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Soft quarter which can trigger a period of underperformance; downgrade to Reduce

Result Highlights

* India operations – India business delivered strong topline with 60% growth in beverages (23% volume and 53% value growth in tea and 19% growth in coffee) and 22% growth in foods (21% volume growth) led by 26% growth in salt and muted 2% growth in Sampann; margins were sharply lower by 400bps to 11% in tea and improved 290bps in foods due to a combination of tea inflation, increased A&P spends and premiumization in salt.

* International operations – Growth was impacted by pantry loading in the base quarter but margins remained steady; 5% growth in US coffee (2% volume decline) and 2% in international tea (7% volume decline).  

* Market share gains in both key categories of tea (+190bps) and salt (+160bps) mainly led by distribution expansion and better on‐ground execution.

* With completion of integration of foods business, company aggressively investing in sales and distribution infrastructure, digital, A&P and innovation.

Valuation and view –

While volume growth in core categories of tea and salt was strong, the 4Q margin performance was well below expectations as the company did not fully pass on tea inflation and continued its A&P aggression. While the management expects tea prices to start cooling off and tea margins to normalize in 2H, that remains a key risk. Salt business growth can also slow down given capacity constraints in near‐ term while Sampann should finally see some acceleration which it has failed to deliver so far. The international businesses might find it difficult to grow on a high base although margins are likely to remains strong given exit from all loss‐making businesses.

Starbucks and Nourishco should ramp‐up once the pandemic subsides while the coffee business should have a good FY22. With commodity inflation expected to settle down in 2HFY22, the company is set for strong EBITDA growth as its growth momentum continues and margins start normalizing in addition to getting the synergy and premiumization benefits.

But given the near‐term margin headwinds coupled with rich absolute and relative valuations, we believe the stock is set for a period of underperformance. We therefore downgrade our rating from Buy to REDUCE and advise waiting for a better entry points. We model in revenue/EBITDA/PAT CAGR of 11%/18%/24% over FY21‐23E and adjust our SOTP‐based PT to Rs 642 from Rs 617, implying 43x FY23E earnings.

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