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Parallels between growth journey:

‘PARACHUTE’ and ‘TATA SALT’

There are brands. There are great brands. ‘Parachute’ (coconut oil brand of Marico), in our view, is one of them. It’s a classic case of building (and sustaining) a brand and earnings brand margins in a (hitherto) commoditized category.

We believe that ‘Tata Salt’, a great brand (already), has the opportunity to build on awareness > availability and find similarities in it’s journey vis-à-vis Parachute.

In this report, we present why we believe ‘Tata Salt’ could potentially reach >60% market share (vs. ~34% now) and be the significant value-driver for Tata Consumer stock. While some investors believe ‘Tata Sampann’ as the next big value-driver for TCPL stock, in our view, it’s likely to be Tata Salt. BUY; TP Rs800.

* Parallels between Parachute and Tata Salt:

Both the brands have multiple similarities, such as: 1) they have been created from commodities (coconut oil and salt); 2) both operate in large unorganised markets; 3) most MNCs and many large domestic players have failed to gain market share in these categories; 4) distribution is relatively tough considering lower revenue per gram and freight costs; and 5) both have ‘right to premiumise’ the portfolio compared to peers.

* Expect similar growth story for Tata Salt:

TCPL is focusing on: 1) increasing direct reach to 1mn outlets by Sept’21 (30% achieved till Mar’21) and total reach has increased to 2.4mn outlets now from 2mn outlets in Mar’20; 2) driving growth of premium variants of Tata Salt, which will also reduce the linkage between commodity and brand and will likely drive (a) steady value market share gains; (b) improve realizations; and (c) expand margins. As Tata Salt enjoys highest EBIT margins among most business segments of TCPL, its revenue outperformance is a potential margin expansion tailwind, in our view.

* Analyzing the growth story of Parachute:

Marico worked on four strategies, viz.: 1) aggressive investments in brand-building (13% adspend CAGR over FY02-FY20 (at a corporate-level); 2) investments in distribution expansion (~6% CAGR in retail outlets over FY07-FY20); 3) introduction of premium variants; and 4) reduction in linkage between commodity (copra) and brand (Parachute) prices. This led to ~800bps market share expansion and 7.1% volume CAGR for Parachute over FY10-FY21. Volumes in the company’s hair oil segment (premium variants of Parachute and other brands) grew at a CAGR of 12% over FY10-FY21.

* Reiterate BUY:

We model TCPL to report revenue and PAT CAGR of 12.6% and 25.5% respectively over FY21-FY23E. We maintain our BUY rating and value the stock on SoTP basis with a target price of Rs800. Key risk is in execution, i.e. delays in realising integration gains, ramp-up of distribution, etc.

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