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Going aggressive on white spaces

TCPL’s acquisitions of Capital Foods and Organic India signify aggression to tap white spaces with a clear intent to build a more comprehensive premium F&B portfolio with high growth potential. The acquisitions are at c.6.8x and c.5.2x FY24E sales of Capital Foods and Organic India vs TCPL’s own valuation at c.7x at CMP, c.5-5.5x at 3-6M ago prices, and add c.6% to TCPL’s Sales and EBITDA. Capital Foods has scaled well in the past (5-year sales CAGR 15%) and has strong margin potential but a lot more work needs to be done in case of Organic India (patchy growth profile, falling margin - could require prolonged category-development work). The immediate task would be to leverage TCPL’s distribution scale to unlock value in estimated large TAMs, and also correct cost-structures (including trade-related) to improve profitability. This, in our view, could take a couple of more years’ work vs management’s guidance of Year-2 break-even.

* Contours of the transaction, and estimated impact on financials: TCPL announced that it has entered into a definitive agreement to acquire: 1) Capital Foods in a phased manner - 75% upfront (to be completed by Mar’24) and balance 25% within three years - at a valuation of INR51bn (EV on no-cash-no-debt basis). This works out to c.6.8x FY24 sales (expected to be in range of INR 7.5-7.7bn), c.30x EBITDA, 2) 100% stake in Organic India for a cash consideration of INR19bn (EV on no-cash-no-debt basis) which works out to c.5.2x FY24E sales (INR 3.6-3.7bn) plus potential earnout linked to FY26 performance. TCPL had net-cash of c.INR 25bn at Sep’24 and plans to fund the acquisitions through a combination of internal accruals and debt or equity (rights) or a combination thereof. Management expects deal to achieve EPS breakeven in Year 2 of operation and be accretive thereafter. For this to be achieved, TCPL would need to double Capital Foods’ FY24 topline by FY26 and make a c.25-26% margin thereon, as per our workings. TCPL has grown Nourishco aggressively (80%+ in FY22/23) after buying out its JV partner’s stake but HUL’s performance on the GSK acquisition suggests that integrating a large business is not all that easy. Organic India could need a much longer period of development, in our view.

* High-growth premium F&B is a key thrust area for TCPL: Capital Foods operates the ‘Ching’s Secret’ (market-leader in ‘Desi Chinese’ categories – chutneys, spices, sauces, soups, noodles) and ‘Smith & Jones’ (cooking pastes) brands while Organic India has a portfolio of premium organic products including tea & infusions, herbal supplements and organic packaged foods with strong moats in supply-chain and organic certifications. Both businesses are in high growth fragmented categories with large TAMs - c.INR220bn for Capital Foods and c.INR820bn globally in the case of the latter, as per management - and enjoy superior gross margins (50-60%+) vs TCPL’s existing portfolio (c.43-44%).

* Expected synergy benefits: Given that both businesses are under-indexed on distribution (Capital Foods/Organic India reach at 400k/24k outlets in India vs TCPL’s 3.8mn), the immediate opportunity is to capitalise on TCPL’s GT strength, and increase presence in the alternate modern channels; Organic India’s portfolio also unlocks the pharma channel for TCPL to cross-sell other brands. On costs front, there is potential to extract efficiencies on various aspects - trade margins, selling expenses, fixed costs, utilisations, etc, though TCPL could need to up ad-spends in line with the intent to drive aggressive growth.

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