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Impact of tea cost inflation is now behind

but higher A&P spends to weigh

* Gross margin pressure eased off in 2QFY22 which has been impacting since the last four quarters due to tea cost inflation. The management expects gross margin to improve on a QoQ basis going forward. However, quarterly performance was impacted due to higher A&P spends (which is expected to continue) and other expenses.

* We maintain our earnings estimates and arrive at our SoTP-based TP of INR945/share. We maintain our Buy rating.

Performance broadly in line

* TCP reported a revenue of INR30.3b (est. INR30.7b), up 9% YoY. EBITDA margin contracted by 70bp YoY to 13.6% (est. 14.3%) due to higher A&P and other expense, but was offset by a 190bp YoY and 200bp QoQ improvement in gross margin to 42.8%. EBITDA grew 3% YoY to INR4.1b (est. INR4.4b). Adjusted PAT stood at INR2.8b (est. INR3b), up 3%.

* A&P/other expenses grew by 27%/23% in 2QFY22, which impacted EBITDA performance, driven by higher (up 75% YoY) A&P investments in the India business.

* Revenue in India Branded Beverages/Foods grew 13%/23% YoY to INR12.7b/INR7.1b. EBIT in India Beverages grew 14% YoY to INR1,697m, while the same in India Foods declined by 19% to INR748m.

* Volume in India Beverages/Foods grew 2%/16% YoY in 2QFY22. The strong growth trajectory in Salt continued, with a revenue growth of 20% in 2QFY22. The Tata Sampann portfolio grew 29% on a strong base of last year.

* The e-commerce channel recorded a growth of 39% YoY and contributed 7% to domestic sales.

* Revenue from Tata Starbucks grew 128% YoY on a relatively low base in 2QFY22. It grew 23% indexed to 2QFY20 (baseline). Same store sales, indexed to Sep’19, is back to 94% in Sep’21. It added 14 new stores in 2QFY22 and entered one new city (Jaipur).

* Revenue grew 10%, while EBITDA/adjusted PAT declined by 8%/13% YoY in 1HFY22. TCP generated a CFO of INR5.4b in in 1HFY22 v/s INR5.3b YoY. The company has a net cash of INR22.5b as of Sep’21.

Highlights from the management commentary

* Distribution: Direct coverage rose to 1.1m in Sep’21 (v/s 0.5m a year back). Going forward, TCP plans to raise its coverage to 1.3m by FY22-end. Total reach increased to 2.6m in Sep’21 (v/s 2m in Sep’20). TCP has more than 4,000 rural distributors currently, which will increase to 5,000 by FY22-end.

* ATL (above-the-line) ad-spend has increased across brands. Special efforts are being made to focus on premium products. TCP will maintain or increase ATL spends (as percentage of sales). Synergy benefits are being redeployed in building its brand and distribution network.

* TCP has reduced its working capital days by 16 days in 1HFY22 as it has moved towards a cash and carry model for the general trade channel.

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 1HFY22) on the back of an increase in numeric distribution. TCP doubled its direct reach to 1.1m 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 the capture of market share from unorganized players via an increasing distribution reach and new product launches.

* We expect a sales/EBITDA/PAT CAGR of 9%/17%/22% over FY21-24E.

* We maintain our earnings estimates (as performance in 2QFY22 was broadly in line) and arrive at our SoTP-based TP of INR945/share. We maintain our Buy rating.

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