TataTAT Consumer Products (TATGLO)

CMP: | 580 Target: | 700 (20%) Target Period: 12 months BUY

February 3, 2021 Price led growth; tea procurement prices peak out… reported strong revenue growth of 23.1% led by robust growth in beverage & India foods segment. Overall volume

growth was ~7%. The sharp increase (70-80%) in tea procurement prices

led the company to take aggressive price hikes in tea. In turn, this resulted Particulars in 43% growth in the India beverages segment. Still price hikes were

Particulars (| crore) Amount insufficient to pass on the entire commodity price rise, which impacted India Market Capitalization 53,447.9 beverage segment margin by 839 bps. India food business grew 19% led by Total Debt (FY20) 1,488.4 12% volume growth. Tata Sampann & Tata Salt Lite saw 40% & 110% sales Cash and Investments (FY20) 2,455.0

Result Update Result growth in Q3. International tea business & US coffee business revenue grew EV 52,481.2 7% & 6%, respectively, led by similar volumes. Gross margins contracted 52 week H/L (|) 407 / 178 574 bps but savings in employee spends, marketing spends & other Equity capital 92.2 overhead of 94 bps, 125 bps & 256 bps, respectively, restricted operating Face value (|) 1.0

margins contraction by 99 bps. Operating profit increased 13.6% to | 361.3 Key Risk crore. PAT increased 28.6% to | 237.4 crore led by higher operating profit & decline in tax provisioning. The company acquired 100% stake in Kottaram  Tea crop in next season would arrive Agro Foods (brand Soulful) for a consideration of | 156 crore. in April-May 2021. Any significant negative impact on production could

Robust innovation pipe line to fuel the growth keep tea prices elevated. In turn, this TCPL’s focus has shifted from base products to valued added products in may pressurise margins in medium

each category. This would not only drive revenues but also expand margins. term It has launched Tata Tea Tulsi, Tetley green tea Immune, Tata tea Gold care, Tata Sampann Poha (thin) & Tata Tea Quick chai (RTD tea) in India during  Any reversal of acceleration in the quarter. It also launched many new product based on health & immunity consumption trend shift from in International geographies. Further, high margin products (Tata Salt Lite, unbranded to branded may impact Tata Sampann) are growing much faster compared to base brands. We volume growth believe consumption shift from loose to branded packaged food would drive Price Chart volumes in tea, pulses categories. We expect 11.7% CAGR revenue growth in FY20-23E backed by volume growth in tea & pulses, Premiumisation in 700 16000 salt, considerable rise in new products launches in last few quarters. 600 14000 500 12000

Tea prices impact on gross margins is temporary 10000 Research Equity Retail

400 8000 300 – Though high tea prices in India adversely impacted gross margins in the 6000 current quarter, we believe reversal of this trend in FY22 given procurement 200 4000 prices have cooled off from peak & company has passed on partial 100 2000 commodity inflation in terms of price hikes. Further, strong revenue growth 0 0

would bring operating leverage benefits & aid margins, going forward. We

Jan-20 Jan-21 Jan-18 Jan-19

Sep-17 Sep-18 Sep-19 Sep-20

May-17 May-20 May-19 estimate 160 bps operating margins expansion in FY20-23E considering May-18 various cost cutting measures in place, reversal in commodity prices & TGBL NIFTY change in product mix in India food business. Securities ICICI Valuation & Outlook Research Analyst The acceleration of unbranded to branded consumption shift post pandemic Sanjay Manyal has worked well for packaged foods companies. We believe these trends [email protected]

would benefit TCPL in the medium term. We estimate 26.6% CAGR earnings growth in FY20-23E. We value TCPL at 50x FY23E earnings with revised target price of | 700/share (earlier | 605) & maintain BUY recommendation.

Key Financial Summary

Key Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)

Net Sales 7251.5 9637.4 11512.3 12473.7 13446.2 11.7% EBITDA 785.9 1292.2 1632.1 1843.0 2016.7 16.0% EBITDA Margin % 10.8 13.4 14.2 14.8 15.0 Adjusted Net Profit 478.4 641.8 985.8 1150.1 1301.8 26.6%

EPS (|) 7.2 5.0 11.0 12.5 14.1 P/E 80.1 116.2 52.6 46.5 41.1 RoNW % 6.5 4.6 7.2 8.1 8.8 RoCE (%) 8.4 6.9 8.9 9.8 10.5 s Source: Company, ICICI Direct Research Result Update | Tata Consumer Products ICICI Direct Research

