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Overall inline but quality of growth in Foods was a let-down

TCPL’s 1QFY23 report was overall mostly on expected lines but growth in the Foods business was a let-down. On profitability front, International Beverages especially Tetley continued to be a disappointment but the plantations businesses, associates and JVs more than made up for the shortfall. Foods volumes fell 3% yoy with base Salt volumes flat yoy and Sampann volumes impacted by trade-related adjustments. International growth was driven by EOC but all price-led as US Coffee volumes were down yoy and so was International Tea. TCPL’s valuation premium, we believe, is entirely based on the intrinsic strength of the Tata brand and the belief that the same can be extended to almost any of the white spaces on the plank of households’ trust in the trademark – the latest being the Horizon-3 protein-platform launch. At TCPL’s current valuation of 54x NTM PE, we see Britannia as a better, simpler and more straight-forward India Packaged Foods play. Trigger for TCPL appears limited to us at this juncture.

* 1QFY23 performance was overall inline, but Foods performance was disappointing:

TCPL’s 1QFY23 consolidated revenue, EBITDA and adjusted net profit grew 10.6%, 14.5% and 45% to INR33.3bn, INR4.6bn and INR 2.7bn respectively. Earnings were overall inline with our expectations. A 4% lower revenue on India Beverages was made up by a c.5% beat in International operations – led by a much higher pricing-growth than we anticipated; volumes were lower, though. EBITDA performance was about 2% below our forecast but Associates/JVs reported a near-break-even vs expectation of losses, which drove a 4% beat to our bottomline forecast. Segmentally: 1) India Beverages revenue grew 3% with volume growth of 1% - this was 4% below our forecast as tea revenue was down 4-5% yoy (price corrections, high base) with the entire growth driven by Nourishco that more than doubled yoy. 2) On Foods, revenue grew 18.6% driven entirely by pricing. Volumes declined 3% as base-Salt volumes were flat on a high-base and post a steep price-hike (19% since July’21). More disappointing was the mere 6% revenue growth in the Sampann portfolio which management attributed to trade-related adjustments and some pullback ahead of Spices re-launch. 3) International revenue growth of 9% (8% CC) was better than we expected with the beat driven by EOC pricing (volumes down 3%). 4) Starbucks had a strong quarter with 3-year CAGR of 27% and importantly, was EBIT positive for the quarter – this contributed to the swing in profits from Associates/JV which was a near-break-even vs losses of INR404mn in base quarter

* Tea-prices deflation benefit was offset by higher SG&A: TCPL’s consolidated gross margin expanded 186bps (standalone gross margin expansion even higher at 322bps) helped by continued benefit from domestic tea price deflation. A lot of these benefits were passed on to end-consumers and used for brand-building initiatives especially for the newer businesses - consolidated A&P spends grew 33.7% with India A&P up 48% yoy, which along with higher growth in Other Expenses (+17% yoy – 1.6x the rate of growth in revenue) led to a lower pace of expansion in EBITDA margin (+47bps). Segmentally, India’s overall margin was nearly flattish yoy (12.7% vs 12.5% LY) as margin expansion in tea was partly offset by input-costs inflation in the Salt business. International Beverages margin was also flat as inflation challenges (both Arabica coffee as well as Kenya tea) are being addressed through pricing actions and cost-saving initiatives.

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