Strong performance amid tough environment
In-line revenue/EBITDA; adj. PAT above est.
* Tata Consumer Products (TCP)’s consolidated revenue/EBITDA was in line with our estimates; like-for-like (adj. for Tata Chemicals’ Consumer biz and IndAS-116) revenue/EBITDA grew 6%/29% for the quarter. The strong performance was attributed to improvement across businesses, barring Tata Coffee Standalone.
* Mr Sunil D'Souza was appointed as MD & CEO w. e. f. from April; hence, the strategy formulation and its execution is expected to be monitored going forward. We maintain our estimates for FY21/FY22 and arrive at an SOTPbased TP of INR431.
Robust performance across businesses, barring Tata Coffee Standalone
* TCP reported revenue of INR24.1b (est.: INR24.5b), up 35% YoY, with EBITDA growth at 77% YoY to INR3.1b (est.: INR3b). Adj. PAT stood at INR1.9b, up 6x YoY on a very low base (est.: INR1.7b). However, like-to-like (L2L) consolidated revenue/EBITDA grew 6%/29%.
* For FY20, L2L consolidated revenue/EBITDA grew 4%/12%. TCP’s standalone L2L revenue/EBITDA increased 3%/38% to INR8.1b/INR900m, aided by 5% volume growth. In FY20, the India Branded Tea business recorded 7% volume growth. The onset of COVID-19 impacted primary sales in March; however, revenues are now gradually returning to normal.
* Revenue for Tata Chemical’s Consumer business (India Food business) grew 7% YoY (to INR5.2b), with the EBITDA margin at 13.4%. For FY20, revenue improved 12% YoY (to INR20.6b), with the EBITDA margin at 15.3%.
* Tata Coffee (TCL)’s consolidated revenue/EBITDA grew 12%/22% YoY to INR5.2b/INR771m, driven by the Overseas Coffee business’ performance. TCL’s standalone revenue declined 17% YoY (to INR1.7b), whereas EBITDA plummeted by 95% to INR7m on a 210bp decline in gross margins (to 55.2%). Revenue/EBITDA for TCL’s Overseas Coffee biz. grew 35%/54% on improvement in gross margins.
* TCP’s Overseas Tea business’ revenue/EBITDA grew 4%/36% YoY to INR5.5b/INR708m for the quarter.
Highlights from management commentary
* Tata Starbucks clocked revenue growth of 21% for FY20. It added 39 new stores during the year, taking the current store count to 185 stores across India. Q4 operations were adversely impacted due to the closure of all stores during the lockdown period. The company has now opened ~40 of its existing stores across seven cities for deliveries and takeaways.
* The new plant in Vietnam is running at 85–90% utilization levels within its first year of operation. It achieved the highest quarterly sale of ~1,050MT.
Valuation and view
* We maintain our estimates for FY21/FY22 as TCP deals in salt/tea/coffee, for which demand has not been materially impacted due to COVID-19; however, the company faced certain issues pertaining to the supply chain, which is returning to normal day by day (for India).
* Tata Group has a clear focus on leveraging its brand and participating in India’s consumption story of INR30tn, which resulted in the merger of Tata Chemicals’ Consumer business with itself.
* The merger of Tata Chemicals’ Consumer business with TCP is in line with Tata Group’s focus on creating a single FMCG-focused company. The merger offers multiple synergies, including higher outlet coverage, focused new product development, stronger cash flow generation, and scale efficiencies.
* Moreover, in the short to medium term, we believe the new CEO, Mr Sunil D'Souza would focus more on marketing under-penetrated food products such as pulses, besan (gram flour), spices, and chilla mix, aggressively leveraging the existing strong distribution network and Tata brand.
* We value the stock on an SOTP basis and arrive at a target price of INR431. Maintain Buy.
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