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International business dents overall performance

In-line operating performance

* Tata Consumer Products (TATACONS) reported a muted operating performance in 3QFY23 despite 14% YoY EBIT growth in the standalone business. The 3Q performance was mainly dragged down by a 39% YoY decline in EBIT of the international branded business due to inflationary pressures, currency weakness and a lag in pricing.

* TATACONS emphasized on its strategy to focus on further penetrating the semi-urban and rural market to close the distribution gap with other large organized players.

* Factoring in an in-line performance in 3QFY23, we maintain our FY23/FY24/FY25 earnings estimates and retain our BUY rating on the stock with an SoTP-based TP of INR900.

Standalone business continues to grow on strong footing

* TATACONS posted revenue of INR34.7b (est. INR34.3b), up 8% YoY. EBITDA margin stood at 13.1% (est. 13.4%), affected by a lower gross margin of 41.5% (v/s 43.7% in 3QFY22). EBITDA declined 2% YoY to INR4.5b (est. INR4.6b). Adj. PAT was down 6.5% YoY at INR2.9b (v/s est. INR2.8b).

* For the Indian branded/international businesses, revenue grew 8%/4% YoY to INR21.7b/INR9.3b, and EBIT was up 14%/down 39% YoY at INR3b/ INR884m.

* Volumes in India Beverages declined 5% YoY, while volumes in Foods grew 4% YoY. The company maintained its strong growth trajectory in Salt, with revenue growth of 27%. The Tata Sampann portfolio grew 37%, aided by a broad-based performance across staples and dry fruits.

* Revenue from Nouishco grew 66% to INR1.2b in 3Q and crossed INR4b in 9MFY23. Tata Starbucks rose 42% YoY, driven by a revival in out-of-home consumption and strong store additions. It added 11 new net stores (opened 15 and closed four) and entered two new cities in 3QFY23.

* For 9MFY23, revenue/EBITDA/adjusted PAT grew 10%/6%

Highlights from the management commentary

* The management expects the salt and tea volumes growth to settle at midsingle digits over the mid to long term. Soulfull/NourishCo/Sampann posted volume growth in double to triple digits.

* TATACONS’s distribution reach at the company level is ~3.6m outlets. At the individual category level, the distribution reach of Tea/Salt/Soulfull/ NourishCo has grown to 2.7m/2.75m/0.3m/0.6m outlets.

* In 3Q, TATACONS lost market share in Tea (down 46bp/113bp volume/value) but gained in Salt (up 90bp). The management is confident of regaining its market share in Tea in coming quarters.

Valuation and view

* TATACONS is focused on new growth engines such as Tata Sampann, NourishCo, Tata Soulfull, and the ready-to-eat/ready-to-consume business (Tata Smartfooz), which will drive the next leg of growth.

* We expect a revenue/EBITDA/PAT CAGR of 9%/16%/26% over FY23-25. Factoring in an in-line performance in 3QFY23, we maintain our FY23/FY24/FY25 earnings estimates and maintain our BUY rating on the stock with an SoTPbased TP of INR900.

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