Tata Consumer Products Ltd - Stock Valuation and Financial Performance

Sustained performance with most segments reporting healthy growth. Tata Sampann, Tata Soulful and NourishCo collectively grew 58% YoY in Q1FY24.

TATA Consumer reported a consolidated revenue growth of 14% to 3619Cr and a consolidated EBITDA margin of 14.3% to 518Cr.The India Beverages business grew by 8%, while India Foods continued its strong trajectory with an 8% increase in volumes. The Salt business margin almost reached the normative range. International business recorded 11% revenue growth (1% ex acquisitions in constant currency) with EBITDA in line with last year. During the year, consolidated revenue grew by 11% to 13,783Cr, led by India Foods with 26% growth and International business with 8% growth primarily due to price increases. Consolidated EBITDA margin of 13.6% to 1874Cr.

Muted results on account of steep inflation in input price and rural demand Slowdown. Revenue growth number are below than our expectation.

Tata Consumer Products | Market Capitalization Rs 60,187 Cr

CMP 653 | P/E ratio 45x FY23

Recommendation | Sell partially

Quick Takeaway 

Results: Tata Consumer Products (TataCP) reported revenue growth of 26% over previous year. Operating profit decline 3% over same period. 

High growth in sales was backed with value as well as volume growth in branded business. Margins were lower due to i) high advertisement spends, ii) higher raw material costs iii) losses in Starbucks. 

MoneyWorks4me Opinion: TataCP’s prospects are improving as it enters foods business through Tata Salt and Tata Sampann brands. Still the large portion of sales comes from low margin and slow growing beverages business; since the market is well penetrated, the major growth engine would be Foods. We find stake in Starbucks JV very lucrative albeit impact on overall growth remains limited.

We find that at Rs. 653/share today, it already factors high growth rate in future. Tata Coffee, a subsidiary of TataCP is an asset intensive and slow growing forms 20% of sales. It trades market at 1.3x Price to Sales versus TataCP at 4.8x sales. So effectively TataCP trades at 45x P/E ratio (exl. Minority profit*) on FY23 profits.

We believe these valuations are stretched for slow growing beverage segment. We recommend selling 30-50% of your holdings in TataCP. We will recommend Sell after seeing if there are any positive surprises from margin expansion or new product introduction.

Tata Consumer Products Ltd | Market Cap: Rs. 47,717 Cr

CMP Rs. 517 | EV/Ebitda 32x

Recommendation | Sell Half

Results: Tata Consumer Products (TataCP)reported a year on year growth of 13% in sales to 2,714 Cr in Q1FY21. Operating profit grew by 37% year on year to 486 Cr.

Click here for 10 year X-ray

Key highlights: 

• India Beverages segment grew by 11%, Branded tea business grew by 8% in value and 4% in volume terms.
• International Beverages, excluding foodservice, grew by 23% in value; volume growth of 27% in Coffee and 4% in Tea. This forms 34% of overall sales.
• India Foods grew by 19% in value and 8% in volume terms.
• TataCPcompleted the acquisition of the entire stake of PepsiCo in NourishCo in May’20.

Outlook: As per the management of TataCP, the company witnessed volume growth across all categories of its business. In April there were hiccups but May and June have seen double digit growth. Rural is witnessing higher growth than urban due to shift of migrants, govt. stimulus and good monsoon.

The product pricing has increased due to change in product mix to premium offerings by the company. The company will not be cutting prices to gain market share but will go in for a profitable growth. Focus will be preferably on urban and then the rural distribution system and the direct distribution reach will be doubled in the next few months.  

MoneyWorks4me Opinion: TataCP’s prospects are improving as it enters foods business through Tata Salt and Tata Sampann brands. Still the large portion of sales comes from low margin and slow growing beverages business; since the market is well penetrated, the major growth engine would be Foods. We find stake in Starbucks JV very lucrative albeit impact on overall growth remains limited.

We find that at Rs. 517/share today, the price already factors high growth rate in future. Tata Coffee, a subsidiary of TCC is an asset intensive and slow growing forms 20% of sales. It trades market at 1.3x Price to Sales versus TataCPat 4.8x sales. So effectively TataCPtrades at more than 32x EVEBITDA and 45x P/E ratio (exl. Minority profit*) assuming improved margins in next 1year. This is due to current favourable prospects of all foods FMCG incl. Britannia.

We recommend selling 30-50% of your holdings in TataCP. We will recommend Sell after seeing if there are any positive surprises from margin expansion or new product introduction.

*Minority Profit – Tata Coffee is a subsidiary with 57% stake. Not entire profit of Tata Coffee belongs to TataCP, however accounting standard recommend to include 100% profit of Tata Coffee in Operating Profit. We have to reduce Minority (43% stakeholders) profit to arrive at TataCP’s share of profit.

