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BW Businessworld

Arabican Nights And Other Tales

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A lot can happen over coffee.  If the Arabian crisis took an expected toll on the most-traded commodity in the world, oil, the ‘Arabican' crisis, with bad weather affecting coffee crops in South America and with leading coffee producers Brazil and Vietnam reportedly hoarding stocks, impacted the second-most traded commodity — coffee.

Not everyone is complaining, though. As coffee prices hovered at 13-year highs, so have stock prices. Tata Coffee has seen its stock price nearly double in the past one month. The counter touched a 52-week high at Rs 1,075 on 21 March, while this month's low in intraday trade was Rs 557. In March 2011, the share price of Tata Coffee had shot up 93 per cent between the low and high prices. On 25 March, the day this story was put together, the closing price of the stock was Rs 907.40 — 58.3 per cent higher than the closing price on 1 March.

The trading volumes on the counter jumped almost eight-fold on some days. Large institutional investors and high networth individuals (HNIs) were accumulating the shares, forcing the price to move up sharply despite weak market conditions. There were reports that Sharad Kantilal Shah, one of the top traders in the domestic market, has raised his holding in the company to 12.9 per cent and became the second largest shareholder. Tata Global Beverages, formerly Tata Tea, is the largest shareholder in Tata Coffee, with a 57.48 per cent stake.

To be sure, Tata Coffee is not a large producer of Arabica coffee beans. Arabica, the costlier variety of coffee beans, grows in higher altitudes and needs a shade cover and makes up 75 per cent of the world's coffee production. For Tata Coffee, the production is just the opposite of the global average. About 23 per cent of the company's annual output of 9,456 tonne of coffee beans is made up of Arabica beans, according to its annual report of 2009-10, and a little more than 77 per cent of Tata Coffee's production comes from the Robusta variety, a bean that is more resistant to extreme weather conditions, but is less expensive.

So what explains the rise in Tata Coffee's stock price? Typically, when Arabica prices are on an ascent, roasters try to replace Arabica beans with the cheaper Robustas to an extent where it does not alter the taste of the blend. This helps in shoring up profits, while not altering the taste of the cup. Analysts claim that this trend could be helping Tata Coffee in some ways.

One look at the Indian export volumes suggests that coffee exports are on the rise. Data from the International Coffee Organization indicates that Indian coffee exports have increased by 95 per cent in January 2011 compared to the same month last year. While that might seem like a more than healthy growth rate, in the same period exports of the Robusta variety have been outstripping even that with a growth rate in exports of 117 per cent. With coffee prices not showing signs of climbing down anytime soon, and with coffee retail majors such as Starbucks having issued warnings that profitability could be hurt, Tata Coffee could be closely watching its bean counter. Rather, its coffee bean counter.

(This story was published in Businessworld Issue Dated 04-04-2011)