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Tea margin trajectory to be key going ahead

Tata Consumer Products Ltd. (TCPL) 2QFY25 operating performance was only slightly below our estimate largely impacted by the core businesses of Tea and Salt. Price action in the salt portfolio has already been implemented in Oct’24. To focus on market share, company has taken staggered price hike in tea portfolio (not enough to compensate for the inflation). Further pricing action in the tea business and its impact on margins remains a key monitorable as it will also be determined by peer actions. Even in a difficult environment, it continues to execute on its strategic priorities (strengthening GT, driving new channels, innovations, etc.). We thus remain fundamentally optimistic and upgrade our rating to BUY with a revised target price (TP) of Rs1,325 (Rs1,280 earlier).

Result Highlights (Consolidated)

* Headline performance: Consolidated revenue was up 12.9% YoY (~5% organic growth) to Rs42.1bn. Consol. EBITDA was up 16.6% YoY to Rs6.3bn. PBT was down 16.1% YoY to Rs4.2bn.

* Consolidated gross margin up by ~110bps YoY to 43.6% (but down ~130bps QoQ). Consolidated EBITDA margin was up ~50bps YoY to 14.9% as employee cost was up 50bps YoY while other overheads were up just 10bps YoY.

* Segmental performance: (1) India Beverages grew 3% (-4% organic), with tea volumes declining by 4% YoY. (2) India Foods revenue up 28% (9% organic). Volume growth was just 1%. (3) International business recorded 7% revenue growth (5% constant currency). (4) Growth businesses grew 15% organically. (5) Non-branded business grew 19% in CC terms.

* Standalone revenues grew by 15.8% YoY to Rs30.5bn. EBITDA margin stood at 11.3% (down 370bps YoY).

Key Conference Call Highlights

(1) Rural demand is recovering but still not at a stage which can drive double-digit volume growth. On the other hand, urban demand has softened. (2) Tea cost up 25-30% and is expected to stay elevated for some time (till 1QFY26). Price hikes to offset ~30% cost increase will impact demand. The company didn’t hike tea prices at one go to focus on market share and still not have passed on the price hike fully to the consumer. If competition takes price increase, there is no reason to not see overall margin improvement in FY25. (3) The company announced a Rs2 price hike effective Oct’24 after 2 years of flat pricing, to mitigate input cost inflation.

Valuation & View In the near-term, focus will be on improvement of growth and profitability in the domestic core business i.e., Tea and Salt. Insignificant operating miss in 2QFY25 has led to minor changes in our full year estimates. Over FY24-FY27E, we now build earnings CAGR of ~20% driven by 13.2% revenue CAGR and 120bps improvement in EBITDA margin. The stock has been under pressure due to subdued demand environment and key input cost inflation. Post the recent correction, the stock now trades at 64x/52x/45x FY25E/FY26E/FY27E EPS. Earnings growth trajectory beyond FY27 also remains robust compared to its peers, with good visibility on revenue growth. Elongated trajectory of strong revenue growth along with margin improvement makes us assign premium multiple compared to some of its domestic FMCG peers even while current ratios are low (but improving). We upgrade our rating to BUY with a revised TP of Rs1,325 (Rs1,280 earlier), as we assign a target multiple of ~54x on FY’27E EPS.

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