India S/A business drives overall EBITDA performance
* Tata Consumer Products’ (TCP) 1QFY21 results were robust (ahead of expectations), mainly led by improvement in standalone (S/A) performance. S/A EBITDA grew 40% YoY due to better realizations, favorable commodity costs and lower discretionary expenditure. Strong operating performance was witnessed across businesses (barring Tata Coffee S/A).
* Factoring in the better-than-expected performance and margin expansion in India Food and Beverage (F&B) segment, we have increased our earnings estimates for FY21/FY22E by 30%/22% to arrive at an SOTP-based TP of INR560/share. Maintain Buy.
Gross Margin expansion drives EBITDA margin
* Revenues were up 13% YoY to INR27.1b (v/s est. INR25.3b). EBITDA grew 38% YoY to INR4.8b (v/s est. INR3.8b). Note that base quarter performance includes India Food business numbers (erstwhile Tata Chemicals’ consumer business). EBITDA margin expanded 310bp YoY to 17.8% due to 180bp expansion in gross margin, lower ad spends and operating leverage. Adj. PAT rose 45% YoY to INR2.6b. The higher growth was due to margin expansion and lower tax rate of 22.1% (v/s 34.1% last year).
* India branded beverages/foods revenue grew 11%/19% YoY to INR10b/INR5.9b. Segment EBIT increased 56%/54% YoY to INR2.2b/INR1.1b. India branded beverages/foods volume grew 4%/8%. International branded beverages witnessed revenue growth of 15% to INR8.7b with EBIT growth of 58% YoY to INR1.3b.
* S/A revenues grew 10% YoY to INR16.1b. EBITDA was up 40% YoY to INR3.3b. Adj. PAT rose 56% YoY to INR2.5b. The higher growth in Adj. PAT was due to margin expansion and the lower tax rate. The consol. performance was driven by S/A and TCL’s coffee sales in the US.
* Tata Coffee’s (TCL) consolidated revenue/EBITDA grew 26%/40% YoY to INR5.9b/INR1.1b, driven by the overseas coffee business’ performance. TCL’s standalone revenue declined 12% YoY (to INR1.8b), whereas EBITDA declined 34% (210bp) to INR152m. Revenue/EBITDA for TCL’s overseas coffee business grew 55%/70%. Revenue growth was aided by the Vietnam plant (absent in the base quarter) and the US’ coffee revenue, which grew 37% (26% underlying growth). Overall, operating leverage led to EBITDA margin expansion.
* TCP’s overseas tea business’ revenue/EBITDA grew 13%/19% YoY to INR5.2b/INR464m
Highlights from management commentary
* The company is on track to realize initial synergy estimates of 2-3% of combined India branded revenues over the next 18-24 months.
* TCP has gained market share in the India tea business from most competitors on the back of better procurement/ distribution (v/s peers).
* Tea prices surged 50% in the last few months and are believed to have peaked. However, it is expected to decline (as crop harvest would reach market). Focus is to achieve profitability rather than volume growth.
* TCP aims to become a complete FMCG company from an F&B company currently. TCP is planning to expand to adjacent product portfolios in the near term and to branch out to newer categories over the long term. The company is focused on maintaining strong RoCE rather than improving sales alone.
Valuation and view
* TCP reported 38% growth in consolidated EBITDA on the back of S/A (contributed 70% to the incremental EBITDA earned v/s last year) and TCL’s overseas tea (30%). S/A EBITDA growth was aided by better realizations, favorable commodity costs and lower discretionary expenditure.
* The Tata Group is clearly focused on leveraging its brand and participating in India’s consumption story of INR30t, which has resulted in the merger of Tata Chemicals’ Food biz with TCP.
* The merger of Tata Chemicals’ Food 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 the under-penetrated food product categories such as pulses, besan (gram flour), spices, and chilla mix, aggressively leveraging the existing strong distribution network and the Tata brand.
* Additionally, the company intends to focus on setting up the right sales and distribution channels and driving cost efficiencies in the near term. It is on track to realize its initial synergy estimates of 2-3% of combined India branded revenues over the next 18-24 months.
* Over FTY20-22E, sales/EBITDA/ PAT is expected at CAGR of 11%/24%/23% to INR119b/INR20b/INR11b.
* Factoring in the better-than-expected performance and margin expansion in the India F&B segment, we have increased our earnings estimates for FY21/22E by
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