business is dependent on the demand and supply in the international and domestic coffee markets, this is in turn dependent on the world coffee production, stocks held by the producing countries and the economic situations prevailing in the importing countries. With its continued thrust on producing quality coffee and increasing the production of specialty coffee, company is able to increase its share in international coffee market.

There is a strong support of Rs 108.12. After that, another support is at Rs 101.74 & Rs 85.38.

If it breaks Rs 115, then it may reach to resistance of Rs 133.46, which is also our target. Further, if it will break the resistance of Rs 133.46, then may reach to 52 W/H of Rs 146.62.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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