Exhibit 1: Change in estimates Q3FY20 Q3FY20E Q3FY20 YoY (%) Q2FY21 QoQ (%) Comments Net sales grew 23.1% led by aggressive price hikes taken in Net Sales 3,069.6 2,827.3 2,493.0 23.1 2,781.3 10.4 tea segments as well as strong volumes With ~70-80% increase in tea prices, gross margins contracted Raw Material Expenses 1,909.6 1,637.3 1,407.8 35.6 1,646.2 16.0 574 bps. However, tea prices have cooled off from the peak Employee Expenses 241.2 242.4 219.4 9.9 229.7 5.0 Marketing spends were down 125 bps as percentage to sales it SG&A Expenses 209.7 158.7 201.4 4.1 166.4 26.0 tried to protect operating margins It continued the cost rationalising measures even in Q3. The Other operating Expenses 347.7 375.2 346.2 0.4 339.5 2.4 overheads spends are down by 256 bps % of sales

EBITDA 361.3 413.6 318.1 13.6 399.6 -9.6 Despite sharp contraction in gross margins, saving across the EBITDA Margin (%) 11.8 14.6 12.8 -99 bps 14.4 -260 bps board restricted operating margins decline by 99 bps Depreciation 64.4 61.9 61.4 4.8 62.6 2.9 Interest 18.1 16.5 20.1 -10.1 17.9 1.2 Other Income 19.5 29.3 28.5 -31.7 26.2 -25.7 Exceptional Expense/(Income) 6.1 0.0 0.8 NA 23.9 NA PBT 292.2 364.5 264.3 10.6 321.5 -9.1 Tax provisiong was down in Q3 due to higher profitability from Tax Outgo 55.2 94.8 75.0 -26.5 87.1 -36.7 overseas businesses where taxation is lower PAT before MI 237.0 269.7 189.2 25.3 234.3 1.2 Profit from Associates 0.4 23.3 -4.6 NA 38.9 NA Led by growth in operating profit & lower tax liability, PAT grew PAT 237.4 273.2 184.6 28.6 273.2 -13.1 28.6%

Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates FY21E FY22E FY23E Comments (| Crore) Old New % Change Old New % Change Old New % Change We change our revenue estimates upwards Sales 10859.0 11512.3 6.0 12,473.7 6.1 12,679.2 13,446.2 6.0 11761.1 mainly on account of aggressive price hikes EBITDA 1772.4 1632.1 -7.9 1955.049 1,843.0 -5.7 2,122.4 2,016.7 -5.0 With sharp increase in tea prices, we revise EBITDA Margin (%) 16.3 14.2 -214 bps 14.8 -185 bps 16.7 15.0 -174 bps 16.6 operating margins estimates downwards PAT 1105.4 1015.7 -8.1 1,246.0 1,150.1 -7.7 1,393.8 1,301.8 -6.6 EPS (|) 12.0 11.0 -8.1 13.5 12.5 -7.7 15.1 14.1 -6.6

Source: Company, ICICI Direct Research

Exhibit 3: Assumptions Current Earlier Comment Segmental Revenues (Gross) FY18 FY19 FY20 FY21E FY22E FY23E FY21E FY22E FY23E Revise our tea revenue estimates upwards Tea / India Beverage 4,922.8 3,167.7 3,376.9 4,558.8 4,923.5 5,268.2 4,086.0 4,412.9 4,721.8 considering sharp increase in tea prices Coffee / International Bevergae 1,079.5 3,238.4 3,226.0 3,419.6 3,556.4 3,663.1 3,322.8 3,455.7 3,559.4 Others 35.7 30.2 26.6 21.3 22.4 23.5 16.0 16.8 17.6 Non-branded 815.2 842.5 974.9 1,072.4 1,126.1 1,182.4 1,072.4 1,126.1 1,182.4 TCL Consumer / India Foods 2,476.5 2,872.7 3,332.4 2,393.9 2,777.0 3,221.3 No. of Starbucks stores 116 146 185 210 235 260 205 225 245.0 Store addition already reached 206

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2 Result Update | Tata Consumer Products ICICI Direct Research

Conference Call Highlights

 TCPL witnessed strong 23% revenue growth largely on account of price hikes, product mix change. However, consolidated volume growth was ~7% during the quarter. NouriCo business witnessed growth of 9% to | 33 crore. The business recovered well from 38% down in Q1 to 9% growth in Q3

