A new revenue stream
Business Standard — June 10, 2007

The company's water initiative, though insignificant today, could pay off in the long run given the huge potential for growth.

It tested the waters by picking up a 30-per cent stake in vitamin water player Glaceau for $670 million last year. But in less than a year Tata Tea decided to sell out because it didn't want to play second fiddle to a new multinational owner.

That doesn't mean it's mothballing ambitions to become a global player in the water segment. On the contrary, last week, the Rs4,045 crore tea and coffee maker picked up a 45.7-per cent stake in Mount Everest Mineral Water, which owns the Himalayan natural mineral water brand.

At an enterprise value of Rs470 crore, the deal appeared to be a trifle expensive because Mount Everest's sales are just about Rs25 crore. However, the value of the company, according to Percy Siganporia, managing direcor, Tata Tea, lies in an aquifer in the Himalayas, which is one of the largest, purest and perennial sources of spring water.

"The aquifer is on a 99-year-old lease from the government and barely one per cent of its potential which could be about a billion litres, has yet been tapped," says Siganporia.

Neither has the potential in the Indian market. Despite growing at 25 per cent annually for the past decade, sales of bottled water today are estimated at just about Rs1,100 crore.

The space is fragmented with nearly 200 brands, most of them regional. But experts say that with investments coming in, there is bound to be some consolidation. Even if the market doubled, however, it would not account for more than 8-9 per cent of the world market which consumed 154 billion litres in 2004. Its share of value would be even less.

That's because prices haven't risen too much over the years, as Unmesh Sharma, FMCG analyst with Macquarie Securities, points out. "It's not a bad idea to have a presence in the space because penetration is extremely low, "he says.

At 0.6 litre per person per annum, consumption is way behind that in countries like Italy where it is 183.6 litres. While the Parle group, which hawks the Bisleri brand, is understood to command a value share of of 16 per cent, multinationals Pepsi which owns the Aqua Fina brand and Coca Cola which sells the Kinley brand are estimated to have a share of 13 per cent each. Himalayan' s share is believed to be about 10 per cent.

And that's what Tata Tea will be looking to grow. The strategy, according to Pradeep Poddar, CEO, will be to start off with the institutional market, where Himalayan already has a presence.

As Yasmin Shah, who researches the FMCG space at Alchemy Securities, points out, "The firm can use its own distribution network and also tap group companies such as Indian Hotels." For the retail foray too, which will happen soon, Tata Tea will bank on its distribution strengths.

But that alone will not boost volumes. In a price sensitive market, even those that have priced their products lower than Himalayan, are not finding the going easy. Nestle has reportedly withdrawn its product, taking a Rs50-crore hit. Himalayan is priced at a premium - a 1-litre bottle retails for Rs25 compared with Rs14 for other brands. Foreign brands such as Evian and Perrier are, of course, priced far higher at between Rs80 and Rs110 a litre.

But, Poddar's confident customers will upgrade. "Aspirations are growing and we believe that customers will be willing to pay a premium for spring water," he says.

At a later stage, Poddar's looking to broaden the product range to include vitamin water, so as to straddle the entire segment.

And it's not just the home market that Tata Tea's setting its sights on; Siganporia believes there's tremendous potential overseas. That's true. Sales of bottled water in the US market alone were about $1 billion in 2006 and the market is growing. Mount Everest, may be a small brand, but for Tata Tea it's a good start.