Robust growth; margins to head northwards…
Tata Consumer Product (TCPL) reported robust sales growth of 18.5% led by India beverage business growth of 32% and food business growth of 13%. International tea business (Tetley, Teapigs, Good Earth), US coffee (Eight O’clock) grew 1%, 4%, respectively in constant currency (CC). The strong growth in India beverage business was led by 11% volume growth & price hikes in tea segment by ~15%. Food business volume growth was 6%. International business volumes were flat & US coffee volumes fell 3%. The dismal volumes in International business was impacted by pantry storing in Q1. Overall volume growth was ~6% (our estimate). Gross margins fell 269 bps with tea prices rising sharply by ~80% given tea crop was negatively impacted by lockdown in April & floods in July. However, cost rationalisation measures led to saving in employee spends to sales (down 112 bps), other overhead to sales (down 158 bps). Further, 95 bps reduction in marketing spends led to operating profit growth of 26.9% to | 399.6 crore & operating margin expansion of 95 bps to 14.4%. The higher operating profit, increased profit from associates resulted in net profit growth of 31.4% to | 273.2 crore.
India business driving growth
We believe decline in out of home tea consumption largely impacted the unbranded tea segment. Simultaneously, increase in at-home consumption benefited branded tea companies. With corporates continuing with work from home, we believe branded tea segment would continue to gain market share from smaller regional brands. The sharp increase in tea prices & subsequent price hikes has also resulted in pricing growth that was absent for many years. The strong growth in India food business (Tata Salt, Tata Sampann) has also been driven by shift from loose to packaged foods. We believe food business has two important growth levels (1) premiumisation trend in salt with increasing consumption of Tata Salt Lite (proposition of less sodium), which is priced at 2x Tata Salt, (2) conversion of loose to packaged food in pulses given branded category is single digit penetration.
Margin in upward trajectory
With consolidation of high margin food business and cost rationalisation by streamlining two business, we believe operating margins would expand in the next two years. Moreover, we believe tea procurement prices would come down with normalisation of tea crop in FY22, which would also benefit in expanding margins as companies generally retain some hikes at the time of prices cooling off from highs. We estimate a 330 bps operating margin improvement to 16.7% by FY23E.
Valuation & Outlook
With the merger of the food business, TCPL’s product portfolio has presence of high growing categories like pulses, spices supported by consumption shift from loose to packaged food. Moreover, tailwinds of at-home consumption would further aid growth. We expect revenues & earnings CAGR of 9.6% & 29.5%, respectively, in FY20-23E. We value TCPL at 40x FY23E earnings with revised target price of | 605/share and BUY rating
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