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Equity Research INDIA July 19, 2020 BSE Sensex: 37020 Tata Consumer Products ADD ICICI Securities Limited Maintain is the author and “Show me” vs “Trust me” story #1 Rs423 distributor of this report

Con sensus (including us) believes (and hopes) in ‘value creation story’ of TCPL, a 60% and 140% stock returns over 1 yr and 3 yrs is testimony. The phase of “Trust Company Update me” story is over. With TCPL’s FY22 valuations at a premium to Colgate, GCPL, Consumer Staples & Marico, it’s now a “Show me” story. We stay believers; retain ADD. We present essential variables for incremental stock returns – Discretionary (1) Tata Tea (India) needs to sustain 6-8% volume growth via formalization, market Target price Rs450 share gains due to regionalization and premiumisation,

Shareholding pattern (2) Tata Salt volume growth needs to accelerate to 8% (from ~5% earlier). It Sep Dec Mar ‘19 ‘19 ‘20 generates lowest revenue/grammage among packaged food products in India and Promoters 34.5 34.5 34.7 hence distribution was capped due to higher freight costs. Merger of distribution Institutional investors 40.6 40.9 38.9 (mixed load) will help to reduce freight cost and leverage the brand potential MFs and others 10.7 12.2 14.9 Banks/FIs 0.3 0.1 0.1 (awareness > availability), Insurance 1.8 2.4 6.1 FIIs 27.8 26.2 17.8 (3) Packaged staples incur additional cost of c.15% compared to loose products.

Others 24.9 24.6 26.4 Hence, Tata Sampann’s ability to recruit and retain consumers (in normal Source: BSE consumer behavior conditions post COVID) is crucial and Price chart (4) Synergy benefits of a minimum of Rs2bn 500  Tata Tea is an established brand with 400 Tea volume growth needs to sustain: healthy RoCE. While the category penetration is high, we believe the TCPL can 300 (Rs) sustain 6-8% volume growth due to (1) category formalization, (2) market share gains 200 due to ‘Regionalization strategy’ and (3) premiumization. 100  Merger of distribution and synergies necessary for growth of Tata Salt: Tata

Jul-17 Jul-18 Jul-19 Jul-20 Salt generates lowest revenues per gram among the packaged food products in India. Jan-18 Jan-19 Jan-20 Thus there are certain restrictions on its distribution as freight cost can hurt profitability. Merger of distribution can help to leverage the distribution and use mix load to reduce freight costs. Higher revenue share of Tata Salt is crucial as it

generates one of the highest operating margins among all products of TCPL.

 Tata Sampann has tailwinds in FY21. While consumer willingness to pay a premium (versus loose products) for staples like Tata Sampann is high at this point, the real test will be after the threat of COVID gets over. Packaged food products incur (at least) an additional cost of c.15% than loose products (GST, packing costs and SG&A). Sustainability of ramp-up depends on the quantum of household penetration improvement in FY21 and the ability to differentiate by adding value.

Market Cap Rs388bn/US$5.2bn Year to March FY19 FY20 FY21E FY22E

Bloomberg TATACONS IN Revenue (Rs mn) 72,515 96,374 98,694 108,913 Shares Outstanding (mn) 916.2 Adj. Net Profit (Rs mn) 4,382 6,870 7,034 8,527 Research Analysts: 52-week Range (Rs) 433/227 Dil. Rec. EPS (Rs) 6.9 7.5 7.6 9.3 Manoj Menon Free Float (%) 65.3 % Chg YoY (5.5) 7.4 2.4 21.2 [email protected] FII (%) 17.8 P/E (x) 60.9 56.7 55.4 45.7 +91 22 6637 7209 Daily Volume (US$'000) 24,882 CEPS (Rs) 8.9 10.1 10.4 12.2 Aniruddha Joshi [email protected] Absolute Return 3m (%) 31.3 EV/EBITDA (x) 33.1 29.4 28.5 25.6 +91 22 6637 7249 Absolute Return 12m (%) 65.8 Dividend Yield (%) 0.6 0.6 0.8 0.9 Vismaya Agarwal, CFA Sensex Return 3m (%) 17.8 RoCE (%) 7.0 7.9 5.4 5.3 [email protected] +91 22 2277 7632 Sensex Return 12m (%) (4.4) RoE (%) 6.1 6.5 4.2 4.2

Please refer to important disclosures at the end of this report

Tata Consumer Products, July 19, 2020 ICICI Securities

 Change in revenue mix- Higher share of India business: Higher revenue share of India Business is crucial for geography and category mix-led margin expansion. We model the revenue share of India business to move to 68% in FY25 from 59% in FY20.

