Consolidation phase Rs791
India Beverages and Foods volume performance of +1% and -3% YoY was underwhelming. High base (Food volumes +17% in 1QFY22) is one of the reasons. That said, >20% price increase in salt (in last 18 months) had likely resulted in higher profit pool for competitors to channelize it towards higher trade margins (per our channel checks - link)
That said, we like, (1) aggression to introduce new products such as plant-based protein products under Tata Simply Better, multiple variants of Tata Soulfull and spices for South India under Tata Sampann and honey and spreads under Himalayan brand, (2) TCPL has continued to gain market shares in Tea (40bps) and Salt (400bps) in Q1FY23 and (3) While there in steep increase in ad-spend (up 33.7% YoY) and energy costs, TCPL has still managed to improve EBITDA margin by 47bps YoY underlining our thesis of structural EBITDA margin expansion towards mid-to-high teens in medium term from 10.8% in FY19.
We also expect the benefits of simplification of corporate structure to be unlocked in FY22-24. Starbucks was EBIT positive in Q1FY23 after adding seven stores. Maintain BUY; we reckon there will be opportunities in stock volatility for longterm investors.
* Q1FY23 results: TCPL reported consolidated revenue, EBITDA and PAT growth of 10.6%, 14.5% and 70.8% YoY, respectively. Constant currency growth was 10%. Segment-wise YoY revenue growth rates: India Beverages 3%, India Foods 19%, US Coffee 20%, International Tea 2% and Tata Coffee 25%. India Beverages and Foods reported volume growth of 1% and -3% YoY, respectively. Gross margin was up 186bps and EBITDA margin was up 47bps YoY due to higher ad-spend. Standalone revenues, EBITDA and PAT were up 5.6%, 12% and -19.7% YoY, respectivelyTCPL reported consolidated revenue, EBITDA and PAT growth of 10.6%, 14.5% and 70.8% YoY, respectively. Constant currency growth was 10%. Segment-wise YoY revenue growth rates: India Beverages 3%, India Foods 19%, US Coffee 20%, International Tea 2% and Tata Coffee 25%. India Beverages and Foods reported volume growth of 1% and -3% YoY, respectively. Gross margin was up 186bps and EBITDA margin was up 47bps YoY due to higher ad-spend. Standalone revenues, EBITDA and PAT were up 5.6%, 12% and -19.7% YoY, respectively
* Strong investments in innovation: TCPL has introduced multiple new products such as (1) Pure spices (chili, turmeric, and coriander) for South India market, (2) Tata Coffee Cold Coffee liquid concentrate in three variants, (3) Tata ORS+ with glucose and electrolytes and Tetley Cold Brew (USA). It has also introduced multiple variants of Tata Soulfull Masala Oats+ and Himalayan honey and spreads. It has launched differentiated plant based protein products under ‘Tata Simply Better’ such as patty, nuggets, kebabs. The ‘New engines of growth’ (Soulfull, Sampann, Himalayan and Tata Q) reported revenue growth of 53% YoY.
* Market share expansion continues in India business: TCPL continues to achieve dual targets of market share expansion and margin improvement in India business. India tea and India salt gained market share of 40bps and 400bps, respectively YoY. We note distribution expansion, steady launches of differentiated products and increase in ad-spend (up 33.7% YoY) have led to market share gains
* Update on distribution expansion: While TCPL is on track to reach direct distribution of 1.5mn outlets by end of FY23, it also plans to double its wholesale reach. The Modern trade channel reported revenue growth of 35% whereas the two-year CAGR in e-commerce was 73%. It now accounts for 8.2% of sales.
* Starbucks was EBIT positive during Q1FY23: Starbucks has 275 stores in 30 cities now. It added seven new stores during Q1FY23 and also entered four new cities. It reported revenue growth of 238% YoY on a favorable base.
* Muted volume performance in International: US coffee and International Tea reported revenue growth of 20% and 2% YoY, respectively. However, we note US coffee and International Tea reported volume decline of 3% and 2%, respectively. We believe volume growth was largely impacted by steep inflation and likely some pantry de-stocking
* Retain BUY: We model TCPL to report revenue and PAT CAGR of 12.7% and 21.5%, respectively over FY22-24E. We maintain BUY and value the stock on SoTP basis with a target price of Rs925. Key risk is execution - delays in realising integration gains, ramp up of distribution, etc.
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