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Buy Tata Consumer Products Ltd For Target Rs. 725

Elevated tea prices curbs margins; growth story intact

Tata Consumer Product (TCPL) reported a mixed set of numbers with splendid growth in tea, salt & pulses categories. Revenue grew 26.3% led by robust 59.6% growth in India beverage (tea, coffee & Nourisco) segment & 22.4% growth in consumer foods business (salt, pulses). International beverages sales remained flat. Non branded business saw growth of 28.8%. With significant increase (~70%) in tea procurement prices, TCPL took staggered price hikes. However, price increases were insufficient to pass on entire cost inflation. The sharp increase in Indian tea prices led to a 623 bps contraction in gross margins.

Though it was able to save 73 bps in employee spends, 42 bps in marketing spends & 214 bps in overhead spends, it was not enough offset the cost inflation. Operating profit de-grew 2.6% to | 300.2 crore. Operating profit margins fell 290 bps to 9.9% in Q4FY21. The company incurred | 63.9 crore expense on account of loss from disposal of overseas business entity. Moreover, loss from associates was | 59 crore in Q4. With lower EBITDA margins & extraordinary expenses, PAT was at | 74 crore against loss of | 133 crore in the corresponding quarter.

Market share gains across segment

With a broader trend of consumption shift from loose to packaged foods, TCPL saw market share gains across segments. India beverage business saw 32% growth with 12% volume growth in FY21E led by ‘at-home’ consumption tailwinds. It gained market share by 100 bps in the segment. Similarly, India food (salt, pulses & RTC) business saw 18% sales growth with 11% volume growth & gained market share of 180 bps in FY21. We believe the second wave of pandemic would continue to drive growth for trusted brands over regional & local brands and market share gains would continue in the medium term. With more than 50% of the category comprise of these unorganised or regional brands, the opportunity to grow through share gains is high. We expect 10.9% revenue CAGR in FY21-23E.

Tea prices hold key for margins

With a considerable increase in tea prices, India beverage segment margins contracted by 400 bps in FY21. Tea prices continue to remain elevated due to a weak first spring in Assam and West Bengal. However normal monsoon could lead to a decline in tea prices, to a certain extent, which would help company to recoup margins. The company is likely to maintain a modest margin, which would aid volume growth with market share gains. We believe TCPL would be able to maintain operating margins with staggered prices hikes & rationalisation of some costs. We expect 13.7% & 14.2% operating margins in FY22E & FY23E, respectively

Valuation & Outlook

In the last few years, the company has divested all of its loss making overseas business. Moreover, with consolidation of foods business (salt & pulses) and acquisition of Soulful & stake in NourisCo, the company is looking to gain large footprint in the India food & beverage space. We remain positive on the company, valuing it at 50x FY23E PE with a revised target price of | 725/share (earlier: | 700) and maintain BUY rating.

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