 India beverage business grew 43% with 10% volume growth. The growth was led by price hikes in tea given tea procurement prices were higher by ~70-80% during the quarter. The company gained market share by 94 bps in Q3. India food business grew 19% led by 12% volume increase. Tata Salt business grew by 19% with double digit volume growth. Similarly, Tata Sampann & Tata Salt Lite revenues jumped by 40% & 110%, respectively. India food business margins expanded by 232 bps mainly led by increasing contribution from premium variants (Tata Salt Lite)

 International tea business grew 14% (constant currency 7% ) led by 6% volume growth & US Coffee business grew 11% (constant currency 6%) with 7% volume growth. Within international business, Canada witnessed growth of 24% led by 19% volume growth. Speciality tea revenues grew 41% growth. UK business witnessed dismal growth of 1% contributed by volume growth of 5%

 As part of the integration of acquired food business, the company reduced its distributors by 63% and increased dedicated sales force by 30%. Similarly rural feet on street increased by 3x. The company is working on the model of keeping exclusive distributors and also enabling direct servicing model through e-commerce. The automation of channel partners increased from 45% to 100%. This led to the reduction of accounts receivable by 50%

 The management indicated Tata Sampann, value added salt, coffee & NourishCo as new growth drivers for the company. The company sees good opportunity in salt in both mass & premium markets but its focus would remain on premium & expanding the distribution

 In the process of expanding its food portfolio, the company acquired 100% stake in Kotttaram Agro for a consideration of | 156 crore. Its flagship brand is Soulfull. The acquisition would help TCPL to leverage their expertise in millets such as Ragi. Soulfull has retail reach of 15000 stores compared to TCPL’s reach of 2.4 million outlets. The company would push the brand through its own distributors. The brand has sales of | 39 crore

 The company is building a platform in differentiated offerings in the health & wellness space with the opportunity of | 20,000 crore. Some of the categories like cereals, mini meals, healthy snacks, protein drinks are growing at 15%+

 In Starbucks, 92% of stores have re-opened. The company opened 13 new stores during the quarter taking the total store count to 209. Dine- in capacity is still 50% and non metros are growing faster. The company returned to EBITDA positive in December 2020

 From a market size perspective, UK regular tea market declined 1.3% whereas fruit & herbal tea category grew 12.8%. Canada regular tea market has grown at 11.2% whereas speciality tea has seen growth of 26.4%. US bags coffee & K Cups grew 9.5% & 8.7%, respectively. India branded tea market saw growth of 14.2% led by 4% volumes

 Tea prices have cooled off from the peak. However, production in new crop season (starts from April-May) would determine tea prices in FY22

ICICI Securities | Retail Research 3 Result Update | Tata Consumer Products ICICI Direct Research

Exhibit 4: Consolidated revenue to grow at 11.7% in FY20-23E Exhibit 5: Tea / India beverage business sales trend

32.9 35.0 16000 35 6000 40 14000 30 5000 30 12000 20 19.5 25 6.6 8.0 7.0 10000 4000 10 20 8000 8.4 3000 0 6.4 15 6000 7.8 2000 -10 4000 10 -20 1000 -35.7 2000 7252 9637 11512 12474 13446 5 3168 3377 4559 4924 5268 -30 0 0 0 -40 FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E

Consolidated Sales (| crore) % Growth India Tea / Beverage business Growth (%)

Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company *FY19 onwards segment reporting has changed from tea to India Beverage

Exhibit 6: Operating margins trend (%) Exhibit 7: Adjusted PAT growth trends

2200.0 20.0 1400 1301.8 2000.0 18.0 15.0 1150.1 1800.0 14.2 14.8 16.0 1200 1600.0 13.4 985.8 14.0 1000 1400.0 10.8 12.0 1200.0 800 10.0 641.8 1000.0 600 8.0 478.4 800.0 400 600.0 6.0 400.0 4.0 200

200.0 2.0

785.9

1632.1 1843.0 2016.7 1292.2 0 0.0 0.0 FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E EBITDA (| crore) Adj. PAT (| crore)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 8: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%) FY20 9637.4 32.9 5.0 -31.1 116.2 41.2 4.6 6.9 FY21E 11512.3 19.5 11.0 120.8 52.6 32.2 7.2 8.9 FY22E 12473.7 8.4 12.5 13.2 46.5 28.5 8.1 9.8 FY23E 13446.2 7.8 14.1 13.2 41.1 25.8 8.8 10.5

