TATA CONSUMER SEES STRONG REVENUE GROWTH BUT MISSES ESTIMATE ON OPERATING PROFIT FRONT

News:

·         Revenue witnessed growth of 10.9% to Rs 3363.1 crore (Idirect estimate: Rs 3384.0 crore) led by 29% growth in India foods business, 39% constant currency growth in Tata coffee & 16% constant currency growth in US coffee business. India beverage business de-grew by 2% largely on the back of lower tea prices & dismal volumes. International tea business also saw flat revenue on constant currency basis. Volume de-grew in low single digit across businesses during the quarter

·         The 29% sales growth in India foods business was entirely contributed by prices given very high inflation in salt prices due to high energy costs. India tea business witnessed 7% revenue decline with 6% cut in prices & 1% volume dip. The company lost market share by 20 bps in India tea business

·         NorishCo continue its growth momentum with 64% sales growth on a relatively low base. Tata coffee plantation & extraction business witnessed 39% growth led by higher coffee & pepper prices. Moreover, extraction business capacity utilisation was at its peak in Vietnam & India

·         Gross margins contracted by 101 bps with waning benefits of lower tea prices & extremely high inflation in salt. Employee & Marketing spends were down by 29 bps & 54 bps respectively. However, overhead spends were up by 54 bps. Operating profit grew by 5% to Rs 433.8 crore (Idirect estimate : Rs 485.0 crore) with operating margin contraction of 73 bps to 12.9%

·         Net profit grew by 36.3% to Rs 389.4 crore mainly on account of exceptional income of Rs 111.2 crore relating to the sales of property. Adjusting for exceptional income, Net profit grew by 3.2% to Rs 307.5 crore (Idirect estimate : Rs 359.3 crore). Profit from associates grew by 41.1% on account of higher income from tea plantation associate company & strong performance from Starbucks JV

·         Starbucks JV saw strong 57% growth during the quarter with continued profit at EBIT level. The company opened 25 stores in Q2 taking the total number of stores to 300 in 36 cities

View:

Tata Consumer remain our top pick in the sector given strong growth opportunity in foods & beverage business & its aggressive strategy of foraying, acquiring newer large opportunity size categories. We believe the company would be able to tap the opportunity in categories like Pulses, Spices, Dry fruits, RTE & beverages. These categories are dominated by unorganised sector or local brands. Though current quarter has seen margin contraction due to high inflation in salt, we believe these headwinds are temporary. With the softening of commodity prices, we believe margins would perk up in medium term. We remain positive on growth prospects given possibility of leveraging Tata brands in multiple newer categories.

Impact:

Neutral.