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Gross margin improvement in sight

In line operating performance

* Higher Tea prices impacted standalone gross margin, and higher A&P investments affected consolidated EBITDA margin. However, the impact of Tea cost inflation is subsiding as gross margin improved QoQ. The management expects the same to reach FY20 levels in one or two quarters.

* Volume growth in the India Foods business rose 17% YoY, whereas revenue grew 20% in the Salt business on the back of market share gains. However, the India Packaged Beverages business recorded 3% YoY volume growth, due to disruption caused by the second COVID wave. Tata Sampann’s portfolio grew 12% YoY due to pantry loading in the base quarter (growth of over 50% in the base quarter).

* We lower our FY22E/FY23E earnings estimates by 3%/2%, factoring in its 1QFY22 performance, and arrive at our SoTP-based TP of INR850/share. We maintain our Buy rating.

Tea inflation dents EBITDA margin

* Revenue grew 11% YoY to INR30.1b (est. INR30.5b) in 1QFY22. EBITDA margin fell 450bp YoY to 13.3% (est. 13.4%) due to a 400bp contraction in gross margin to 40.8%. EBITDA declined by 17% YoY to INR3,995m (est. INR4,083 m). Adjusted PAT fell 29% YoY to INR1.9b (est. INR2.3b) due to a higher tax rate.

* Revenue for the India Branded Beverages/Foods grew 27%/20% YoY to INR12.7b/INR7b. EBIT in India Beverages/Foods declined by 30%/16% YoY to INR1,507m/INR960m. EBIT margin in the India Beverages business expanded by 750bp QoQ to 11.9%.

* India Packaged Beverages business recorded 24%/3% value/volume growth. India Foods business registered 20%/17% revenue/volume growth. Revenue from Salt grew 20% in 1QFY22, despite a higher base. Tata Sampann’s portfolio rose 12% due to pantry loading in the base quarter (two-year CAGR of ~30%).

* The e-commerce channel recorded significant growth (153% YoY) and contributed 7% of domestic sales.

* Tata Starbucks recorded a revenue growth of 371% YoY in 1QFY22 on a lower base, impacted by the lockdowns. Despite this growth, revenue in 1QFY22 was lower when indexed to 1QFY20 levels. Delivery contribution rose to 27%, led by several focused initiatives to offset the decline in dine-in revenue.

* Standalone revenue grew 22% YoY to INR19.7b. Gross margin contracted by 610bp YoY (+380bp QoQ) to 34.7% on the back of higher Tea prices and higher A&P spends. Consequently, EBITDA fell 16% YoY to INR2.7b. We believe the standalone business will see margin expansion in coming quarters on declining Tea prices and benefit from operating leverage. The India Foods business is expected to return to a higher growth trajectory, with the expansion of its product portfolio and increasing reach.

Highlights from the management commentary

* Direct reach: TCP ended 1QFY22 with a direct reach of 820,000 outlets (v/s 500,000 outlets in Sep’20). It is looking at 1m outlets by Sep’21. It added 3,000 distributors and is looking to triple its field force to expand its rural footprint.

* Tata Sampann: TCP is targeting aggressive growth in Tata Sampann. It is witnessing huge traction in Poha, Pulses, and the Spices segment. There is a gradual pickup in the Mixes category.

* The company is on course to achieve its targeted synergies of INR1,000-1,500m.

Valuation and view

* 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 (+190bp YoY) and Salt (+160bp YoY) in FY21 (it also increased in 1QFY22) on the back of an increase in numeric distribution. Direct coverage rose 30% in FY21, and the management aims to reach 1m by Sep’21. The company is establishing a strong S&D channel, which would act as a key growth driver.

* TCP is targeting lower double-digit growth in the India business – Tata Tea and Tata Salt – driven by: a) cross-selling between the Foods business and TCP’s Tea distribution channel, and b) expansion into newer geographies.

* TCP is building Tata Sampann, which deals in pulses and spices. This should grow in high double-digits. The market size for Pulses/Spices in India currently stands at INR1,500b/INR600b, with unorganized players constituting 99%/70% of the market. Growth is expected through capture of market share from unorganized players via an increasing distribution reach and new product launches.

* We expect a sales/EBITDA/PAT CAGR of 10%/21%/26% over FY21-23E.

* We lower our FY22E/FY23E earnings estimates by 3%/2%, factoring in its 1QFY22 performance, and arrive at our FY23E SoTP-based TP of INR850/share. We maintain our Buy rating.

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