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On course for growth

TATACONS’s FY22 annual report focuses on six strategic initiatives identified by the management to strengthen its foundation as a strong consumer products company. These include: 1) accelerating the core business; 2) driving digital and innovation; 3) unlocking synergies; 4) creating a future-ready organization; 5) exploring new opportunities; and 6) embedding sustainability. The key takeaways are:

Laying the groundwork for future growth

* TATACONS has made significant progress on key strategic initiatives laid out to build a focused consumer products company.

* Strengthening and accelerating the core business: In FY22, TATACONS expanded into new target markets, launched regional focused packs, unveiled impactful campaigns across multiple platforms, and drove premiumization. It met its direct reach commitment of 1.3m outlets in India by the end of Mar’22. It gained ~100bp/400bp market share in core categories such as Tea/Salt.

* Drive digital and innovation: TATACONS’s innovation efforts are focused on understanding and pre-empting evolving consumer trends and coming up with high-quality and differentiated products to delight these increasingly discerning consumers. The contribution of innovation to turnover has increased by 2x YoY in FY22. The e-commerce channel performed well, with its share of revenue increasing to 7.3% in FY22 v/s 5.2%/2.5% in FY21/FY20. The management is focused on driving growth in this channel and strengthening its digital market presence.

* Unlocking synergies: In FY22, significant steps were taken to improve efficiencies such as the integration of Tata Soulfull and Tata SmartFoodz, merger of Tata Coffee with TATACONS (refer report), and the simplification of the international business. This will yield operational efficiencies in management, legal, and administrative costs, and assist in creating a single listed entity in capturing the full value of the group.

* Exploring new opportunities: In FY22, TATACONS entered the Ready-to-Eat (RTE) category with Tata Q, expanded into new markets with Tata Sampann, accelerated the growth momentum for NourishCo, multiplied the reach of Tata Soulfull, and forayed into the energy drinks market in the UK with Good Earth.

India Food business to be a key growth engine

* Revenue from the India Food business grew 19% YoY to INR29.1b, driven by a 17% increase in the Salt business in FY22, along with strong volume growth of 28% in Tata Sampann. EBIT margin contracted by 650bp to 9.4% (INR2.7b)

*  TATACONS launched several new products in the Food business comprising of Tata Salt, Tata SmartFoodz, and Tata Sampan. It will continue to invest in multiple avenues like product innovation, brand development, and expanding market reach. The TATACONS Food business will act as one of the key growth engines in driving the next phase of its TATACONS growth.

* India’s Pulses/Branded Spices market is largely unbranded, with the branded portion in pulses pegged at 1-2%. The Pulses/Spice market is valued at INR1.5t/INR234b. The shift in trend to packaged and branded products from loose is led by increasing awareness for better quality and authentic products. Under the Tata Sampann brand, TATACONS has launched differentiated products across pulses, spices, and RTE segments to garner a higher market share by capitalizing on the ‘Tata’ brand. In FY22, it launched Tata Salt Immuno, Tata Shuddh, Tata Salt SuperLite, Shuddh by Tata Salt, Tata Sampann Dry Fruits, Tata Sampann Rice masala, and Tata Sampann Dal Tadka Masala. 

* The Indian Branded Salt market is estimated at INR69b. Tata Salt recorded an 8%/17% growth in volume/value terms in FY22. Overall, the Premium Salts portfolio grew 27% in FY22. The company strengthened its leadership in the Salt category by raising its market share by 400bp to 37%. It also doubled its direct reach in FY22.

India Beverage business to grow through new avenues

* The branded Tea market in India grew by ~15% in FY22, driven by price inflation in CY20 due to pandemic-led disruption such as supply-chain constraints. India’s total Branded Tea market is currently valued ~INR273b and is dominated by organized players, with ~70% market share (in value terms).

* Revenue grew 6.5% YoY v/s 30% in FY21. Volumes grew 3% YoY in FY22. EBIT margin for India Beverages rose 530bp in FY22. Its market/volume share in the Tea category was up ~100bp/154bp YoY to 22.2%/22%. The company maintained its numero uno position in the e-commerce channel.

* TATACONS recorded the highest volume growth in Tata Tea premium in over a decade. It saw market share gains in Chakra Gold franchise in Tamil Nadu.

* It relaunched Tata Tea Agni Masterbrand and continued its hyperlocal brandbuilding strategy for key brands in its portfolio.

Stable performance by International Beverages business

* The international business registered a 5% revenue decline to INR33.4b in FY22 (1% like-for-like growth, net of exits in the international Food Service business; but down 2% in constant currency terms). The business saw a 110bp YoY improvement in margin due to restructuring (portfolio exits from non-Branded and unprofitable markets and change in the distributor model in Europe and Australia) and strategic price increases to offset the inflationary pressures in input cost.

* Revenue from the US Coffee business remained flat YoY in FY22. Despite the unprecedented inflation in coffee prices in FY22, EBIT for Eight O’clock Coffee grew YoY on account of hedging and a price hike.

* Revenue from the UK business declined by 3% YoY, however revenue from Teapigs and Good Earth grew 8% and PAT grew 13% to INR1.4b in FY22.

* Its Canadian business posted a YoY revenue decline of 7% (in constant currency terms) in FY22. The e-commerce channel performed well in FY22 and delivered double-digit growth. The company was able to maintain a strong market share in Mar’22 in its Canadian business.

Strong cash generation offers headroom to achieve its growth objectives

* Working capital days improved to 35 days in FY22 v/s 44 days in FY21, led by a decline in inventory days (by four days), but was aided by the stretching of payables by five days. TATACONS has been investing in business planning through digitization, demand, and supply optimization, which led to inventory optimization.

* Five-year average CFO/EBITDA stood at 70% over FY18-22. On the back of strong cash generation, CFO/EBITDA came in at 88% in FY22 (v/s 107% in FY21).

* TATACONS maintained a capex run-rate of INR2.1b/INR2.6b over the last 10/five years.

* Net cash decreased to INR17.9b in FY22 (v/s a net cash of INR26.8b in FY21). Gross debt-to-equity ratio stood at 0.07x in FY22 (v/s 0.05x/0.22x in FY21/FY16), thus granting TATACONS enough headroom to carry out various expansions and branding activities for its newly diversified product portfolio, along with its existing basket of products.

Valuation and view

* TATACONS’s holistic strategy aims at transforming by: i) strengthening and accelerating its core business, ii) exploring new opportunities, iii) unlocking synergies, iv) digitization of the supply chain, v) expansion of its product portfolio and innovation, vi) enhancing its focus on premiumization and health and wellness products, vii) embed sustainability, and viii) expanding its sales and distribution infrastructure, supply chain, and capability building towards being a multi-category FMCG player.

* The unlocking of sales and distribution synergies from the merger of group companies has started to yield results. This is evident from the market share increase in Tea (+100bp YoY) and Salt (+400bp YoY) as of Mar’22, backed by an increase in numeric distribution. The company is establishing a strong S&D channel, which will act as a key growth driver.

* TATACONS is building Tata Sampann, which is their Pantry category. This should grow in high double-digits by capturing market share from unorganized players via an increase in distribution reach and product launches.

* We expect a revenue/EBITDA/PAT CAGR of 11%/19%/29% over FY22-24 and arrive at an FY24E SoTP-based TP of INR900/share. We maintain our Buy rating.

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