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Growth levers in place

Tata Consumer Products’ (TCPL) FY21 annual report focuses on initiatives taken by the management to leverage the ‘Tata’ brand in creating capabilities for building a multicategory FMCG company. Some of these strategies include strengthening and accelerating the core business, exploring new opportunities, unlocking synergies, digitizing the supply-chain, product portfolio expansion, and expanding its sales and distribution infrastructure. Key highlights below:

India Food business to spearhead growth

* Revenue from the India Food business grew 18% YoY (to INR24.4b), which can be attributed to the 17% increase in the Salt business in FY21, along with Tata Sampann whose portfolio grew 26%. EBIT margin expanded by 300bp to 15.9% (or INR3.9b).

* The India Food business – comprising Tata Salt and Tata Sampan, which includes pulses, spices and condiments, and ready-to-cook (RTC) – is expected to drive a major shift to the organized from the unorganized sector. The segment should drive the next phase of TCPL’s growth.

* India’s pulses/spices market is valued at INR1,500b/INR600b, with the share of organized branded players pegged at 1%/30%. Both segments are estimated to grow significantly on the back of higher health consciousness and growing importance of hygiene among the populace. A strong brand like Tata Sampann, is expected to gain substantially from this transition.

* The Indian Branded Salt market is estimated at INR60b. Tata Salt recorded 19% volume growth to ~1.3MT in FY21. Value contribution from the premium portfolio grew to 3.5% in FY21 (v/s 1.8% in FY20). Rock Salt scaled up by 3x in FY21, which also contributed to growth in the Salt business. Tata Salt further strengthened its market leadership position, with value share increasing by 180bp to 33% in the Packaged Salt category.

India Beverage business to maintain its growth trajectory

* India’s Branded Tea market is currently valued at INR260b and is dominated by organized players with 65-70% market share (in value terms). The branded market grew ~8% in FY21, albeit a decline in the initial months due to the impact of the lockdowns and tea price inflation.

* Revenue rose 36% to INR46b, with 12% volume growth in the Branded Tea business, whereas EBIT margin contracted by 300bp to 10.8% (to INR5b) in FY21.

* The business saw an increase in market share (both in value and volume terms), supplemented by an increase in direct outlet reach (including rural) and quality of distribution. The company recorded 60bp/100bp volume/value market share improvement to 20.4%/21%, which was due to significant increase in both product range and depth of its outlet reach.

* TCPL launched two products: Sonnets by Tata Coffee (premium roast and ground coffee for connoisseurs) and 1868 by Tata Tea (exclusive range of luxury teas across India).

International Beverage business

* In FY21, the international business registered 8% (1% in constant currency terms) revenue growth to INR34.7b. Excluding Food Service and Out-of-Home sectors, which were impacted by the COVID-19 pandemic, the international business grew 12% (5% in constant currency terms) led by Retail and Online segments, with volume growth of 7%/1% in Branded Coffee/Tea. EBIT margin expanded 200bp to 13.2%, with EBIT jumping by 27% YoY to INR4.6b.

* The US Coffee business recorded robust 8% growth of INR18b in FY21, whereas corresponding volume growth stood at 7%, with K-cup outpacing coffee bags.

* Revenue from the UK business grew 8% YoY to INR12b, with a substantial growth in EBIT, partly benefitting from higher tea consumption at home due to the pandemic.

* The Canada business posted a revenue growth of 15% (in constant currency terms) in FY21, capitalizing on increased tea consumption at home. Higher sales, lower sales promotion expenses, and strong control over overheads led to strong growth in profitability.

Strong cash generation to support its expansion plans

* Inventory increased by 31% in FY21. However, trade receivables dropped by 17%, whereas trade payables increased sharply by 72%. Inventory days rose by six days in FY21, whereas the corresponding drop in receivables days was 11 days. Payable days increased by 15 days, thereby sharply (20 days) reducing working capital days to 44 days in FY21 (v/s 64 days in FY20).

* TCPL's five-year average CFO/EBITDA stood at 53% over FY16-20. On the back of strong cash generation, CFO/EBITDA rose to 107% in FY21 (v/s 84% in FY20).

* It has maintained a capex run-rate of INR2b/INR2.3b over the last 10/five years. Net cash increased to INR26.8b in FY21 (v/s net cash of INR12.7b in FY20).

* On the back of strong cash generation and lower debt levels, gross debt/equity ratio stood at 0.05x in FY21 (v/s 0.09x in FY20). This gives TCPL 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

* TCPL’s holistic strategy aims at transforming by: i) strengthening and accelerating its core business, ii) exploring new opportunities, iii) unlocking synergy, iv) digitization of the supply chain, v) product portfolio expansion 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 multicategory FMCG player.

* The merger of the India Food business with TCPL is in sync with the management’s vision to create a single FMCG-focused company. The merger offers multiple synergies, including higher outlet coverage, focused new product development, strong cash flow generation, and scale efficiencies.

* TCPL has two strong legs – Tata Tea and Tata Salt – in its India business, where it is targeting lower double-digit growth, led by: a) cross-selling between the Food business and TCPL’s Tea distribution channel, and b) expansion into new geographies.

* TCPL’s third leg – Tata Sampann (pulses, spices and RTC) – is expected to grow in double-digits. The market size of pulses/spices (branded) in India currently stands at INR1,500b/INR600b, with unorganized players constituting 99%/70% of the market. Growth is expected through market share gains from unorganized players via an increasing distribution reach and new product launches. Also, growing consciousness towards healthy eating habits and hygienic products is expected to benefit TCPL due to its strong brand name.

* We expect a revenue/EBITDA/PAT CAGR of 9%/21%/27% over FY21-23E and arrive at an FY23E SoTP-based TP of INR775/share. Maintain Buy.

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