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High tea prices dent EBITDA margin; performance below expectation

Scale-up of Tata Sampann remains critical

* Higher tea prices impacted standalone gross margins by 10.1pp YoY to 30.9%, and higher A&P consequently impacted the consolidated EBITDA margin by 290bps YoY to 9.9%. Consolidated EBITDA de-grew 3% YoY on the back of 13% EBITDA de-growth in standalone. The Tata Sampann portfolio grew 2% during the quarter, impacted by volatility in the Pulses market; portfolio grew 26% during FY21. The scale-up of the Sampann portfolio remains a key monitorable.

* We lower our earnings estimates for FY22 by 7% on the back of near-term margin pressure in Tea. We maintain our earnings estimates for FY23 and arrive at an FY23 SOTP-based TP of INR725/share. Maintain Buy.

Higher distribution reach drives volume growth in India biz.

* Tata Consumer Products (TCP) reported consolidated revenue growth of 26% YoY to INR30.4b (est. INR28.6b). The EBITDA margin contracted 290bp YoY to 9.9% (est. 11.9%) on a 620bp gross margin contraction to 39.2%. EBITDA de-grew 3% YoY to INR3,002m (est. INR3,397m). Adj. PAT was down 36% YoY to INR1.1b (est. INR1.9b), largely due to higher tax rate and MI.

* India Branded Beverages/Foods revenue was up 60%/22% YoY to INR12b/INR6.4b. India Beverages EBIT de-grew 40% YoY to INR524m, while India Foods EBIT grew 52% YoY to INR868m. International Branded Beverages revenue remained flat YoY to INR8.8b, with EBIT de-growth of 14% YoY to INR1,101m.

* India Branded Beverages/Foods volumes grew 23%/21% YoY, benefitting from a low base effect and expansion in the distribution reach. Salt revenue grew 26% during the quarter. The Tata Sampann portfolio was up 2% in 4Q, impacted by volatility in the Pulses market.

* Standalone revenue grew 39% YoY to INR18.5b and EBITDA was down 11% YoY to INR1.4b. The gross margin contracted 1,010bp YoY (+80bp QoQ) to 30.9% on the back of higher tea prices.

* Tata Coffee consol: Revenue grew 14% YoY to INR5.9b, with EBITDA growth of 22% YoY to INR944m. Tata Coffee standl: Revenue grew 30% to INR2,177m and EBITDA was INR241m v/s INR7m last year. Tata Coffee Overseas (Tata Coffee consol less Tata Coffee standl): Revenue grew 7% YoY to INR3,736m, with EBITDA de-growth of 8% YoY to INR703m.

* TCP Overseas Tea: Revenue grew 8% to INR6b, with EBITDA declining 10% YoY to INR637m.

* In FY21, consolidated revenue/EBITDA/adj. PAT grew 20%/19%/21%. In FY21, TCP generated CFO of INR16.6b, up 53% YoY, on the back of lower trade receivables and higher payables; this was offset by higher inventory.

Highlights from management commentary

* TCP has increased its reach to 2.4m outlets – a 15%/11% increase for Tea/Salt. This is in line with TCP’s long-term strategy to double direct reach within 12M and double numeric reach within 36M. Numeric reach / direct coverage was up 30%/20% YoY in FY21; TCP is on track to achieve its 1m target by Sep’21.

* At the time of acquisition of the Salt business from Tata Chemicals, TCP targeted synergies of INR1–1.5b at the EBIT level over 18M. Of this, INR50–70m of monthly cost synergies has started to be realized.

* Tata Starbucks: Revenue growth of 14% was seen in 4Q, albeit on a low base (impacted by COVID in Mar’20). FY21 revenue declined 33%, driven by the adverse impact of COVID on out-of-home consumption. The business was EBITDA+ for the year – it added 39 new stores and gained a presence in seven new cities during the year.

Valuation and view

* The unlocking of sales and distribution synergies is among the key reasons the merger of the group companies has started to yield results – this is evident from the market share increase in Tea (+190bp YoY) and Salt (+160bp YoY) in FY21 on the back of an increase in numeric distribution (+15% in Tea and +11% in Salt). Direct coverage increased 30% in FY21, and the management aims to reach 1m by Sep’21. Thus, in our view, the company is taking a step in the right direction to establish a strong S&D channel, which would act as key growth driver.

* TCP has two strong legs in the India business – Tata Tea and Tata Salt – wherein it is targeting lower double-digit growth, driven by a) cross-selling between the Foods biz and TCP’s Tea distribution channel and b) expansion into new geographies.

* TCP is building its third leg, Tata Sampann, which deals in pulses and spices – which should grow in the high double digits. The market size of Pulses/Spices in India currently stands at INR1,500b/INR600b, with unorganized players forming 99%/70% of the market. Thus, growth is expected through capturing market share from unorganized players via increasing distribution reach and new product launches.

* Over FY21–23E, sales/EBITDA/PAT is expected to post a CAGR of 9%/21%/27%.

* We lower our earnings estimates for FY22 by 7% on the back of near-term margin pressure in Tea. We maintain our earnings estimates for FY23 and arrive at an FY23 SOTP-based TP of INR725/share. Maintain Buy

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