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Tata Consumer Products Equity Research INDIA June 16, 2020 BSE Sensex: 33229 Tata Consumer Products ADD ICICI Securities Limited Maintain is the author and Annual Report Analysis Rs371 distributor of this report Story through key words = ‘The platform for better’, Regional, Digital transformation, Direct delivery to consumers and Change in consumer habits. Company Update We like TCPL’s strategy to (1) focus on regional launches to gain market shares as consumer preferences change in different states, (2) leverage Tata Sampann Consumer Staples & brand to launch food products such as nutrimixes/ chilla mix, poha, and pulses Discretionary based snacks and (3) invest in digital transformation from sourcing to distribution, (4) keep closer connect with consumers as the habits/ buying pattern Target price Rs415 are likely to change and (5) enable direct delivery of products through delivery providers and e-commerce partners. We stay believers; retain ADD rating with Earnings revision (%) FY21E FY22E SoTP based target price of Rs415. Sustained improvement in return ratios (EVA Revenues 0.0 0.0 positive) is integral for long-term value creation. EBITDA 0.0 0.0 ‘The platform for better’ strategy: The annual report speaks about ’The platform PAT ↓ 2.6 ↑ 2.1 for better’ strategy. The company wants to push boundaries in all business activities to improve product quality, productivity and contribution to the people and planet. Change in spotlight from National to Regional: TCPL came out with campaigns Shareholding pattern targeting each state separately in FY20. It changed the product packaging as well as Sep Dec Mar method of communication to connect with regional consumers. Key states targeted ‘19 ‘19 ‘20 Promoters 34.5 34.5 34.7 under this strategy were UP, Delhi, Punjab and Haryana. It also acquired regional Institutional brands (Kala Ghoda and Lal Ghoda) in Rajasthan. investors 40.6 40.9 38.9 MFs and others 10.7 12.2 14.9 Plans to launch food products under Tata Sampann brand: TCPL did multiple Banks/FIs 0.3 0.1 0.1 Insurance 1.8 2.4 6.1 pilots during FY20 in Foods category such as Nutrimixes/ Chilla mix, poha, pulse FIIs 27.8 26.2 17.8 based snacks, low sugar Tata Nx. It plans to do limited launch in select channels or Others 24.9 24.6 26.4 select geographies to gauge customer acceptance before national rollout. Source: BSE Possibility of lower sales in H1FY21 due to up-stoking in Q4FY20: Even the Price chart categories which are declining structurally (e.g. black tea in UK) also reported higher 450 volume growth. TCPL expects some slowdown in H1FY21 with easing of lockdown. 400 Takeaways from Mr. Sunil D’Souza, MD & CEO’s Q&A: (1) TCPL is strengthening 350 300 its capability in digital transformation for commodity buying, enabling the entire (Rs) 250 supply chain from demand planning to procurement and sales, (2) It has tied up with 200 delivery providers and e-commerce partners to enable direct delivery to consumers 150 100 and (3) There are many changes in consumer beliefs, habits and buying patterns. As consumer adapts to a new normal, some of the changes will stick. The key is to keep close to the consumer and quickly adapt to changes. Jun-19 Jun-17 Jun-18 Jun-20 Dec-18 Dec-19 Dec-17 Acquisition-led revenue growth: TCPL reported strong revenue growth of 32.9% in FY20, largely driven by acquisition of consumer products portfolio of Tata Chemicals. India beverages reported revenue growth of 6.6%. International beverages reported revenue decline of 0.4%. Revenues of non-branded business were up 15.7%. Tata Starbucks (JV) reported revenue growth of 21%. Market Cap Rs339bn/US$4.5bn Year to March FY19 FY20 FY21E FY22E Bloomberg TATACONS IN Revenue (Rs mn) 72,515 96,374 98,694 108,913 Shares Outstanding (mn) 916.2 Adj. Net Profit (Rs mn) 4,382 6,870 7,034 8,527 Research Analysts: 52-week Range (Rs) 397/199 Dil. Rec. EPS (Rs) 6.9 7.5 7.6 9.3 Manoj Menon Free Float (%) 65.3 % Chg YoY (5.5) 7.4 2.4 21.2 [email protected] FII (%) 17.8 P/E (x) 53.4 49.8 48.6 40.1 +91 22 6637 7209 Aniruddha Joshi Daily Volume (US$'000) 27,230 CEPS (Rs) 8.9 10.1 10.4 12.2 [email protected] Absolute Return 3m (%) 14.1 EV/EBITDA (x) 29.0 25.7 25.0 22.4 +91 22 6637 7249 Absolute Return 12m (%) 49.8 Dividend Yield (%) 0.7 0.7 0.9 1.0 Vismaya Agarwal, CFA Sensex Return 3m (%) (2.3) RoCE (%) 7.0 7.9 5.4 5.3 [email protected] +91 22 2277 7632 Sensex Return 12m (%) (14.9) RoE (%) 6.1 6.5 4.2 4.2 Please refer to important disclosures at the end of this report Tata Consumer Products, June 16, 2020 ICICI Securities