IGI Logo

Worm’s world view #33: Conversations with TATA CONSUMER distributors in Western Maharashtra

Due to price hikes, the total commission earned by distributors has increased but reduction in trade margin, reduction in schemes and higher diesel costs are impacting profit margins of the distributors - that's the insight from our conversation with TCPL distributors in Western Maharashtra. They told us, (1) with reduction in salience of wholesale channel, the throughput has increased materially through the distributors (read direct reach increase), (2) TCPL has again raised prices of Tata Tea key SKUs (100 grams and 250 grams) in Q1FY22, (3) lockdown and lower out-of-home consumption has impacted off-take of Tata Grand coffee in Q1FY22. Coffee sachets are sold largely for out-of-home consumption, (4) there is increase in working capital for dealers as the inventory and debtors have increased due to higher prices and due to delayed payments from retailers and (5) Tata Sampann Nutrimixes and Soulfull are not yet rolled out through distribution channel in Western Maharashtra.

Consensus (including us) believes (and hopes) in ‘value creation story’ of TCPL, a 96% and 189% stock returns over 1 yr and 3 yrs is testimony. The phase of “Trust me” story is over. With TCPL’s FY23E valuations at a premium to nearly all consumer staples stocks (except HUL, Nestle), it’s now a “Show me” story. We stay believers; retain BUY.

Price hikes in Tata Tea:

TCPL has continued to raise prices of its tea brands even in Jun’21. It has raised prices of key SKUs such as 100 grams and 250 grams in Q1FY22. Considering the steep price hikes and impact of lockdown, the dealers indicated that there is some impact on volumes. However, they remain confident about recovery in next 1-2 months. No trade / consumer schemes were announced in Q1FY22.

Market share gains to continue:

As the unorganized / smaller players have raised prices higher than Tata Tea, the dealers believe Tata Tea will continue to gain market shares.

No change in pricing of Tata Salt and Tata Coffee:

Reduction in wholesale channel is allowing the distributors to sell Tata Salt more. With no change in pricing, Tata Salt continues to do well in Western Maharashtra and dealers believe it is gaining market share from smaller players. However, they indicated that demand for Tata Grand Coffee is lower now after initial success in H2FY21.

Lockdown affected Tata Grand coffee business:

The sachets of Tata Grand coffee were doing well in out-of-home consumption market. Due to lockdown, out-ofhome consumption was impacted in Q1FY22 and there is impact on off-take of Tata Grand coffee sachets. However, dealers opined that the volumes are likely to increase once restrictions are lifted. Generally, there is higher demand for coffee in monsoon season due to increase in out-of-home consumption. Demand for Tata Grand coffee bottles (i.e. family consumption) was also muted in Q1FY22.

Increase in working capital:

Considering tea and salt are fast moving items, there was limited investment in working capital for dealers as well as retailers. However, with lockdown, limited number of working hours and steep inflation, the inventory and debtors have increased for dealers. The dealers used to collect cash on same day from retailers. However, now they collect cash only after two days. The dealers indicated that it generally takes 3-4 months to normalise situation and reduce this additional working capital investment.

Increase in diesel costs hurting profitability of dealers:

While the commission rates are cut, the dealers continue to generate higher absolute commissions as the commission rates are linked to MRP. Steady increase in diesel costs has increased cost burden. The transportation cost is ~40% of commission earned. However, the labour charges (driver and porter wages) have largely remained same over past two years.

Nutrimixes and Soulfull is not yet rolled out in Western Maharashtra through distributors:

While pulses and spices are rolled out through distributors, the new products such as nutrimixes and Soulfull are not yet rolled out via distribution channel in Western Maharashtra.

We do channel checks. We do network checks. However, >20 years of experience has taught this analyst that on-the-ground checks have utility, if and only if, we don't extrapolate it as a national trend (as diversity is high in India). Worm's world view is our periodic product on network checks.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer