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Reaching new culinary heights

Feasting begins: expanding total addressable market in F&B space Tata Consumer Products (TATACONS IN) is set to acquire Capital Foods (CF, Not Listed) and Organic India (OI, Not Listed), thereby expanding its product range and extending the total addressable market (TAM) by ~1.5x. With a valuation of INR 51bn at 6.8x FY24E sales, CF boasts robust umbrella platform brands, namely Ching’s Secret and Smith & Jones, which caters to fast-growing, in-home consumption of non-Desi cuisine with a market leadership across categories, such as Schezwan Chutney, Indian-Chinese blended masalas, sauces, ginger-garlic paste, and soups. OI, valued at INR 19bn based on 5.2x FY24E sales, is one of the strongest “Better For You” organic brands spanning Food & Beverages (F&B) and herbal & traditional supplements with significant presence in India and the US. We believe these acquisitions put TATACONS in the top quartile of sales growth in our coverage universe

Growing footprints: huge potential to leverage distribution prowess Despite its strong brand positioning, CF has a distribution gap with a mere ~0.4mn outlets in the domestic market, thereby presenting a huge opportunity to tap into TATACONS' extensive network of 3.8mn outlets as on Sep’23 and strong online presence. OI, with a domestic coverage of 24,000 outlets, also has the potential to leverage TATACONS' distribution & unlock its pharma channel and cross-sell brands, such as Soulfull, Tetley, and GoFit. These acquisitions would bolster exports potential via cross-synergies in distribution channels in India & abroad.

FY26E EPS neutral: 16.8% margin improvement from 14.4% now The acquisition is likely to be funded via available cash reserves, debt (bridge-financing with short-term debt & commercial papers) and equity issuance via a rights issue. Both businesses are margin-accretive, and management expects significant margin improvement through rationalization of trade margin and cost optimization. For the acquired business, we expect a 20% revenue CAGR during FY24E-26E with margin expansion from the current mid-teens to ~24-25% by FY26E. Our FY26E EPS of INR 22.1 remains unchanged as a PAT hike of 2-3% would be offset by the rights issue (we assume an issue of INR 32bn at INR 1,100 per share).

Valuation: reiterate Accumulate with a higher TP of INR 1,246 We lower our PAT by 4.4% in FY25E and raise it by 6.2% in FY26E to factor in the effects from the acquisitions. We reiterate Accumulate with a higher SOTP-based TP of INR 1,246 from INR 1,030 as we assign 50.0x (from 48.0x) FY26E P/E to the standalone business & new acquisitions, 6.0x (from 5.0x) price/sales to NourishCo & Soulfull businesses, 2.5x (unchanged ) price/sales to the international beverages business and Eight O’Clock, and 1.0x price/sales to the Tata Coffee unbranded business as we roll forward to March 2026E.

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