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4 Result Update | Tata Consumer Products ICICI Direct Research

Financial summary

Exhibit 9: Profit and loss statement | crore Exhibit 10: Cash flow statement | crore (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Total Operating Income 9637.4 11512.3 12473.7 13446.2 Profit/Loss after Tax 681.0 1015.7 1150.1 1301.8 Growth (%) 32.9 19.5 8.4 7.8 Add: Depreciation 241.7 247.5 246.9 250.1 Raw Material Expenses 5,410.7 6,785.1 7,042.9 7,617.7 Add: Interest 77.9 69.5 62.2 58.4 Employee Expenses 884.8 958.5 1,062.6 1,144.9 (Inc)/dec in Current Assets -95.8 -233.8 -742.1 -431.6 Marketing Expenses 676.7 692.9 850.1 915.9 Inc/(dec) in Current Liabilities 13.8 -117.7 155.4 157.2 Administrative Expenses 0.0 0.0 0.0 0.0 CF from operating activities 1082.2 981.2 872.4 1335.9 Other expenses 1,373.1 1,443.6 1,675.1 1,751.0 (Inc)/dec in Investments -337.9 -9.5 -9.8 -10.1 Total Operating Expenditure 8,345.3 9,880.1 10,630.7 11,429.5 (Inc)/dec in Fixed Assets -150.8 -3,591.7 -100.0 -100.0 EBITDA 1292.2 1632.1 1843.0 2016.7 Others -184.1 4,690.2 30.8 31.1 Growth (%) 64.4 26.3 12.9 9.4 CF from investing activities -672.8 1089.0 -79.0 -78.9 Depreciation 241.7 247.5 246.9 250.1 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Interest 77.9 69.5 62.2 58.4 Inc/(dec) in loan funds 32.1 -405.9 -40.0 -40.0 Other Income 111.6 100.4 105.5 110.7 Dividend paid & dividend tax -221.6 -438.6 -603.1 -767.6 PBT 1,084.2 1,415.6 1,639.4 1,818.9 Inc/(dec) in Sec. premium 0.0 -690.1 0.0 0.0 Exceptional items -274.8 39.4 0.0 0.0 Others -118.8 -69.5 -62.2 -58.4 Total Tax 274.2 349.2 426.2 472.9 CF from financing activities -308.3 -1604.1 -705.3 -866.0 PAT 460.1 1015.7 1150.1 1301.8 Net Cash flow 101.1 466.1 88.1 391.0 Growth (%) 0.7 120.8 13.2 13.2 Opening Cash 737.5 889.3 1,355.4 1,443.6 EPS (|) 7.0 11.0 12.5 14.1 Closing Cash 1121.7 1587.8 1675.9 2066.9

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 11: Balance sheet | crore Exhibit 12: Key ratios | crore (Year-end March) FY20E FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Liabilities Per share data (|) Equity Capital 92.2 92.2 92.2 92.2 EPS 5.0 11.0 12.5 14.1 Reserve and Surplus 13,722.7 13,609.6 14,156.6 14,690.8 Cash EPS 7.6 13.7 15.2 16.8 Total Shareholders funds 13,814.9 13,701.8 14,248.7 14,783.0 BV 149.9 148.7 154.6 160.4 Long Term Borrowings 1,100.6 694.7 654.7 614.7 DPS 2.7 4.0 5.5 7.0 Long Term Provisions 183.2 368.4 399.2 430.3 Cash Per Share 12.2 17.2 18.2 22.4 Other Non-current Liabilities 1425.4 1425.4 1425.4 1425.4 Operating Ratios (%) Total Liabilities 16524.0 16190.2 16727.9 17253.3 EBITDA Margin 13.4 14.2 14.8 15.0 Assets PBT / Net Sales 11.2 12.3 13.1 13.5 Gross Block 7,115.5 7,615.5 7,715.5 7,815.5 PAT Margin 4.8 8.8 9.2 9.7 Less: Acc Depreciation 2,472.8 2,720.3 2,967.2 3,217.3 Inventory days 64.8 85.0 90.0 90.0 Net Block 1,551.0 4,895.2 4,748.3 4,598.2 Debtor days 34.9 35.0 40.0 40.0 Capital WIP 95.4 95.4 95.4 95.4 Creditor days 35.8 25.0 25.0 25.0 Goodwill 10105.0 5600.0 5600.0 5600.0 Return Ratios (%) Non Current Investments 544.0 553.4 563.2 573.3 RoE 4.6 7.2 8.1 8.8 LT Loans & Advances/Others 525.2 525.2 525.2 525.2 RoCE 6.9 8.9 9.8 10.5 Current Assets RoIC 13.9 16.2 17.6 19.2 Inventory 1,712.0 2,680.9 3,075.7 3,315.5 Valuation Ratios (x) Debtors 922.4 1,103.9 1,367.0 1,473.6 P/E 116.2 52.6 46.5 41.1 Cash 1,121.7 1,587.8 1,675.9 2,066.9 EV / EBITDA 41.2 32.2 28.5 25.8 Loans & Advances 1,449.9 757.0 820.2 884.1 EV / Net Sales 5.5 4.6 4.2 3.9 Other Current Assets 173.2 252.3 273.4 294.7 Market Cap / Sales 5.5 4.6 4.3 4.0 Current Liabilities Price to Book Value 3.9 3.9 3.8 3.6 Creditors 944.0 788.5 854.4 921.0 Provisions 92.4 189.2 205.0 221.0 Solvency Ratios Short Term Borrowings 387.8 504.6 546.8 589.4 Debt/EBITDA 1.2 0.7 0.7 0.6 Other CL 554.4 378.5 410.1 442.1 Debt / Equity 0.1 0.1 0.1 0.1 Net Current Assets 3,703.5 4,521.0 5,195.9 5,861.3 Current Ratio 2.7 3.5 3.8 3.8 Total Assets 16524.0 16190.2 16727.9 17253.3 Quick Ratio 1.6 1.6 1.7 1.7

