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Strong Standalone offsets weak International business

Operating performance in line

* Tata Consumer Products (TATACONS)’s Standalone operating performance was strong led by EBIT margin expansion of ~190bp YoY (mainly due to gross margin expansion of ~210bp YoY) in 2QFY23. The strong Standalone performance offset the contraction in International business margins (EBIT margin contracted ~690bp) led by input cost inflation, currency weakness and lag in pricing. This resulted in muted Consolidated business performance, with EBIT margin contracting ~60bp YoY to 10.7% in 2QFY23.

* The company is on a portfolio expansion spree in its F&B segment, with product launches in new and innovative categories such as recent launch of Tata Sampann Hing and its foray into Protein-based product categories with the launch of a plant-based protein supplement Tata GoFit.

* Factoring in an in-line performance in 2QFY23, we maintain our FY23 and FY24 earnings estimates. We maintain our BUY rating on the stock with an SoTP-based TP of INR880.

Realization growth drives overall sales

* TATACONS posted a revenue of INR33.6b in 2QFY23 (est. INR33.2b), up 11% YoY. EBITDA margin stood at 12.9% (est. 13.2%), led by a lower gross margin of 41.7% in 2QFY23 v/s 42.8% in 2QFY22. EBITDA rose 5% YoY to INR4.34b (est. INR4.38b). Adj. PAT was at INR2.5b (v/s est. INR2.9b), down 13% YoY.

* Revenue in the Indian Branded/International business grew 9%/7% YoY to INR21.6b/INR8.4b, with EBIT at +26%/-46% YoY to INR3.1b/INR597m in 2QFY23, respectively.

* Volumes in India Beverages declined marginally by 1% YoY, while the same in Foods remained flat in 2QFY23. Its strong growth trajectory in Salt continued, with a revenue growth of 27%. The Tata Sampann portfolio grew 37%, led by the strong performance across pulses, poha and spices.

* Revenue from Nouishco grew 64% to INR1.4b, with broad-based growth across products and geographies. Tata Starbucks rose 57% YoY fueled by normalization in store operations and revival in out-of-home consumption trend. It added 25 new stores and entered six new cities in 2QFY23.

* For 1HFY23, Revenue/EBITDA/Adjusted PAT grew 11%/10%/11%, respectively. CFO/Net Cash stood at INR3b/INR20b in 1HFY23, respectively.

Highlights from the management commentary

* Tea – The management expects tea prices to continue its downtrend. The company is witnessing stress in semi-urban and rural regions while urban region is performing better.

* International business – TATACONS will be taking structural cost-saving actions to mitigate input cost inflation, adverse currency movement and lag in pricing.

* Tata Sampann portfolio posted strong double-digit growth (37%) in 2QFY23, led by broad-based performance across pulses, poha and spices. The management is expecting this segment to sustain a CAGR of 30% going forward.

Valuation and view

* TATACONS is on a portfolio expansion spree in its F&B segment, with product launches in new and innovative categories such as ready-to-cook/eat, mini meals, breakfasts, cereals, snacks, ready-to-drink (RTD), and protein-based products. The Food business is likely to be the growth engine for the company, with Tata Sampann leading from the front.

* We expect a sales/EBITDA/PAT CAGR of 11%/18%/30% over FY22-24, respectively. Factoring in an in-line performance in 2QFY23, we maintain our FY23 and FY24 earnings estimates. We maintain our BUY rating on the stock with an SoTP-based TP of INR880.

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