Good Show Expected - Bengal Tea & Fabrics

It pays to have a diversified business in volatile times like these, as it helps to de-risk against business cycles and volatility. Bengal Tea & Fabrics (BTF) is one such company whose business is spread into two different areas, tea and fabrics. This diversification has helped its stock hold on to its price in a much better manner by declining only 10 per cent against the BSE Small-cap Index, that plunged by 18 per cent since reaching its pick in early November. The other factor in favour of the company to override the volatility of the stock is its good dividend yield which works out 2.6 per cent.

In FY10, the company earned one-fifth of its revenues from tea while the remaining four-fifth came from the fabric division. The revenue mix has remained almost the same over the past two years. Under fabrics, BTF is present in yarns and cloth. Its textile mill at Ahmedabad has an installed capacity of 50224 spindles and 692 looms. For FY10, the company sold 134.5 lakh meter (14.92 per cent increase on yearly basis) of cloth and 42.76 lakh kg of yarn (16.46 per cent increase on yearly basis). Average realisations were up 6.47 and 7.11 per cent in cloth and yarn respectively compared to FY09. The trend is likely to continue this year too, but this might not really help the company to improve its margins as cotton prices have also shot up in the same period. In tea, BTF owns three estates (Ananda Tea Estate, Pathalipam Tea Estate, and Bordeobam Tea Estate) with an annual production of about 1.6 million kg of tea. Situated in North Lakhimpur in Upper Assam, the planted area of these estates put together is around 626 hectares. For FY10, the tea business witnessed a 25 per cent jump in sales value backed by a substantial increase in average realisation per kg. The same was up 22.53 per cent. Going forward, tea prices are expected to remain firm in 2011 as global tea deficit may reach as much as 130 million kg by April 2011. Average prices in Assam are also expected to see an upward movement of 20 per cent in the next one quarter, helping the company to post better results and increasing the share of the tea segment in the company’s overall revenue.

The last quarter results show that the tea segment improved its share from 20 per cent at the end of FY10 to 24 per cent at Q2FY11. For the second quarter ending September, revenue of BTF increased by 31 per cent on a yearly basis to Rs 50.46 crore. In the same time, profit of the company increased by 52 per cent to Rs 5.53 crore. This is far above the last five-year CAGR of 10 per cent and 41 per cent in topline and bottomline respectively. This shows the acceleration in the performance of the company. In addition to a better financial performance, the stock is available at very attractive valuation 3.1 times of its annualized earning of H1FY11. Even on the basis of EV/EBITDA, it is trading less than five times and at a market cap to sales of 0.3 times. Looking at the improving financials and attractive valuation we recommend investing in the stock with an expected price appreciation of 15-20 per cent in next one year.