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India Beverages drives performance in 4QFY22

Earnings in line with our estimate

* TCP reported a strong operating performance, led by gross margin expansion of ~540bp YoY to 44.6% in 4QFY22. Earnings were driven by its standalone business (gross margin expanded by 930bp YoY and 140bp QoQ) on benign Tea prices. However, higher investments behind brands and other expenses restricted consolidated EBITDA growth to 48%.

* Margin in the India Foods business was impacted by inflation and investments in new businesses. The management guided at doubledigit growth, with a constant expansion of its portfolio.

* Factoring in an in line performance in 4QFY22, we maintain our FY23 and FY24 earnings estimate. We arrive at our SoTP-based TP of INR900 and maintain our Buy rating.

Gross margin expansion in Tea business drove earnings in 4QFY22

* TCP reported a revenue of INR31.8b (est. INR31.2b), up 5% YoY. EBITDA margin expanded by 410bp YoY to 14% in 4QFY22 (est. 13.9%) due to better gross margin at 44.6% v/s 39.2% in 4QFY21. EBITDA rose 48% YoY to INR4.4b (est. INR4.4b). Adjusted PAT grew 2x YoY to INR2.3b (est. INR2.2b).

* Revenue for India Branded Beverages remained stagnant YoY at INR11.9b, while that for India Branded Foods grew 19% YoY to INR7.6b. EBIT for India Branded Beverages grew 3.7x YoY to INR2b, while EBIT for India Foods fell 33% YoY to INR583m, impacted by inflated input costs and continued investment in new businesses.

* Volumes in India Beverages grew 3% YoY in 4QFY22, while the same in Foods declined marginally by 1%. Its strong growth trajectory in Salt continued, with a revenue growth of 15% in 4QFY22. Volumes in the Tata Sampann portfolio grew 30% on a strong base of last year.

* Revenue from Tata Starbucks grew 32% YoY in 4QFY22, partially impacted by the third COVID wave. Same-store sales grew 18% as compared to pre-COVID levels. It added 23 new stores in 4QFY22 and entered four new cities (Goa, Bhubaneswar, Nashik, and Guwahati).

* Revenue/EBITDA/adjusted PAT rose 7%/11%/12% YoY in FY22. TCP generated a CFO of INR15.2b (CFO/EBIDTA ratio at 88% in FY22), resulting in a net cash of INR24.9b as of Mar’22.

Highlights from the management commentary

Tea prices in India have come off significantly from their peak. South India tea prices saw a slight uptick sequentially, but fell significantly YoY. We expect prices to remain range bound, with a good monsoon forecast resulting in a better harvest season. Kenya tea prices continued to rise QoQ and YoY, led by the government’s minimum reserve regime.

India Foods: In FY22, the Foods business has seen good volume growth, driven by both Salt (+17% YoY) and Sampann. Going forward, the India Foods business is expected to register strong double-digit growth, driven by constant additions of new product under Tata Sampann, Tata Soulfull, and Tata Q brands. The management constantly endeavors to improve margin in the longer term. However, it expects cost pressures to remain in the short-term.

Distribution: Direct reach of the company stood at 1.3m outlets as of Mar’22. It is targeting 1.5m direct outlets by Mar'23. The management aims to grow its retail touch points to 4m levels by Sep’23 from the current 2.7m. It has increased the number of distributors by 25% YoY to over 2,000 and quadrupled its rural/semi-urban distributors to more than 8,000 levels. Total numeric reach for Tea/Salt has risen by 18%/15% YoY.

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 (+100bp YoY) and Salt (+400bp YoY) as of Mar’22, backed by an increase in numeric distribution. The company is establishing a strong S&D channel, which will act as a key growth driver.

* TCP is building Tata Sampann, which is their Pantry category. This should grow in high double-digits by capturing market share from unorganized players via an increase in distribution reach and product launches.

* We expect a sales/EBITDA/PAT CAGR of 10%/19%/29% over FY22-24. Factoring in an in line performance in 4QFY22, we maintain our FY23 and FY24 earnings estimate. We arrive at our SoTP-based TP of INR900 per share and maintain our Buy rating.

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