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Growing footprint in the F&B industry

Tata Consumer (TATACONS)’s acquisitions of Capital Foods Pvt. Ltd (CF) and Organic India Pvt Ltd (OI) are in line with their strategic priority to expand the total addressable market (TAM) into adjacent, high-margin, and high-growth categories. The key highlights are as follows:

 These acquisitions will enable TATACONS to advance in its journey to become the leading FMCG player, offering a wide range of products across pantry, liquid, mini meals, and sustainable categories. The incremental TAM in India and internationally will increase to ~INR1t with these new additions. 

Through these acquisitions, TATACONS can benefit from multiple synergies, including access to new markets, wider distribution reach, optimized trade margins via increased shelf space, better operating leverage through economies of scale, and higher margins.

We have factored in the financials of both the companies, assuming a fundraise via a rights issue amounting to INR35b, which is 50% of the total deal value (or 61% of the immediate funding requirement of INR57.25b). This is leading to an EPS dilution of 3%/2% in FY25E/26E and it will be EPS accretive from the third year of operations.

On track to become a premium F&B platform

The acquisitions of CF and OI align with the company's strategy to establish a formidable F&B platform with a wide gamut of packaged foods spanning various cuisines and "better-for-you" products. 

CF is renowned for condiments, food products, and ingredients marketed under the Ching's Secret (77% of the business) and Smith & Jones (17%) brands. Ching’s Secret leads the Desi Chinese genre, dominating across various product categories, viz., Chutneys, Blended Masalas, Sauces, and Soups. Meanwhile, Smith & Jones caters to the fast-growing trend of in-home cooking and specializes in Italian and other Western cuisines. 

OI specializes in organic teas & infusions (40% of the business), organic packaged products (40%) and health supplements (20%). It is backed by Fabindia. 

Both CF and OI’s products complement the existing product categories of TATACONS, such as: 

The core portfolio of tea, coffee and salt (addition of organic Teas/infusions); 

Pantry platform consisting of pulses, spices, besan, poha, ready-to-cook items, etc. (addition of sauces, chutneys, noodles, organic packaged foods, Chinese masalas, and ginger-garlic paste); 

Mini-meals such as breakfast cereals, ready-to-eat items, snacks (addition of soups and instant noodles); 

And lastly, the latest category of Horizon 3 consisting of protein platform (addition of Herbal supplements). 

These acquisitions offer TATACONS a massive potential to drive synergies by leveraging the company’s current distribution network (3.8m total reach), increasing scale, and delivering significant operating efficiencies through the high-margin products of CF and OI.

Expanding TAM into existing and newer markets

CF secures top positions (#1 or #2) in five key categories: Chutneys (Schezwan), Blended Masalas (Desi Chinese), Sauces, Ginger Garlic Paste, and Soups. 

The TAM for the CF’s products as of CY22 stood at INR214b, and it is expected to register a CAGR of 13% by CY27 to INR416b. This will take care of the strong growth trajectory of the brands in the Indian in-home consumption segment. 

OI is a 25+ year-old brand with a global presence in 48+ countries, mainly in India (50% of revenue) and the USA (40%), and long-standing relationships with 12,000+ farmers. 

Organic India operates in categories with a TAM of INR70b in India and INR750b in international markets, where TATACONS holds a strong presence. This TAM is expected to register a CAGR of 11%/8% in India/International to INR120b/INR1,110b by FY28. 

Together, the TAM for TATACONS will increase by INR1,034b. 

Both CF and OI have strong brand presence in the international markets, with exports contributing ~17%/48% in FY23. TATACONS can leverage this to scale up its in-house brands, such as Tata Raasa, Joyfull Millets, and Tata Sampann, in these markets.

Valuation and View

TATACONS’s holistic strategy aims at transforming by: i) strengthening and accelerating its core business, ii) exploring new opportunities, iii) unlocking synergies, iv) digitizing the supply chain, v) expanding its product portfolio and innovation, vi) enhancing its focus on premiumization and health & wellness products, vii) embedding sustainability, and viii) expanding its sales and distribution infrastructure, supply chain, and capability building towards being a multi-category FMCG player.

In line with its strategy of new opportunity exploration, TATACONS acquired the CF and OI businesses that will contribute ~8%/9% of the incremental PAT for FY25/26 and is expected to support margin expansion backed by the synergies discussed above.

TATACONS has further strengthened its three strong legs – Tata Tea (where it is adding organic tea and infusions from OI), Tata Salt, and Tata Sampann (pantry category where the CF portfolio will be housed).

The acquisition is EPS accretive for the company from the third year of operations and is undertaken at industry standard valuations (~6.8x/5.2x EV/sales of FY24E vs. EV/Sales of ~6.4x for TATACONS). Further, this acquisition will improve the brand offerings and product portfolio of the company in both the domestic and the international markets.

In terms of financing, rights issues will be more EPS-accretive than debt funding (refer to exhibit 7).

We have factored in the financials of both the companies, assuming a fundraise via a rights issue amounting to INR35b, which is 50% of the total deal value (or 61% of the immediate funding requirement of INR57.25b). This is leading to an EPS dilution of 3%/2% in FY25E/26E and it will be EPS accretive from the third year of operations (refer to Exhibits: 4 and 7).

We expect a CAGR of 13%/18%/25% in revenue/EBITDA/PAT over FY23-26. We arrive at our SoTP-based TP of INR1,350 and reiterate our BUY rating on the stock.

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