EBITDA margins expanded despite gross margin decline: The gross margins declined 80bps in FY20 due to higher input prices and adverse revenue mix. However, the EBITDA margin improved 257bps in FY20 due to lower staff cost as % of net sales (194bps) and lower ad-spend as % of net sales (60bps). Improvement in net working capital days: The net working capital days declined from 101 in FY19 to 87 in FY20. The improvement is largely attributable to reduction in inventory days. We believe the acquisition of foods business resulted in lower inventory days. Core RoCE improves in FY20: The core RoCE has improved to 14.9% in FY20 from 12.9% in FY19 due to better profit margins. Core RoCE is calculated as EBIT / (Capital employed – Goodwill – Investments). Strong FCF generation in FY20: The FCF generation was strong at Rs8.3bn in FY20 (vs Rs(825)mn in FY19). While the OCF has increased due to acquisition of consumer business of Tata Chemicals, the stock acquisition route has not impacted the capex. TCPL continues to be net cash in FY20 (~Rs10/share). Maintain ADD: We model TCPL to report 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 Rs415. Key downside risk is lower-than-expected integration synergies. 2 Tata Consumer Products, June 16, 2020 ICICI Securities FY20 – Annual report highlights ‘The platform for better’ strategy The company’s annual report speaks about ‘The platform for better’. We note the company’s strategy is to focus on doing better in everything it does. It wants to do better in products and services, contribution towards people, the planet and productivity across workspace. Chart 1: ‘The platform for better’ strategy Source: Company, I-Sec research Highlights regarding key brands Tata Tea: Tata Tea is market leader by volume (~19.7%) and second largest player in value terms (20%) in India. It is the fastest growing tea brand in modern trade. The company changed the spotlight from national to regional and came out with campaigns targeting each state separately. It changed from product packaging to method of communication to connect with regional consumers. Key states targeted under this strategy were UP, Delhi, Punjab and Haryana. The spice based tea brands (Tata Tea Elaichi and Masala) have crossed revenues of Rs2bn in FY20. The company launched Tata Tea Tulsi Green in Q2FY20 in Delhi and plans to roll out it nationally in FY21. TCPL has rolled out seven stores of Tata Cha in Bengaluru. The company was forced to delay opening of four stores due to lockdown. Tetley: Global tea industry is ~US$45bn and black tea is the biggest segment. However, black tea segment continues to decline and non-black tea (Green, Decaf, 3 Tata Consumer Products, June 16, 2020 ICICI Securities Specialty, Cold infusions, Fruit and Herbal) segment is growing faster. Health and Wellness is key focus area of the industry. Tetley Super Teas and Tetley Cold Infusions also target the Health and Wellness segment. Due to fears of coronavirus pandemic, there was up-stocking by consumers which led to higher growth in FY20. However, the growth rates are expected to decline in coming weeks due to lifting of the lockdown. The company introduced new campaign ‘Now We’re Talking’ for Tetley Tea in UK. The company also introduced Indian flavour tea targeting South Asian diaspora. It introduced these tea variants under its flagship brand Tata Tea. TCPL introduced multiple non-black tea variants in Canada and now its market share has reached 3.9% in non-black tea market in Canada. TCPL also introduced Tetley tea in three different variants in USA as Masala, Elaichi and Ginger. Eight O’clock: The coffee market is slowing down in USA and there is growth only in (1) premium/ food service brands such as Starbucks, (2) small niche brands and (3) private labels. The company introduced Barista Blend and Flavors of America variants in FY20. Tata Salt: Tata Salt is market leader with 30% share of the entire salt category in India. Tata Chemicals expanded salt manufacturing capacity from 1 million tonnes to 1.2 million tonnes in FY20 and it is expected to provide support to TCPL’s growth plans in salt business. Tata salt launched campaign ‘Sawal kijiye apne namakse’. It was aimed at educating consumers about quality of salt. There is growing health awareness among consumers and they are selecting better-for-you options. (E.g.- lower sodium content in Tata Salt Lite, Iron and Iodine fortification in Tata Salt Plus). Specialty salts (Rock salt and Black salt) have gained market shares in modern trade in FY20.
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