IGI Logo

Higher input costs hurt margins

Operating performance in line with estimates

? Tata Consumer Products (TATACONS) reported a weak performance in 3QFY25, with EBIT declining 15% YoY due to higher input costs (tea cost inflation) in Indian branded business which declined 43% YoY. This was partially offset by the international branded beverage segment (EBIT up 53% YoY) and non-branded business (EBIT up 89% YoY).

? Going forward, Indian business margins are likely to recover as the company has increased prices of salt and tea (staggered price hikes to mitigate cost inflation). However, higher input costs will continue to weigh on margins in the near term.

? We largely maintain our FY25/FY26/FY27 EBITDA estimates and reiterate BUY with an SoTP-based TP of INR1,130.

International beverage and non-branded businesses drive operating profitability

* 3Q revenue grew 17% YoY to ~INR44.4b (in line). EBITDA margin contracted YoY by 230bp to 12.7% (est. 12.5%), led by lower gross margins (down 270bp YoY). EBITDA declined 1% YoY to INR5.6b (est. in line).

* The Indian branded business grew 19% YoY to INR28.3b, led by revenue growth of 16%/24% YoY in the Indian branded beverage/Indian food businesses to INR15b/INR13.1b. EBIT declined 43% YoY to INR2.1b.

* Volumes in the Indian packaged beverage business increased 7% YoY, while volumes in the foods business grew 1% YoY (excluding Capital Foods). Salt segment’s revenue grew 7% YoY, with modest volume growth. The Tata Sampann portfolio grew 23% YoY.

* RTD segment’s (NourishCo) revenue declined ~2% YoY to ~INR1.58b due to the recalibration of trade pricing. However, the Premium business grew 12% in 3QFY25, contributing ~15% to the total RTD business. Tata Starbucks revenue grew 8% YoY, driven by improving demand trends.

* International branded beverages revenue grew 16% YoY to ~INR12b, with EBIT growth of 53% YoY to INR1.7b. EBIT margins stood at 14%, up 340bp YoY. The Non-branded business revenue increased 9% YoY to INR4.6b, while EBIT jumped 89% YoY to INR930m.

* Adj. PAT declined 18% YoY to INR2.8b (est. INR3.4b). During the quarter, the company incurred exceptional expenses of INR62m, related to legal and professional fees for business acquisitions (integration and restructuring).

Highlights from the management commentary

* Pricing: The company maintains competitive pricing without extra discounting, implementing calibrated price hikes covering 40% of cost increases (tea prices up 25-30% YoY). The company prioritizes long-term competitiveness in the Indian tea market, balancing volume and value growth. It remains strategic in pricing, leading where possible while aligning with competitors.

* International Business: A significant portion of margin expansion in the International business came from the UK and Canada, where the company has implemented structural changes. The US has also seen improvement.

* Distribution Channel: The Ecommerce channel grew 59% and Modern Trade recorded 14% YoY growth in the quarter (excluding Capital Foods and Organic India). Ecommerce now accounts for ~15% of revenue, which is slightly above Modern Trade. The rollout of new channels in Food Services and Pharmacies, aimed at fueling growth, is progressing as planned.

Valuation and view

* We expect margin pressure to continue in the Indian beverage business in the near term due to higher input costs, while the International business is expected to continue delivering healthy operating performance. The RTD segment is gaining traction with strategic price calibration. Indian food business margins are expected to improve, driven by the synergy benefits from the integration of Capital Foods and Organic India, as well as a price increase in salt.

* We expect TATACONS to clock a CAGR of 10%/9%/13% in revenue/EBITDA/ PAT during FY24-27. Reiterate BUY with an SoTP-based TP of INR1,130.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412