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Likely improvement in (sustainable) profitability of Tata Salt; a DCF-accretive event

We believe Tata Salt has the “price-retention’ power to largely retain consumer prices in the event of commodity price correction – implying higher DCF-accretive gross margin expansion. We reckon it will utilise the higher resources to drive growth in Sampann, Soulfull, Nourishco, Tata Coffee etc. Tata Salt (and TCPL) gross margins were impacted in H2FY22-H1FY23 due to steep inflation in input cost (coal, brine etc). It raised consumer prices of Tata Salt by 33% in just 12 months to mitigate inflation impact with some sacrifice in volumes. We expect this trend to reverse for the better. Broadly, there are two types of salt, (1) vacuum- packed salt, (2) solar salt. Coal is an important input in vacuum-packed salt manufacturing. Read our report on Parallels between growth journey: ‘PARACHUTE’ and ‘TATA SALT’. Retain BUY.

* Coal inflation hurt Tata Salt margins in H2FY22-H1FY23...: Steep increase in input prices (coal, brine, packaging material, transportation cost) led to contraction in margins of Tata Salt and Tata Consumer in H2FY22-H1FY23. It forced TCPL hike prices of Tata Salt from Rs21/Kg in Q1FY22 to Rs28/Kg in Q2FY23 just to cover the inflation sacrificing some volumes.

* ... we model reversal of the same now: With decline in prices (>20%) of key commodities, we model the reverse trend to follow. The EBITDA margin of Tata Salt is expected to better pre-inflation era. While TCPL may pass on some savings as trade / consumer offers, it is likely to retain the MRP (the consumer price printed on the pack). We model TCPL’s EBITDA margin to be 14.3% in FY25 (vs FY23: 13.5%) due to improvement in gross margins of Tata Salt.

* Usage of additional savings to provide capital to growth businesses: TCPL has multiple growth segments (Sampann, Soulfull, Nourishco, Tata Coffee etc.) which have shown strong promise over FY21-23. However, these businesses need investments in branding, distribution, new launches and R&D. We model some benefits from additional profits of Tata Salt to be used in growth businesses.

* Tata Salt is highest margin contributor to Tata Consumer: Tata Salt generates steady state EBITDA margin of 18-20% compared to TCPL consolidated margin of ~13%. We model improvement in highest margin segment like Tata Salt to lift the overall profitability.

* Portfolio creation - A sustainable solution: To structurally resolve the issue of underlying commodity linkage, TCPL is working on creating a portfolio of Tata Salt premium variants. As these new launches mature in next 3-4 years, we model the portfolio approach will likely provide stability to margins as well as drive value market share gains.

* Drawing parallels with Parachute (Marico): While Parachute margins had strong linkage with underlying commodity (copra) prices, we note it has introduced a large portfolio of Parachute oil and hair care products. It has steadily reduced the commodity linkage and has allowed Parachute to steadily gain shares as well as stabilize/ improve margins. We model a similar story to unfold in case of Tata Salt. See report Parallels between growth journey: ‘PARACHUTE’ and ‘TATA SALT’.

* Retain BUY: We model TCPL to report revenue and PAT CAGR of 12% and 21%, respectively over FY23-25E. Retain BUY. We value the stock on SoTP basis with a revised target price of Rs950 (was Rs900 earlier). Key risk is execution – slower- than-expected ramp up of distribution and steep competition.

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