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Incubating new products Operating performance above estimates

* Tata Consumer Products (TATACONS) reported 8% YoY EBIT growth in 2QFY25 on the back of a strong performance in its international branded beverage segment (EBIT up 74% YoY) and non-branded business (EBIT up 86% YoY). EBIT for India branded business declined 26% YoY due to tea cost inflation.

* Organically (excluding acquisition), India business revenue grew 2% YoY and EBITDA declined 23% YoY in 2QFY25.

* Going ahead, India business margins are likely to recover as the company has increased prices of salt (to mitigate cost inflation) and tea (staggered price increases). The growth business will continue to drive revenue, with a rebound in the ready-to-drink (RTD) segment.

* Factoring in 2Q performance, lower interest cost led by repayment of debt and tax benefits from the merger with subsidiaries, we increase our FY25 earnings estimates by 6% while maintaining our FY26 earnings estimates. Reiterate BUY with an SoTP-based TP of INR1,320.

International beverage and non-branded business drives operating profitability

* 2Q revenue grew 13% YoY to INR42.1b (in line). EBITDA margin improved YoY by 50bp to 14.9% (est. 13.8%), led by higher gross margins (up 110bp YoY). EBITDA rose 17% YoY to INR6.3b (est. INR5.8b).

* Indian branded business grew 10% YoY to INR26.5b, led by revenue growth of 3%/20% YoY in Indian branded beverage/Indian food business to INR13.8b/INR12.7b. EBIT declined 26% YoY to INR2.4b.

* Volumes in India packaged beverage business fell 4% YoY, while volumes in the foods business grew 1% YoY (excluding Capital Foods). Salt segment revenue grew 2% YoY, with flat volumes. Tata Sampann portfolio grew 26% YoY.

* RTD segment (NourishCo) revenue declined ~11% YoY to ~INR1.54b due to unfavorable weather and competitive pricing actions. Tata Gluco Plus pricing was reset in response to competition with encouraging initial results. Tata Starbucks revenue grew 2% YoY, in line with soft demand trends in the sector.

* International branded beverages revenue grew 18% YoY to ~INR11.2b, with EBIT growth of 74% YoY to INR1.7b. EBIT margins stood at 15%, up 490bp YoY. Non-branded business revenue increased by 19% YoY to INR4.6b, while EBIT jumped 86% YoY to INR1.1b.

* Adj. PAT grew 10% YoY to INR3.8b (est. INR3.4b). During the quarter, the company incurred exceptional expenses of INR272m relating to legal and professional fees for business acquisitions (integration and restructuring).

* For 1HFY25, revenue/EBITDA/adj. PAT grew 15%/20%/3% YoY to INR85.7b/INR12.9b/INR6.9b. Based on our estimates, the implied revenue/EBITDA growth for 2HFY25 is 15%/11% YoY.

Highlights from the management commentary

* RTD: The entry of a new player with different price points disrupted the industry. The company has adjusted its pricing strategy in response to competition, resulting in encouraging initial outcomes. It expects to return to 25-30% growth by 3Q end.

* New distribution channel: Under a pilot project, the company has launched its products in pharmacies in 10 cities. Further, it will launch products such as salt, pulses, sauces and mayo (capital foods products), tea and coffee in the HoReCa channel under this pilot project. It has created HoReCa-ready packs across categories and initial results are encouraging.

* Tata Sampann posted another strong quarter with 26% YoY growth. It posted high single-digit margin, led by a change in the product mix, brand awareness and economies of scale.

Valuation and view

* TATACONS's holistic strategy is aimed at: 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 toward being a multicategory FMCG player.

* We expect TATACONS to clock a CAGR of 10%/13%/19% in revenue/EBITDA/ PAT during FY24-26. Reiterate BUY with an SoTP-based TP of INR1,320.

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