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Growth tapers off from high base but stable growth and margin outlook despite aggressive investment plans; maintain ADD

Our view

India beverages saw a revenue decline of 4% for the quarter and marginal 2% volume growth mainly due to the very high base, while margins improved due to lower tea prices. Foods business grew strongly at 19% despite a high base led by Sampann and premium salts with margins impacted by inflation and higher investments in new businesses. Tata Coffee grew 7% led by plantations and Vietnam business. Nourishco growth of 51% on a high base Starbucks growth of 32% were other key positives. International performance was mixed with UK revenue up 5%, US coffee up 11% and US tea down 8% and Canada tea down 1%. Market share gains in both key categories of salt (+400bps) and tea (+100bps) were key positives.  E expect stable margins in the tea business going forward with focus on improved execution for continued double‐digit growth. Foods business momentum should continue despite a strong near‐term base with margins remaining low due to higher A&P spends and new business investments. Starbucks and Nourishco should see continued distribution‐led expansion while recent acquisitions can also start contributing from 2HFY23. The international business performance can remain sluggish for the foreseeable future given inflation headwinds and tapering in‐home consumption. An improvement in working capital cycle and cash generation has given more ammunition to the company to explore further inorganic opportunities. We like the improved execution and multiple growth opportunities in front of the company. But given the relatively high absolute and relative valuations, we maintain our ADD rating for now.

Result Highlights

Result summary – Revenue/EBITTDA/PAT growth of 4.5%/48%/86% on consol basis. Revenue growth led by 19% growth in India branded foods and 2‐yr CAGR of 21% in India beverages while International business reported revenue increase of 1.2%. Total branded business registered revenue growth of 4.5%. Gross margins improved 540bps/90bps YoY/QoQ to 44.6% due to cooling off in tea prices. EBITDA margin came in at 14% vs 9.9%/14.4% YoY/QoQ driven by steady employee and other expenses. A&P spends lower by 8% QoQ.

Segmental performance – India beverages business revenue was marginally down 1% however 2‐yr CAGR at 25%, India foods business revenue growth of 19% with ‐1% volume growth, International beverages revenue up 1.2% with margin increasing from 12.7% to 14.4%.

Valuation

We model in revenue/EBITDA/PAT CAGR of 12%/18%/30% over FY22‐24E assuming normalization of tea/salt volume growth trajectory and strong growth in Sampann/acquired brands coupled with steady margin improvement. We reiterate our ADD rating with a revised SOTP‐based PT of Rs 847, implying 49x FY24E earnings.

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