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Innovations, premiumisation to aid sales, margin

About the stock: Tata Consumer Products (TCPL) is one of the major FMCG companies present in tea, coffee & other beverages in India, UK, US, Canada & some other geographies. In India, it also has salt, pulses, spices & other foods products. Its subsidiary NourishCo is present in packaged water & other beverages. The company is in a JV with Starbucks, which has 275 stores in India.

* cThe company has 2000+ distribution directly reaching to 1.3 million outlets in India, which will be increased to 1.5 million outlets by March 2023

* TCPL also increased its rural/ semi urban distributors 4x to 8000+ after the consolidation of consumer business

Q1FY23 Results: TCPL posted solid results with 10.6% sales growth on high base.

* Sales were up 10.6% YoY aided by 18.8% growth in foods business

* EBITDA was at | 457.3 crore, up 14.5% YoY, with margins at 13.7%

* Consequent PAT was at | 276.7 crore (up 38.2% YoY)

What should investors do-TCPL’s share price has moved up 4.7x in the last five years (from | 164 in August 2017 to 773 in August 2022).

* We continue to remain positive on TCPL’s strategy of driving premium trend in foods business & foray in large opportunity size categories

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 950 on ascribing 55x FY24 earnings multiple

Key triggers for future price performance:

* Tea business margins have fully recovered & focus would shift to growing volumes. Similarly, inflation headwinds in salt are expected to subside, which would recoup margins as well as volumes in the business

* Strong innovation & premiumisation strategy in salt, tea, Sampann, Soulful & Tata Q in India market expected to drive margins. Newer categories like pulses, spices, dry fruits & Soulful to drive volume growth

* Starbucks is witnessing strong growth with significant improvement in operating margins. Likely to drive profitability

Alternate Stock Idea: We also like Dabur in our FMCG coverage.

* Significant shift in consumption towards healthier, natural & Ayurveda based products & aggressively foray in many big categories would be driving growth for Dabur

* Value the business at 55x FY24 earnings. BUY with a TP of | 700

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