 Retain ADD: We model revenue and PAT CAGR of 6.3% and 11.4%, respectively over FY20-22E. We value the stock on SoTP basis with unchanged target price of Rs450. Key downside risk is lower-than-expected integration synergies.

Tata Consumer Products, July 19, 2020 ICICI Securities

Catalysts to unlock potential in the story

The phase of “Trust me” story is over. With TCPL’s FY22 valuations at a premium to Colgate, GCPL, Marico, it’s now a “Show me” story.

Tea volume growth needs to sustain at 6-8%

While there is high penetration of tea in India, there is scope to gain market shares from (1) unorganised/ smaller players, (2) launch of differentiated products and (3) regionalization strategy. TCPL has introduced different variants of tea in different states. It has also changed the consumer communication and packaging according to the requirements in respective state.

We believe sustaining tea volume growth upwards of 6% is imperative. With an established business model (and healthy return ratios), it needs to focus on (further) growing the franchisee now.

Chart 1: Volume growth of India Beverages (Largely Tata Tea)

8 (%) 6

0 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20

Source: Company, I-Sec research

Distribution-led growth should be visible H2FY21 onwards

TCPL had distribution network of 2mn retail outlets whereas Tata Salt had distribution network of 1.5mn outlets prior to the merger. We believe merger of the distribution networks is underway now and the benefits will be visible H2FY21 onwards. Merger of distribution network will help to (1) cross selling of products and (2) better terms of trade with the distributors.

Tata Consumer Products, July 19, 2020 ICICI Securities

Chart 2: Creation of stronger distribution network post-merger

3.0

2.5

2.0

1.5 (mn)

1.0

0.5

0.0 TCPL distribution network Consumer business TCL Combined distribution network

Source: Company data, I-Sec research

Table 1: EBITDA of distributors… Table 2: … to increase post-merger Particulars Rs Particulars Rs TCPL sales 100 TCPL sales 100 Commission (Rs mn) @5% 5 TCL consumer sales 25 Direct costs @40% 2 Commission (Rsmn) @5% 6.25 Indirect & fixed costs 1.5 Direct costs @40% 2.5

EBITDA 1.5 Indirect & fixed costs 1.5

EBITDA 2.25 Source: Company, I-Sec research

Why merger of distribution is necessary for growth of Tata Salt? While Tata Salt is one of the most trusted food brands in India, it generates lowest revenues per gram compared to other food products. Hence, we believe merger of distribution network can help to reduce the freight costs (usage of mixed load in trucks) and generate higher revenues of Tata Salt.

Table 3: Revenues per grammage for major food products Brand Segment Price/Grammage (Paise) Tata Salt Packaged Salt 1.8 Maggi Noodles 16.2 Good Day Biscuits 17.2 Tata Tea Agni Packaged Tea 20.0 Govardhan Paneer (Cottage cheese) 42.5 Bingo Wafers/ Chips 50.0 Cadbury 5 Star Chocolates 50.0 Nescafe Classic Instant coffee 236.5 Source: Company data, I-Sec research

Tata Sampann has tailwinds in FY21

While consumer willingness to pay a premium (versus loose products) for staples like Tata Sampann is high at this point, the real test will be after the threat of COVID gets over. Packaged food products incur (at least) an additional cost of c.15% than loose products (GST, packing costs and SG&A). Sustainability of ramp-up depends on the quantum of household penetration improvement in FY21 and the ability to differentiate by adding value.

Tata Consumer Products, July 19, 2020 ICICI Securities

Covid-19 has stimulated the demand for packaged food products. Consumers are ready to pay higher price for the hygiene and better packaging. We believe this trend has provided an opportunity for (commodity+) brands like Tata Sampann. There are two possible reasons for higher growth of Tata Sampann revenues as (1) the existing consumers buy more as the preference is for home-cooked food and (2) Tata Sampann recruits new households. We keenly watch consumer behaviour post the threat of Covid as there is c.15% higher cost for a branded staples product versus a loose commodity. Ability to attract and retain consumers (in-spite of c.15% higher costs) will be crucial for sustainable value creation. Table 4: Additional costs incurred by packaged food products like Tata ampann Expense As % of Sales Comments GST 5% No GST on loose items but 5% on branded food items Packaging c.4% There is negligible cost of packaging loose products Branding c.5% Ad-spend, Sales promotion etc. Storage cost c.1% Separate storage of packaged products Total additional costs c.15% Source: Company, I-Sec research

Change in revenue mix – Important for margin expansion The change in revenue mix will also be important for generating higher margins (and return ratios) for TCPL. Among the three segments, India Beverages, India Foods and International Beverages, India Beverages generates highest margins. Steady increase in revenue share of India Beverages and India foods will improve the margins at the consolidated level. Chart 3: EBIT margins of major segments (FY20)

16.0

14.0

12.0

10.0

8.0 (%)

6.0

4.0

2.0

- India Beverages India Foods International Non branded branded business business

Source: Company, I-Sec research

Revenue share of India business (Food+ Beverages) can move up to 68% in FY25 from 59% in FY20 and it will improve the margins as well as FCF generation.

