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Tata Starbucks - The hidden gem within TATACONS portfolio

TATACONS entered into a Joint venture with Starbucks Corporation in FY13 to form Tata Starbucks Pvt. Ltd. Over the past decade, Tata Starbucks has successfully capitalized on India’s growing coffee chain market, expanding rapidly to generate a revenue of ~INR12.2b in FY24.

* Tata Starbucks has accelerated its store addition trajectory over the last five years, tripling its store count to 421 outlets in FY24 from 146 outlets in FY19 (~24% CAGR in store addition over the period). Going ahead, it plans to reach ~1,000 outlets by FY28 (~2.5x in the next four years; ~25% CAGR).

* Along with store additions, the company is focusing on improved store economics and is rolling out its successful pilot program (wherein it has revamped menu and décor and introduced new serving sizes) in additional stores to improve annual revenue per store (~INR32m in FY24).

* Factoring this strategic growth plan, coupled with flourishing Indian coffee chain market (~10-12% growth per annum), we expect Tata Starbucks to clock ~26%/35% revenue/EBITDA CAGR over FY24-26.

* Currently, we are valuing Tata Starbucks by the DCF method and arrive at an Enterprise value of ~INR182b (~9x FY26E Revenue).

Rapid store expansion and improving store economics to drive growth

* Tata Starbucks Private Limited (a 50:50 joint venture coffee chain company, owned by TATACONS and Starbucks Corporation) launched its business in India in FY13 with a single outlet in Mumbai.

* Over the past decade, the company has expanded to more than 400 outlets pan India (~26% store addition CAGR over FY14-24), reaching ~421 outlets by FY24 (up 26% YoY). It has clocked a revenue of INR12.2b in FY24 (~29% revenue CAGR over FY14-24; up 12% YoY) with revenue per store of ~INR32m (~4% CAGR over FY14-24; however, it is down 11% YoY, led by overall slowdown within the QSR space).

* Going ahead, the company had given guidance to reach ~1,000 outlets by FY28 (i.e., ~2.5x in four years; 25% CAGR).

* It plans to continue its expansion into Tier-2 cities and increase the number of its drive-thru outlets, airport-based outlets, highway stores and 24-hour café creating a significant presence pan India.

*  Apart from this, in order to increase its penetration in India and accelerate the acceptance among Indian consumers, Tata Starbucks had initiated a pilot program. This program introduces new products, smaller serving sizes, and renewed décor for its outlets, specially curated for the Indian market.

* This pilot program yielded positive results within the launched stores. Consequently, the company plans to extend these initiatives to additional stores going ahead.

* We believe this will not only increase the popularity and affordability, but also improve the store economics on account of higher revenue per store (led by volume growth)

* Factoring in the rapid store expansion and increasing revenue per store, we expect Tata Starbucks to clock ~26% revenue CAGR over FY24-26.

* The rapid expansion of stores is likely to maintain operating expense (opex) and capex at elevated levels. However, leveraging scale and operating efficiencies, Tata Starbucks anticipates further enhancements of its margins.

Flourishing market to aid growth trajectory; competition remains key monitorable

* Cafe chains in India are growing at a faster pace, led by increasing demand from younger, aspirational consumers, increasing global exposure, and increasing adoption of western culture.

* As per Statista Research, the India Coffee Chain Market is estimated at ~INR45b in CY23. Multiple industry reports suggest that the market is likely to grow by ~10-12% per annum for the next few years.

* However, the expanding market is also attracting competition from the domestic start-up space as well as global coffee chain companies.

* New global entrants like the British chain Pret a Manger and the Canadian chain Tim Hortons, alongside emerging specialty coffee chains such as Blue Tokai, Third Wave, and Slay are capitalizing on the flourishing coffee culture in India.

* As consumer preferences continue to evolve, fueled by factors such as urbanization and changing lifestyles, the competitive landscape is expected to intensify as this will lead to emergence of new domestic player and global chains. However, we believe that the coffee chain market in India is at a nascent stage and is large enough to accommodate all the new players.

* Comparing the key coffee chain players, Tata Starbucks is leading its peers with revenues of INR10.9b in FY23 (vs. INR9.2b/INR1b for Café Coffee Day/Costa Coffee), led by strong revenue growth over the last few years (~25% revenue CAGR over FY19-23). Café Coffee Day revenue also includes sales from other key business verticals, including vending machines (~48,788 machines in FY23) and hospitality services (3 resorts in Karnataka).

* In terms of operating profitability, it is placed at the second position with an EBITDA margin of ~18% in FY23 (Costa coffee led the charts with a margin of ~24%, while Café coffee day witnessed operating loss).

Good value unlocking potential for TATACONS

* With the growing coffee consumption and flourishing coffee chain market in India, coffee chain companies are attracting greater interest from venture capital and private equity funds. (As per Tracxn, Indian specialty coffee café chains have raised close to USD100m in the last two years).

* Within the unlisted space, Third Wave coffee has raised USD35m at a valuation of USD155m (valuing it at ~9x FY23 sales). While Blue Tokai is in advanced talks to raise funds at a valuation of USD180-200m (valuing it at 11.5x FY23 sales).

* In terms of listed entity, Coffee Day Enterprise (operates CCD) is valued at 1.5x FY23 sales (on account of continuous revenue decline and operating losses) while Devyani Enterprise (operates Costa Coffee) is valued at 6.5x FY23 sales.

* Currently, we are valuing Tata Starbucks by the DCF method and arrive at an Enterprise value of ~INR182b (~9x of FY26E Revenue)

* This valuation (~17x FY23 revenue) is higher than the valuations of other unlisted companies in this space (~9 to 11.5x of FY23 revenue). However, Tata Starbucks is placed at a much better position among the key coffee chain players in India (market leader within the space with strong brand value) with ~421 outlets as on FY24 with a revenue of ~INR12.2b. Factoring the same, we believe Tata Starbucks demands premium valuations.

Valuation and view

* TATACONS has a strategic roadmap in place to leverage the flourishing coffee chain market in India and sustain the high growth trajectory for Tata Starbucks. This involves rapidly expanding stores while enhancing store economics to drive continued success. Factoring the same, we expect Tata Starbucks to clock ~26%/35% revenue/EBITDA CAGR over FY24-26.

* TATACONS is following a two-pronged growth approach: 1) focusing on new growth engines such as Tata Starbucks, Tata Sampann, NourishCo, Tata Soulfull, and the readyto-eat/ready-to-consume business (Tata Smartfoodz); and 2) rapidly scaling up its distribution network along with digitization prowess across the supply chain, which will drive the next leg of growth.

* We expect a revenue/EBITDA/PAT CAGR of 13%/17%/19% over FY24-26 and arrive at our SoTP-based TP of INR1,350. We maintain our Buy rating on the stock.

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