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Tata Consumer Products Ltd>
  • CMP : 802.9 Chg : 10.25 (1.29%)
  • Target : 950.0 (22.90%)
  • Target Period : 12 Month

13 Aug 2022

Innovations, premiumisation to aid sales, margin…

About The Stock

Tata Consumer Products (TCPL) is one of the major FMCG companies present in tea, coffee & other beverages in India, UK, US, Canada & some other geographies. In India, it also has salt, pulses, spices & other foods products. Its subsidiary NourishCo is present in packaged water & other beverages. The company is in a JV with Starbucks, which has 275 stores in India.

  • The company has 2000+ distribution directly reaching to 1.3 million outlets in India, which will be increased to 1.5 million outlets by March 2023
  • TCPL also increased its rural/ semi urban distributors 4x to 8000+ after the consolidation of consumer business
Q1FY23 Results

TCPL posted solid results with 10.6% sales growth on high base.

  • Sales were up 10.6% YoY aided by 18.8% growth in foods business
  • EBITDA was at Rs 457.3 crore, up 14.5% YoY, with margins at 13.7%
  • Consequent PAT was at Rs 276.7 crore (up 38.2% YoY)
What should Investors do?

TCPL’s share price has moved up 4.7x in the last five years (from Rs 164 in August 2017 to 773 in August 2022).

  • We continue to remain positive on TCPL’s strategy of driving premium trend in foods business & foray in large opportunity size categories
  • We maintain our BUY rating on the stock
Target Price and Valuation

We value the stock at Rs 950 on ascribing 55x FY24 earnings multiple

Key triggers for future price performance
  • Tea business margins have fully recovered & focus would shift to growing volumes. Similarly, inflation headwinds in salt are expected to subside, which would recoup margins as well as volumes in the business
  • Strong innovation & premiumisation strategy in salt, tea, Sampann, Soulful & Tata Q in India market expected to drive margins. Newer categories like pulses, spices, dry fruits & Soulful to drive volume growth
  • Starbucks is witnessing strong growth with significant improvement in operating margins. Likely to drive profitability
Alternate Stock Idea

We also like Dabur in our FMCG coverage.

  • Significant shift in consumption towards healthier, natural & Ayurveda based products & aggressively foray in many big categories would be driving growth for Dabur
  • Value the business at 55x FY24 earnings. BUY with a TP of Rs 700

Key Financial Summary

Key Financials FY20 FY21 FY22 5 Year CAGR % (FY17 - FY22) FY23E FY24E (Blank) CAGR % (FY22-24E)
Net Sales 9,637.4 11,602.0 12,425.4 12.9 13,956.8 15,393.2 - 11.3
EBITDA 1,292.2 1,543.8 1,718.8 16.8 2,035.2 2,376.8 - 17.6
EBITDA Margin % 13.4 13.3 13.8 - 14.6 15.4 - -
Adjusted Net Profit 641.8 932.6 1,015.2 17.4 1,335.8 1,600.5 - 25.6
EPS (Rs) 5.0 10.1 11.0 8.9 14.5 17.4 - 25.6
P/E 154.9 76.6 70.2 - 53.3 44.5 - -
RoNW % 4.6 6.4 7.0 - 8.5 9.8 - -
RoCE (%) 6.9 8.0 8.4 - 9.8 11.2 - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

