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Strong growth narrative on foods and tea but valuation and margin headwinds remain; maintain REDUCE

Our view

The key positives for the quarter were a strong growth despite a high base in salt (strong share gains) and Sampann, strong momentum in OOH businesses like Starbucks and Nourisco and second consecutive quarter of margin recovery in tea business.

The key areas of concern were weak volume growth in tea, margin pressure in foods business and sluggish performance of international businesses. With tea prices setting down, the business should get back to mid to high single digit volume growth while Sampann portfolio should continue with its recent growth momentum led by distribution and portfolio expansion.

Margins might remain volatile in the near term with the ongoing fuel inflation and aggressive A&P aggression by the company. A strong improvement in working capital cycle and cash generation has given more ammunition to the company to explore inorganic opportunities. We like the improved execution and multiple growth opportunities in front of the company, but find the current valuations expensive on both absolute and relative basis. And hence would wait for some underperformance before turning constructive on the stock.

Result Highlights

* India operations – India business delivered topline growth of 17% with 14% growth in beverages (2% volume growth) and 23% growth in foods (16% volume growth) led by 20% growth in salt and robust 29% growth in Sampann despite a high base; margins came in at 13.4%/10.5% vs 13.3%/16%% in India‐Beverages and foods due to a combination of tea & coffee inflation and increase of 75% yoy in A&P spends.

* International operations – Flat revenue growth adjusted for foodservice business vs decline of 2.4%, with improved margins performance; flat US coffee and 5% revenue growth in international tea (1% volume growth).  

* Market share  ‐  Market share gains over last August in both key categories of tea (+168bps) and salt (+300bps) mainly led by distribution expansion and better on‐ground execution.

* OOH businesses – 121% growth in Nourishco (35% 2‐yr CAGR), 128% in Starbucks (11% 2‐yr CAGR with 14 new stores opened.

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

Valuation

We model in revenue/EBITDA/PAT CAGR of 11%/15%/23% over FY21‐24E assuming normalization of tea/salt volume trajectory and strong growth in Sampann coupled with steady margin improvement. We reiterate our REDUCE rating with an unchanged SOTP‐ based PT to Rs 776, implying 45x FY24E earnings.

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