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5 Result Update | Tata Consumer Products ICICI Direct Research

Exhibit 13: ICICI Direct coverage universe (FMCG) CMP TP M Cap EPS (|) P/E (x) Price/Sales (x) RoCE (%) RoE (%) (|) (|) Rating (| Cr) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E Colgate (COLPAL) 1,609 1,860 Buy 43,654 35.0 37.8 40.5 45.9 42.5 39.7 9.3 8.5 8.0 76.7 80.2 83.7 58.7 61.5 64.3 India (DABIND) 523 620 Buy 91,067 9.9 11.0 12.3 52.8 47.5 42.7 9.4 8.5 7.7 26.5 27.0 27.4 22.9 23.0 23.3 (HINLEV) 2,238 2,600 Hold 561,507 33.6 40.5 45.0 66.5 55.3 49.7 12.4 10.8 10.0 25.3 29.4 31.7 19.1 22.5 24.3 ITC Limited (ITC) 217 225 Buy 213,884 11.2 12.0 13.4 19.4 18.0 16.2 4.7 4.2 3.8 27.2 30.5 35.7 20.9 23.4 27.5 Jyothy Lab (JYOLAB) 156 175 Hold 5,728 5.9 6.4 7.1 26.6 24.4 21.9 3.1 2.8 2.6 30.6 31.1 31.6 26.0 25.9 26.3 (MARLIM) 416 490 Buy 53,156 9.1 9.8 10.9 45.7 42.5 38.0 6.8 6.1 5.5 42.9 45.4 48.2 37.1 38.6 40.9 Nestle (NESIND) 17,183 18,000 Hold 152,970 223.4 253.4 284.2 76.9 67.8 60.5 11.5 10.4 9.5 59.9 66.6 73.7 119.1 139.2 160.6 Tata Consumer Products (TATGLO) 580 700 Buy 53,448 11.0 12.5 14.1 52.6 46.5 41.1 4.6 4.3 4.0 8.9 9.8 10.5 7.2 8.1 8.8 VST Industries (VSTIND) 3,681 4,200 Hold 5,809 202.4 218.7 235.2 18.2 16.8 15.6 5.1 4.7 4.3 44.7 47.4 52.8 33.2 35.2 39.0 Varun Beverage (VARBEV) 893 730 Hold 19,429 11.3 21.7 26.6 79.0 41.1 33.6 3.0 2.5 2.3 12.3 18.6 20.7 10.1 16.7 17.6 Zydus Wellness (ZYDWEL) 1,885 2,500 Buy 12,343 19.0 60.3 71.3 99.3 31.3 26.4 6.6 5.8 5.3 6.2 7.8 9.0 5.5 8.0 9.3

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6 Result Update | Tata Consumer Products ICICI Direct Research

RATING RATIONALE ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) – 400 093 [email protected]

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