tata coffee: not much to take out

Tata Coffee's market value increased from Rs.5,074 m (high) in 2006 to Rs.23,533 m in 2016. It was as low as Rs.3,117 m in 2006. One would have earned 16.58% or 22.4% depending upon when one bought it, and if one had bought it. Not bad. 

Nevertheless, in 2016 the investor would have made 3.23% based upon the high price and 29.11% based upon the low price in 2011. The disparity is because of the double whammy presented by the market itself: a high PE of 27.67 and a low PE of 9.04 for the stock in 2011. 

In the last five years, revenues increased by 6.28%, yet earnings per share increased by 10.18% helped by other income and exceptional items. The average operating margin has been approximately 14%.

The return on capital has remained low, and was 9.1% in 2016. The company's annual average spend on reinvestment was Rs.278 m in the last five years. 

The alarming part though is that Tata Coffee's incremental return on capital has deteriorated. 

For any business to be successful, the key is to have the ability to generate a very high rate of return on its incremental capital. Unfortunately for Tata Coffee, the historical return on capital is already low, and its incremental return on capital is worse. 

With 19 coffee estates measuring 18,273 acres, instant coffee capacity of 8,400 MT; 7 tea estates measuring 6067 acres; and pepper vines, I need to estimate the growth rate, which if I use what I reckon is reasonable takes the value of Tata Coffee to a very low number. It's a struggle to find the growth rate.

The company has identified volatility in the international coffee prices, currency rate movements, high, price-sensitive competition, and dependency on nature as key risks involved in the business.

It has Rs.11,344 m of goodwill on the balance sheet; its subsidiary, Consolidated Coffee Inc. earned Rs.804 m of which, Rs.402 m was attributable to Tata Coffee. Consolidated Coffee owns Eight O' Clock Coffee Company.

The good news is that there has not been any dilution to equity. However, Tata Coffee should strive to have the ability to take sufficient cash out compared to what it has put in its operations. Can the company pull it off?