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Robust volume growth; Promising outlook

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.

* Q3FY21, revenue spiraled 23.1% YoY to Rs. 3,070cr driven by robust volume growth and market share gains across divisions.

* EBITDA margin dwindled 100bps YoY to 11.8% on account of higher operating costs and tea price inflation. However, adjusted PAT rose 31.8% YoY to Rs. 224cr.

* Given robust volume growth, economic revival and high growth potential from SoulFull to gain market share, we are positive on the company’s performance. We upgrade our rating on the stock to BUY with a roll forward target price of Rs. 684 based on 48x FY23E EPS.

Topline continues to grow

Consolidated revenue grew 23.1% YoY to Rs. 3,070cr, led by strong performance in India (+35.8% YoY) and International Beverages (+8.7% YoY). India Beverages was up 46.0% YoY to Rs. 1,275cr, aided by volume growth of ~10% YoY, and +94 bps YoY market share gain. India Foods business rose 18.8% YoY to Rs. 631cr with 12% YoY volume growth as Tata Salt added (2.7x value added) & Tata Sampann shines. NourishCo subsidiary registered ~9% QoQ to Rs. 33cr aided by key players Tata Gluco Plus and Tata Water Plus (1.6x value added). Additionally, International Beverages rose 8.7% YoY to Rs. 926, which included International tea ( Rs. 549cr; +14% YoY with ~6% volume), US coffee business (Rs. 321cr ; 11% YoY with ~7% YoY volume growth) and second wave of COVID in the US affected International food service. Separately, Tata Coffee (incl. Vietnam) was hit due to decline in domestic extractions.

Margin under pressure on spike in tea prices

EBITDA came in at Rs. 361cr, up 13.6% YoY (-9.6% QoQ) due to strong profit delivery in International & India Foods business with solid control over discretionary costs. However, EBITDA margin contracted 100bps YoY to 11.8% impacted by higher cost of materials as a percentage of sales 45.4% vs. 37.9% in Q3FY20, owing to fluctuation in tea prices. Further, employee benefit expenses rose 94bps YoY as a % of sales. However, Adj. PAT rose 31.8% YoY at Rs. 224cr (vs. Rs. 170cr in Q3FY20).

Key concall highlights

* Company signed definitive agreement to acquire 100% stack in Kottaram Agro Foods Pvt. Ltd., the owner of SoulFull brand. This should leverage company to strengthen its distribution network and start its journey in packaged food industry. Additionally, in order to re-balance its portfolio, management decided to exit its Matt coffee business in Australia.

* In Tata Starbucks business, ~92% of its stores have been reopened (with ~50% dine in capacity) with 13 new stores foraying into 3 new cities.

* Exceptional revenue growth of 24% recorded in Canada (+19% vol.), bagging 29.5% market share with Tetley Super 3.0 shining big.

Valuation

Higher volume traction in India business, digitization across supply chain coupled with synergy benefits in upcoming period are the key growth drivers. Additionally, company is confident in navigating the margin pressure by focusing on volume and share growth. Hence, we are positive on the stock and upgrade our rating to a BUY with a roll forward target price of Rs. 684 based on 48x FY23E EPS.

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