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Market share gains continue in both tea and salt; RM headwinds should normalize by 1QFY22

Tata Consumer Products (TCPL) reported a mixed performance in a difficult quarter where it faced unprecedented tea price inflation. While revenues were ahead of expectations, profitability fell short of expectations despite strong cost controls and premiumization. Other than the India tea business, most other businesses delivered a strong performance led by strong growth in the salt business, sequential recovery in Starbucks and Nourishco and strong profitability and growth in international beverages. While margin headwinds impacted tea margins, market share gains was a key positive. In the foods business, continued premiumization in salt, strong performance in pulses, and recent acquisition of Soulfull brand should help achieve aggressive growth targets. Integration is also going ahead of schedule and start delivering benefits from 4Q onwards. While near‐term margin headwinds remain for the tea business, sustained improvement in foods and international business margins should help offset that in addition to synergy benefits flowing in. Starbucks and Nourishco are also quickly proceeding towards normalcy and the company continues steady footprint expansion. Overall, we do not find any deviation in narrative and execution from the new leadership and continue to view TCPL as a solid structural story with both growth and margin tailwinds which can deliver industry‐leading earnings growth over the next few years. We reduce our FY21 EPS estimate by 3% to build in the margin weakness, but increase our FY22 and FY23 estimate by 5% and 8% to build in higher realizations in India businesses and better growth rates in international beverages. We are building in a 12.5% revenue and 22.7% earnings CAGR over FY20‐23E. We reiterate our BUY rating with a revised SOTP‐based TP of Rs 617 (from Rs 574), implying 48x/42x FY22/FY23E P/E.

Financial highlights

* Standalone revenue/EBITDA growth of 34%/‐5% and consolidated revenue/EBITDA growth of 23%/14%; sharp growth and margin decline mainly in account of tea price inflation in India

* India beverages business grew 43% with 10% volume growth in tea and Nourishco contributing Rs 33cr with revenue growing 9%

* India foods business grew 19% with 12% volume growth led by 19% growth in salt (2.7x growth in value‐added salts) and high double digit growth in Tata Sampann

* India business EBITDA margins down 410bps to 10% despite strong cost controls and better sales mix given sharp tea price inflation, which led to sharp fall in tea business gross margins while foods business saw improved margin performance given strong growth in salt business

* International tea business grew 13% with 4% volume growth led by a 7% currency benefit; margins saw a sharp 690bps increase to 11.8% led by better mix, cost cuts and weak Kenyan tea prices

* US coffee business also saw a 19% growth with 10% volume growth and 7% currency benefit; margins flattish at 20.6%  

* Tata Coffee saw 10% revenue and 6% volume growth led by ramp‐up in Vietnam operations; margins up 320bps to 12.1% given better tea and pepper realizations

* Profit from associates/JVs at Rs 3.5mn with losses at Starbucks offset by tea price‐ led profitability improvement in associate plantations

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