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Tea business propels overall growth

Earnings better than estimated

Tata Consumer Products (TCP) reported strong operating performance led by gross margin expansion of ~590bp (to 43.7%) in 3QFY22. The result was especially driven by its Tea business. However, higher A&P spends (which is expected to continue) and other expenses restricted EBITDA growth to 28%.

India Foods margin was impacted by inflation and investments in new businesses. Management guided for sustained investments in the business to enhance its product portfolio.

Revenue/EBITDA for 3QFY22 came in above our estimates. Factoring in the same, we increase our EBITDA for FY22E by 4% and largely retain our FY23E & FY24E. Further, we retain our earnings estimates and arrive at our SoTPbased TP of INR910, implying 23% upside potential. Maintain BUY.

Benign tea price drives gross margin

TCP reported a revenue of INR32.1b (est. INR30.7b), up 5% YoY. EBITDA margin expanded 260bp YoY to 14.4% (est. 13.8%) on gross margin improvement (+590bp YoY/+90bp QoQ to 43.7%). EBITDA grew 28% YoY to INR4.6b (est. INR4.2b). Adj. PAT was at INR2.8b (est. INR2.4b), up 23% YoY.

A&P/other expenses grew 17%/25% YoY in 3QFY22, respectively, led by higher A&P investments in the India business that impacted its EBITDA.

Revenue for India Branded Beverages remained stagnant YoY at INR12.8b, while that for India Branded Foods grew 16% YoY to INR7.3b. EBIT for India Branded Beverages grew 2.8x YoY to INR2.2b, while EBIT for India Foods degrew 54% YoY to INR426m.

Volume in India Beverages/Foods grew 6%/4% YoY in 3QFY22, respectively. The strong growth trajectory in Salt continued, with a revenue growth of 15% in 3QFY22. The Tata Sampann portfolio grew 39% in volumes on a strong base of last year.

Revenue from Tata Starbucks grew 60% YoY on a relatively low base in 3QFY22. It grew 37% indexed to 3QFY20 (baseline). Same-store-sales, indexed to Dec’19, are back to 100% in Dec’21. It added 13 new stores in 3QFY22 and entered two new cities (Trivandrum and Siliguri).

Revenue rose 8% YoY, while EBITDA grew 2.5% YoY/adjusted PAT dropped 2% YoY in 9MFY22. The company had a net cash of INR18.9b as of Dec’21.

Highlights from the management commentary

Tea prices: The domestic tea prices have remained rangebound but continue to be higher than pre-COVID levels. Kenya tea prices saw an uptick QoQ and YOY led by the minimum reserve regime introduced by the government.

Salt business, the strongest volume contributor, has grown only 3% YoY majorly due to down-stocking in Oct’21 and Nov’21 with a respite in Dec’21. This led to a revenue growth of 15% YoY in 3QFY22. The company has a 38% market share (+476bp YoY) in the overall salt business. The premium salt portfolio grew 29% by value in 3QFY22.

TCP acquired Tata SmartFoodz Ltd. (TSFL), the owner of the brand “Tata Q” in Nov’21, which will enable TCP to capitalize on the emerging consumer trends and growing demand for convenient and healthy products

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 (+160bp YoY) and Salt (+476bp YoY) as of Dec’21 backed by an increase in numeric distribution. 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 domestic market size for pulses and spices currently stands at INR1,500b and INR600b, with unorganized players constituting 99%/70% of the market, respectively. Growth is expected by capturing the market share from unorganized players via an increasing distribution reach and new product launches

We expect a sales/EBITDA/PAT CAGR of 9%/17%/21% over FY21-24E, respectively. Revenue/EBITDA for 3QFY22 came in above our estimates. Factoring in the same, we increase our EBITDA for FY22E by 4% and largely retain our FY23E & FY24E. Further, we retain our earnings estimates and arrive at our SoTP-based TP of INR910, implying 23% upside potential. Maintain BUY.

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