Tata Consumer Products, July 19, 2020 ICICI Securities

Table 5: FY20-25E - Volume and price CAGR estimates of different segments of TCPL Revenues (Rsmn) FY20 Volume CAGR (%) Price CAGR (%) FY25E Comments Distribution gains, ~2% market share India Tea 36,265 8 3 61,109 gain, Regionalization strategy 2-3% Market share gains, India Salt 17,637 8 4 31,082 premiumization, distribution gains Beneficiary of rising health awareness Tata Sampann 3,000 30 3 12,485 post Covid Globally market is declining but some Tetley 19,812 2 1 22,968 market share gains, premiumization Tata Coffee Standalone 7,194 6 3 11,069 Steady growth in market Eight O’clock 12,466 2 3 15,910 In line with market growth Total 96,374 154,622 Revenue CAGR of 10% Source: Company, I-Sec research

Table 6: Revenue share of India beverages and Foods could increase Segment FY20 FY25E India Tea 38% 40% India Salt 18% 20% Tata Sampann 3% 8% Tetley 21% 15% Tata Coffee Standalone 7% 7% Eight O’clock 13% 10% Total 100% 100% Source: Company, I-Sec research

Tata Consumer Products, July 19, 2020 ICICI Securities

Key charts - Annual

Chart 4: Revenues and growth rates Chart 5: EBITDA margin

120000 EBITDA margin Mean +1SD -1SD 110000 18 17 100000 16 90000 15 80000 14 70000 13 (%) (Rs mn) (Rs 60000 12 11 50000 10 40000 9 30000 8 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY21E FY22E

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 6: Net profit and growth rates Chart 7: RoE & RoCE

10,000 RoE RoCE Cost of Capital 16 8,000 14

6,000 12 10 4,000 8 (%) (Rs mn) (Rs 2,000 6 4 0 2 (2,000) 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY21E FY22E

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 8: Net working capital days Chart 9: Gross margin & ad-spend

160 Gross margin Ad-spend as % of Net Sales 140 70

120 60

100 50

80 40 (Days) (%) 60 30

40 20

20 10

0 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY21E FY22E

Source: Company data, I-Sec research Source: Company data, I-Sec research

Tata Consumer Products, July 19, 2020 ICICI Securities

Key charts – Quarterly (Consolidated)

Chart 10: Revenues and growth rates Chart 11: Net profit and growth rates

Revenues YoY Growth (%) Net profit YoY Growth (%)

30000 40 2000 700 35 1800 600 25000 1600 30 500 20000 25 1400 1200 400 20 15000 1000 300 15 (Rs mn) (Rs (Rs mn) (Rs 800 200 10000 10 600 5 100 5000 400 0 200 0 0 -5 0 -100 Jun-18 Jun-19 Jun-18 Jun-19 Mar-18 Mar-19 Mar-20 Mar-18 Mar-19 Mar-20 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 'Jun-17 'Jun-17

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 12: Gross margin (%) Chart 13: PAT margin (%)

Gross margin PAT margin

47 12

46 10

45 8

44 6

43 4

42 2

41 0 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Mar-18 Mar-19 Mar-20 Mar-18 Mar-19 Mar-20 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 14: EBITDA margin (%) Chart 15: Effective tax rate (%)

EBITDA margin Effective tax rate

16 40 14 35 12 30 10 25 8 20 6 15 4 10 2 5 0 0 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Mar-18 Mar-19 Mar-20 Mar-18 Mar-19 Mar-20 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19

Source: Company data, I-Sec research Source: Company data, I-Sec research

Tata Consumer Products, July 19, 2020 ICICI Securities

Chart 16: Mean P/E(x) and standard deviation

TCPL P/E -1 Std Dev. Mean +1 Std Dev. 60

30 (x)

0 Jul-17 Apr-11 Apr-15 Oct-19 Jan-13 Jun-13 Jan-17 Jun-18 Mar-16 Mar-20 Feb-12 Sep-11 Aug-12 Dec-13 Nov-14 Sep-15 Aug-16 Dec-17 Nov-18 May-14 May-19

