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Decent performance in Q3

Tata Consumer Products (previously known as Tata Global Beverages Limited -TGBL) is an Indian multinational non-alcoholic beverages company and a subsidiary of Tata group TGBL markets under the major brands like Tata Tea, Tetley, and Good Earth Teas etc.

* Revenue up 4.5% YoY (+4% YoY in constant currency terms), aided by growth in domestic India business.

* EBITDA margin rose 340bps YoY to 15.2% aided by better product mix and lower costs. Hence, Adj. PAT rose 24.0% YoY despite higher taxes.

* Company has managed to deliver a resilient performance in a tough quarter on the back of volume growth in certain categories and regions, along with premiumisation of certain products and new introductions. We reiterate our BUY rating on the stock with a rolled forward target price of Rs. 862 based on 50x FY24E adj. EPS.

Volume growth drives topline, margins improve substantially

During Q3FY22, revenue grew 4.5% YoY to Rs. 3,208cr (+5.8% QoQ, +4% in cc terms), aided by strong volume growth in India business, esp. in Sampann portfolio (+39% YoY volume growth), and also in the salt category owing to price hikes, as well as strong sequential recovery in the tea portfolio, Soulfull, and Starbucks. EBITDA rose 34.7% YoY to Rs. 487cr, as EBITDA margin improved by 340bps YoY to 15.2% due to high margin product mix. Adj. PAT grew 24.0% YoY to Rs. 278cr.

Key concall highlights

* During Q3FY22, company introduced Tata Salt Superlite and Shuddh, while it has also taken a 15% price increase in its whole salt portfolio.

* NourishCo’s revenue up 91% YoY, on the back of strong growth across products and geographies. Company launched Tata Fruski in new markets, and Tata Nature Alive, a premium mineral water product in select markets in the north.

* Australia business transitioned from a direct distribution model to distributor-led in order to expand reach and improve efficiencies.

* Starbucks now operational in 19 cities, with 13 additional stores opened during the quarter, taking the total to 246 (~94% remained open during Q3FY22).

Tata Q addition to drive growth in the premium foods category

During November 2021, company acquired a 100% stake in Tata SmartFoodz for Rs. 395cr in a strategic move to expand into value added categories. Acquisition of Tata Q brand marks the company’s foray into the higher margin Ready-to-Eat (RTE) category. Besides expansion of its product portfolio, the company is expected to benefit from the rapid pace of growth in the RTE segment as well as enabling it to achieve significant synergies across procurement and logistics in both its domestic and international operations. Additionally, the company would be able to leverage Tata Q’s in-house MATS technology to create a strong pipeline of value-added products in the future.

Valuation

Company’s new product offerings in Soulfull, acquisition of Tata Q business, as well as expansion of offerings through its online D2C channel 1868 should aid performance in the coming quarters. Meanwhile, its Tata Salt and Sampann portfolio is expected to continue to perform well, aided by recent price hikes and significant volume growth. Similarly, the beverages line-up, esp. its tea range should see improvement in margins with reductions in input costs. We estimate PAT to grow at 21.4% FY21-24E CAGR and EBITDA margin to improve to 15.2% by FY24E. We reiterate our BUY rating on the stock with a rolled forward target price of Rs. 862 based on 50x FY24E Adj. EPS.

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