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Food business to drive the next leg of growth

Operating performance in line

* TATACONS reported a healthy operating performance, with gross margin expansion of ~190bp YoY to 42.6% in 1QFY23. Earnings were driven by a 320bp YoY gross margin expansion in its standalone business, aided by tapering off in Tea prices, and partly offset by input cost inflation in Salt.

*  The company is on a portfolio expansion spree in its F&B segment, with product launches into new and innovative categories such as the launch of Tata ORS+ with glucose and electrolytes, and its recent foray into Protein based product categories, with the launch of a plant-based meat product.

* Factoring in an in line performance in 1QFY23, we maintain our FY23 and FY24 earnings estimate. We arrive at our SoTP-based TP of INR890 and maintain our Buy rating.

Softening of Tea prices aided operating performance

* TATACONS reported a revenue of INR33.3b (est. INR33.1b), up 11% YoY. EBITDA margin stood at 13.7% (est. 13.5%) in 1QFY23, led by a better gross margin at 42.6% v/s 40.8% in 1QFY22. EBITDA rose 14% YoY to INR4.4b (est. INR4.5b). Adjusted PAT grew 45% YoY to INR2.7b (est. INR2.5b)

* Revenue in the Indian Branded/International business grew 9% each YoY to INR21.5b/INR8.4b, with EBIT up 11%/9% to INR2.7b/INR1.1b in 1QFY23.

* Volumes in India Beverages grew marginally by 1% YoY, while the same in Foods fell 3% in 1QFY23. Its strong growth trajectory in Salt continued, with a revenue growth of 20%. The Tata Sampann portfolio grew 6%, led by the short-term impact of trade terms, realignment across channels, and pullback ahead of a relaunch in Spices

* Revenue from Nouishco grew 110% to INR1.8b, with broad-based growth across products and geographies. Tata Starbucks grew 3.4x YoY on a low base, with a normalization in store operations. It added seven new stores and entered four new cities in 1QFY23.

Highlights from the management commentary???????

* Tea prices in India have come off significantly from their peak in FY21. However, in the recent month, prices in North India have seen an uptick due to severe rainfall resulting in a production loss. Prices in South India remained range bound in 1QFY23 and significantly lower on a YoY basis.

* Despite a hike in prices in Tata Salt to INR28 from INR25, the company is able to hold and improve its market share to 38% (up 400bp YoY).

* Tata Sampann recorded a three-year CAGR of 30% and is expecting similar growth levels going forward, with margin aspiration of a high single to low double-digit in the near to mid term.

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 mini meals and protein-based products. The Food business is expected to be the growth engine for the company, with Tata Sampann leading from the front.

* We expect a sales/EBITDA/PAT CAGR of 11%/19%/31% over FY22-24. Factoring in an in line performance in 1QFY22, we maintain our FY23 and FY24 earnings estimate. We arrive at our SoTP-based TP of INR890 and maintain our Buy rating

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