Source: Company data, I-Sec research

Tata Consumer Products, July 19, 2020 ICICI Securities

Financial summary

Table 7: Profit & loss statement Table 9: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY19 FY20 FY21E FY22E FY19 FY20 FY21E FY22E Net Sales 72,515 96,374 98,694 108,913 Operating Cashflow 5,981 11,643 10,446 11,390 Operating Expenses 64,656 83,453 85,369 94,046 Working Capital (3,883) (820) (273) (1,691) EBITDA 7,859 12,922 13,325 14,867 Changes % margins 10.8 13.4 13.5 13.7 Capital Commitments (2,924) (2,518) (3,000) (3,000) Depreciation & Amortisation 1,226 2,417 2,554 2,682 Free Cashflow (825) 8,305 7,173 6,699 Gross Interest 525 779 812 679 Cashflow from 733 (6,728) (1,534) (869) Other Income 1,571 1,116 1,466 2,131 Investing Activities Recurring PBT 7,680 10,842 11,425 13,638 Issue of Share Capital - - - - Less: Taxes 2,609 2,742 2,879 3,478 Inc (Dec) in Borrowings (79) (867) (5,070) (679) Less: Minority Interest (689) (1,230) (1,512) (1,633) Dividend paid (2,158) (2,216) (2,949) (3,410) Net Income (Reported) 4,788 6,937 7,034 8,527 Chg. in Cash & Bank 594 1,011 620 4,741 Extraordinaries (Net) 406 67 - - balance Recurring Net Income 4,382 6,870 7,034 8,527 Closing cash & balance 10,336 16,215 16,834 21,575 Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 8: Balance sheet Table 10: Key ratios (Rs mn, year ending March 31) (Year ending March 31) FY19 FY20 FY21E FY22E FY19 FY20 FY21E FY22E Assets Per Share Data (Rs) Total Current Assets 45,996 56,821 58,193 66,447 EPS 6.9 7.5 7.6 9.3 of which cash & cash eqv. 10,336 16,215 16,834 21,575 Cash EPS 8.9 10.1 10.4 12.2 Total Current Liabilities & 11,403 15,528 15,969 17,623 Dividend per share (DPS) 2.5 2.7 3.2 3.7 Provisions Book Value per share (BV) 116.2 149.9 216.5 222.1 Net Current Assets 34,593 41,292 42,224 48,824 Investments 9,950 13,831 12,830 11,774 Growth (%) Net Fixed Assets 48,617 113,125 170,903 171,222 Net Sales 8.1 32.9 2.4 10.4 Capital Work-in-Progress 4,244 954 954 954 EBITDA (6.3) 64.4 3.1 11.6 Total Assets 97,404 169,202 226,911 232,773 PAT (0.8) 41.2 5.4 19.4 DPS - 8.0 18.5 15.6 Liabilities Borrowings 12,936 17,264 13,058 13,285 Valuation Ratios (x) Deferred Tax Liability 874 2,865 2,865 2,865 P/E 60.9 56.7 55.4 45.7 Minority Interest 10,277 10,925 11,423 11,942 P/CEPS 47.6 42.0 40.7 34.8 Equity Share Capital 631 922 922 922 P/BV 3.6 2.8 2.0 1.9 Face Value per share (Rs) 1.00 1.00 1.00 1.00 EV / EBITDA 33.1 29.4 28.5 25.6 Reserves & Surplus* 72,686 137,227 198,643 203,760 EV / Sales 3.6 3.9 3.9 3.5 Less: Misc. Exp. n.w.o. Net Worth 73,317 138,149 199,565 204,682 Operating Ratios Total Liabilities 97,404 169,202 226,911 232,773 Raw Material / Sales (%) 55.3 56.1 56.0 55.9 Source: Company data, I-Sec research Employee cost / Sales (%) 11.1 9.2 9.2 9.2 Other exps / Sales (%) 22.8 21.3 21.3 21.3 Other Income / PBT (%) 20.5 10.3 12.8 15.6 Effective Tax Rate (%) 34.0 25.3 25.2 25.5 Working Capital (days) 100.9 87.3 86.2 83.8 Inventory Turnover (days) 81.0 64.8 65.0 65.0 Receivables (days) 34.3 34.9 34.7 35.0 Payables (days) 33.5 35.8 36.0 36.0 Net D/E (x) (0.1) (0.1) (0.1) (0.1)

Profitability Ratios (%) Net Income Margins 6.0 7.1 7.1 7.8 RoACE 7.0 7.9 5.4 5.3 RoAE 6.1 6.5 4.2 4.2 Dividend Payout 43.2 36.2 41.9 40.0 Dividend Yield 0.6 0.6 0.8 0.9 EBITDA Margins 10.8 13.4 13.5 13.7 Source: Company data, I-Sec research

Tata Consumer Products, July 19, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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