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Operating profitability led by international beverage and non-branded business

Operating performance in line

* Tata Consumer Products (TATACONS) reported a healthy operating performance in 1QFY25. EBIT growth of 12% YoY was led by a strong performance in international branded beverage segment (EBIT up 52% YoY) and non-branded business (EBIT up 92% YoY). EBIT for India branded business declined 1% YoY.

* We broadly maintain our FY25/FY26 EBITDA estimates. Reiterate BUY with an SoTP-based TP of INR1,380.

Broad-based revenue growth across segments

* TATACONS reported revenue of INR43.5b (in line), up 16% YoY. EBITDA margin improved 80bp YoY to 15.3% (in line), led by higher gross margins (up 270bp to 44.9%). EBITDA was up 22% YoY at INR6.7b (in line). Margin expansion was led by structural interventions and tactical pricing in most of its international markets and higher coffee realizations within unbranded business.

* Indian branded business grew by 14% YoY to INR28.2b, led by revenue growth of 5%/25% YoY in Indian branded beverage/Indian food business to INR15.2b/INR12.9b. EBIT declined by 1% YoY to INR3.3b.

* Volumes in India packaged beverage business stood flat YoY, while volumes in the foods business grew 10% YoY (excluding Capital Foods). The salt segment’s revenue increased 9% YoY, led by ~8% YoY volume growth. Tata Sampann portfolio grew 37% YoY.

* Ready-to-drink (RTD) segment revenue grew ~7% YoY to ~INR3.11b. The business was hurt by a strong summer, which reduced out-of-home consumption, especially for single serve packs. Tata Starbucks revenue grew only 4% YoY due to lower footfalls.

* International branded beverages revenue grew 17% YoY to ~INR10.5b, with EBIT growth of 52% YoY to INR1.8b. EBIT margins stood at 16.8% (up 380bp YoY). Non-branded business revenue increased 33% YoY to INR5b, while EBIT jumped 92% YoY to INR961m due to higher coffee prices.

* Adjusted PAT declined by 5% to INR3b (est. INR3.9b), led by an increase in finance costs (by 3.6x YoY) and depreciation (up 81% YoY) relating to the acquisition. Also, the company witnessed an exceptional loss of INR171m relating to business restructuring in 1QFY25.

Highlights from the management commentary

* Acquired businesses: Capital food and Organic India are margins-accretive businesses; however, in this quarter, their combined gross margin stood at ~48.4%, affected by integration costs (being the first quarter). Going ahead margins are expected to expand, driving up overall company margins.

* Tata Sampann reported 37% YoY growth, driven by multiple innovations over last few years (such as launch of branded dry fruits on ecommerce platforms). New launches contributed one-third of the segment’s growth. Margins also expanded sequentially.

* Commodity prices: Tea production in the country was affected by unfavorable weather conditions. Accordingly, North India tea prices were up 16% YoY. Robusta coffee prices have touched record highs during the quarter due to global supply shortages. Averages prices for 1Q were 57% higher YoY.

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 revenue/EBITDA/PAT CAGR of 12%/18%/20% during FY24-26. We broadly maintain our FY25/FY26 EBITDA estimates. Reiterate BUY with an SoTP-based TP of INR1,380

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