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Simplification is good but no real change to valuation construct

Tata Consumer has chalked out a path to simplify holding structure of the businesses housed within itself that essentially involves 1) it now owning an additional 10.15% of what broadly represents the international tea portfolio, and 2) merging Tata Coffee (currently c.57.48% owned by TCPL) into itself after demerging the plantation business into a wholly-owned subsidiary. The transactions value the international tea business at an EV of c.INR38bn (excluding net liquid surplus of c.INR18.5bn) vs INR 38-39bn implied in our SOTP for TCPL, and Tata Coffee is valued at a c.14% premium to CMP based on the agreed swap ratio. TCPL could enjoy c.4-5% EPS accretion overall but it would now derive a slightly larger share of revenue and profit from non-branded and international tea businesses – two of the least preferred part of its portfolio, in our view. Seen holistically, we believe the transactions aren’t really all that significant w.r.t. TCPL’s overall valuation construct. Simplification could drive some synergies in the future but would first entail some costs in the process (e.g. stamp duty, etc for transfer of coffee estates to the new entity could be large)

Acquisition of additional 10.15% stake in what broadly represents the International tea portfolio: One part of the restructuring involves TCPL diluting 0.8% of its shareholding in favour of Tata Enterprises (Overseas) AG (not treated to be a ‘related party’) to acquire an additional 10.15% stake in Tata Consumer Products UK. Post this, TCPL would own the business in entirety. This entity largely houses the international tea business of TCPL and the transaction values the portfolio at INR56.2bn including the c.INR18.5bn of net liquid surplus on its books (as at Mar’21). Enterprise value of the business accordingly works out to INR37.8bn vs the valuation of INR38.5bn included by us in our SOTP (based on 13x forward EV-EBITDA)

Tata Coffee to be merged into TCPL: Tata Coffee, which is currently 57.48% owned by TCPL, would effectively get merged into TCPL, barring its plantation business which will be housed in a fully-owned subsidiary. The subsidiary structure is likely to make it easier to ‘monetise’ the plantation business in case a need arises in the future, in our view. Given the large land-holding in the plantation business, we believe the transfer could involve significant costs in terms of stamp duty, etc to be paid but management believes the benefits to be derived in the future from the simpler structure would more than offset the costs involved. The transaction values Tata Coffee at INR223/share which is a c.14% premium to its CMP (based on TCPL’s CMP of INR743 and swap ratio of 3:10) which makes the Tata Coffee stock the clear winning trade in this exercise, in our view

No real change to TCPL’s overall valuation construct:, in our view Strictly speaking, these transactions do not materially change the overall valuation construct for TCPL, in our view. TCPL’s EPS could go up by c.4-5% at best but the quality of incremental earnings is weaker (from non-branded and international tea which represent two of the least favoured businesses in TCPL’s portfolio). The street may still choose to view this a bit more favourably, though, also because a simpler organisation structure would make it easier for some of the businesses to be ‘monetised’ in the future, if need arises. For now, Tata Coffee holders are the clear winners from this exercise.

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