MoneyWorks4me’s employees may be invested in the securities mentioned in the above mail/report/article. For a detailed disclosure click here.

About the Industry: - Tea is one of the oldest beverages in India with a penetration level of more than 90%. The size of the tea market in India is estimated at ~INR250b (~USD3.5b). The branded tea category (i.e. sold in packages) represents ~65% of the total market. The share of branded tea has increased over the years (~3% in the past four years) due to increase in the availability, quality factors and awareness. Tata Tea and Hindustan Unilever are the two largest branded tea players in India with a ~45% value share in the branded tea market, broadly split equally between the two. But, the tail of competition is long, including brands like Wagh Bakri, Girnar, Society, Eveready, Duncan’s, Marvel, etc. India is primarily a black tea market, but the wellness/green tea market is growing relatively fast.

About the Company: -Tata Global Beverages (TGB) is a natural beverages company with interest in tea, coffee and water. It is the second largest branded tea player globally with operations spanning over 40 countries. Branded products represent ~90% of its consolidated sales, of this, tea accounts for ~80%.

Tata Tea is amongst the oldest branded tea players in India, in existence for more than 30 years. Besides HUL, it is the only brand with national reach. Tata Tea currently has eight brands, five national and three regional. The regional brands target local taste and flavor. It is present across price-points — various brands cater to a broad range of consumers — from the mass market to the premium segment.

Tata Tea reaches over ~1.9-2m outlets, having grown at CAGR of ~4% over the past decade; it is amongst the largest in the beverage category in India. It has ~20% value market share in the branded tea category in India, which it has maintained over the last decade. Tata Tea has been rated as the second most trusted hot beverage brand in India.

New growth avenues: TGB entered into JV with Starbucks and started its operations in India in 2012. This venture comprises ~15% of the overall revenue of TGB. The opportunity for growth in the premium coffee segment in India is huge. After witnessing some slowdown in FY16-17; Starbucks focus is now back on growth; it added 25 stores in FY18 and 30 stores in FY19. The sale per store stood at 3.3 crore in FY19.

Recent development: - TGB is primarily into beverages; however, post-merger with Tata Chemical’s consumer business, the company will enter the staples segment. Tata Salt and Tata Sampaan are the key brands it will add to its portfolio. The company introduced the premium Tetley Super Green tea range in early- 2018, roping in popular actress, Deepika Padukone, as the brand ambassador. It has also launched a pilot project in the ‘out-of-home’ retail tea format – Tata Cha. The first store was launched in 3QFY18 in Bengaluru; currently 6 stores are operational with the company targeting to add another 6 stores by end-FY20. Launched ready-to-drink beverage — Tata Tea Fruski, a combination of green tea with ayurvedic ingredients and available in mango and orange flavors. Launched Chakra Gold tea in Elaichi flavor targeted at consumers in Tamil Nadu and Andhra Pradesh.

TGB is part of the diversified Tata Group; Tata Sons, the group’s holding company, is the single major shareholder (and promoter) in TGB with ~34% stake. With the appointment of Mr. N. Chandrasekaran as the Chairman of Tata Sons, there is renewed focus on RoCE. Also, simplification and consolidation of Tata group companies is on the radar – evident by the merger of Tata Chemicals’ (TTCH) consumer business with TGB.

Results: TGB reported a year on year increase of 4% in sales and 41% jump in operating profit in Q2FY20.

Key highlights:

• Domestic business was 61% of the overall revenue & International stood at 39%.
• Domestic tea posted a revenue growth of 7.9% and was again entirely volume- led.
• Within International Tea, both UK and Canada posted volume growth of 2% but underlying revenue was down 2% since UK growth was led by discount channel.

Outlook:  We believe that TGB operates in a perfect competition market (19% market share) where no player enjoys any major advantage over other player as they operate in fragmented manner. But because it is an asset light model, the company earns very high return on capital employed. In such markets, the brand recall plays a vital role which can be achieved by aggressive marketing. TGB spends 8% of its revenue on marketing which appears high compared to 4% by Britannia and 6% by Nestle, although not exact competitors but food products companies.

TGB prospects are likely to improve as it ventures into diversified FMCG company with Tata Chemical’s Tata Salt and Tata Sampann brands. In beverages, since the market is well penetrated, the major growth engine would be shifting of consumers to premium segments. We find stake in Starbucks JV very lucrative albeit impact on overall growth remains limited. We do not find margin of safety at current price as its already factoring high than expected growth rate in future.

Source- Investor Presentation of Company, Ace Equity