Q1FY23 Results: Foray in newer category & innovations to drive revenues

  • TCPL witnessed revenue growth of 10.6% to Rs 3326.8 crore led by strong growth in India foods & International consumer business
  • India beverage business (Tea & NourishCo) sales grew 3.3% led by 1% volume growth & 2.3% price hikes. Within India beverage business, tea segment saw 4% sales decline and 1% volume growth. The sluggish growth in the segment is mainly due to high base (24% growth led by volume & prices). India coffee branded sales grew 73% led by 43% volume growth on a low base (relatively new business). Tea business margins improved significantly mainly on account of benign tea procurement prices
  • The company has taken price cuts in tea given tea procurement prices have remained benign in 2021-22. In new season (2022-23), there was a small blip in June-July due to floods in Assam but prices have stabilised since then
  • Within India beverage, NourishCo (100% subsidy) saw strong 110% sales growth to Rs 183 crore. On a three-year CAGR basis, the business grew 38%. Himalayan & Tata Water Plus grew by 246% & 191%, respectively. The growth in the segment was led by extreme summer and new launches. Despite high commodity inflation, business margins expanded on account of high operating leverage
  • India foods business saw growth of 18.8% led by 22% price increase & 3% volume dip. Salt business grew 20% despite high base mainly led by price hikes. The volume dip in the segment is mainly due to high base of 17% growth. The premium salt portfolio grew by 36% during the quarter. The margin remained under pressure due to high energy & grinding related costs. The salt margin dipped 500 bps
  • Tata Sampann portfolio grew mere 6% on the back of trade terms & margin rationalisation across channels. It is important to note that 25% of the pulses & 40% of spices sales contributed by online channel. The company also pulled back spices sales due to re-launch. On a three-year CAGR basis, Sampann brand growth is 30%. Tata Sampann dry fruits scaling up well at e-commerce platform. The company is expanding the products to select offline retailers
  • International business sales grew 8.9% on the back of 20% growth in US coffee (3% volume de-growth), 2% growth in International tea (2% volume de-growth). The growth was largely led by price hikes in tea & coffee business in respective geographies
  • Eight O Clock (EOC) K-cups & bags saw market share gains driven by distribution expansion. UK brand ‘Teapigs’ grew 16% led by strong performance in out of home, exports & grocery channels. Canada business saw revenue growth of 14% led by volumes as well as pricing. Speciality tea sales grew 8%. Tetley brand holds market share of 27.3%
  • Tata Coffee (plantation & extraction) sales grew 25% led by 8% volume growth & 17% price hike. Extraction business grew 26% driven by India & Vietnam businesses. Operating profit (EBIT) grew significantly led by higher coffee realisation in both plantation & extraction
  • In Starbucks JV, the company opened seven new stores and entered four new cities. The store count is at 275 in 30 cities. Revenue grew 238% on a relatively low base quarter, which was adversely impacted by Covid-19 second wave. The Starbucks business is EBITDA positive in Q1
  • On a three-year CAGR basis, India beverage, India foods & International business grew by 13.2%, 19.1% & 3.5% respectively. Similarly, unbranded business saw 13.1%, three-year CAGR growth
  • Despite high inflation in salt business, gross margin expanded by 186 bps on account of benign tea prices. The company increased its marketing spends by 194 bps (33% jump in spend) to support new launches. Overhead spends were up 78 bps due to lower spend in Covid impacted base quarter. Employee spends were down 48 bps. Operating profit grew 14.5% to Rs 457.3 crore with operating margin expansion of 47 bps to 13.7%
  • The company reported a slight profit from associates of Rs 20 lakh against a loss of Rs 40.4 crore on account of profitability in Starbucks. This along with higher operating profit resulted in net profit growth of 38.2% to Rs 276.7 crore
  • TCPL direct distribution reach is 1.3 million outlets, which is likely to increase to 1.5 million outlets by March 2023. Wholesale outlet direct coverage increased by 2x. Modern trade channel sales grew 35%. E-commerce sales grew at a CAGR of 73% in last two years and contributes 8.2% to the sales
  • The company increased advertisement spends by 48% in India packaged beverage. It gained market share by 40 bps in tea. In India foods business, the company rolled out ‘Tata Salt Immuno’ nationally after pilot launch last year. The company gained market share by 400 bps in salt business. Market share in salt has grown from 30% to 38% in last three years (at the time of merger of consumer business)
  • The company has launched Cold Coffee liquid under Tata Coffee, Tata ORS+, Tetley Cold brew. TCPL forayed in Masala Oats category under Tata Soiulful brand. It extended Himalayan brand in Honey, Jams & Preserves. All these products are sourced through Himalayan region. TCPL also forayed into Protein category with the launch of plant based meat segment. The opportunity size in the category is Rs 2800-4000 crore
  • Newer businesses/categories/brands like NourisCo, Sampann, Soulful & Tata Q has grown by 53% during the quarter
  • The company is looking to grow volumes from larger categories of pulses & spices. Pulses category size is Rs 1.55 lakh crore and spices category size is Rs 66,000 crore. The company is aiming to clock high single to low double digit margin in these categories
  • After the acquisition of Soulful, the company has expanded its direct distribution reach from 15000 stores to 4.0 lakh stores. The direct reach of Sampann would also be similar

Tata Consumer continues to report a strong set of numbers driven by price hikes in India food & international businesses. Further, benign tea prices continue to result in gross margins expansion, which gives TCPL leeway to increase its ad-spend behind new brands & categories. The newer products like Tata Sampann, Tata Soulful, Tata Q, NourishCo brands & new launches under Himalayan brand saw YoY growth of 53% during the quarter. We believe newer products would drive the volume growth for the company in the longer run. Moreover, leveraging existing brands for extensions in high opportunity size categories & premiumisation play in saturated categories like Salt & Tea would result in margin improvement going forwards. We believe expansion of Starbucks stores would also aid profitability in future. We remain positive on Tata Consumer on growth outlook & margin expansion possibility. We maintain our BUY recommendation on the stock with a revised target price of Rs 950/share (earlier Rs 910/share).

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