India Equity Research Consumer Staples June 29, 2021
TATA CONSUMER
COMPANY UPDATE
KEY DATA Rating BUY From sips to gulps: Beefing up execution Sector relative Outperformer Price (INR) 766 12 month price target (INR) 880 Tata Consumer (TCPL) is trading near its all-time high, having run up Market cap (INR bn/USD bn) 706/9.5 32% since our initiation about five months ago. In this report, we are Free float/Foreign ownership (%) 65.3/19.5 What’s Changed highlighting the takeaways from the company’s AGM, including the Target Price Rating/Risk Rating ⚊ focus on expanding its online and offline distribution to drive the next leg of growth. Tea price correction, likely over the next two months, is INVESTMENT METRICS 80 a key variable. A potential YoY moderate correction in tea prices is 60 likely, but prices are likely to be higher than the level two years ago. 40
20 The new leadership has infused vigour in execution. And, on the 0 whole, we remain quite positive on the stock over the medium to long Sales Growth EPS Growth RoE PE (%) (%) (%) (x) term. Maintain ‘BUY’ with a revised TP of INR880.
Consumer Staples TATACONS IN EQUITY
FINANCIALS (INR mn) Top eight takeaways Year to March FY20A FY21E FY22E FY23E Portfolio: To strengthen its portfolio and remain aggressive on acquisitions. Revenue 96,374 1,16,020 1,33,392 1,49,548 EBITDA 12,922 15,438 19,342 23,329 Eight O’Clock Coffee: Set for India launch DTC model (e-commerce) this week. Adjusted profit 7,346 8,873 12,548 15,580 Diluted EPS (INR) 8.0 9.6 13.6 16.9 Immunity health products: An area of focus; launches to follow. EPS growth (%) 13.9 20.8 41.4 24.2 RoAE (%) 6.3 6.3 7.9 9.3 Distribution: TCPL will ensure availability despite the second wave. The company P/E (x) 95.1 78.7 55.6 44.8 is taking steps to make products available everywhere and at all times. EV/EBITDA (x) 53.0 43.5 34.9 28.7 Dividend yield (%) 0.4 0.5 0.8 1.0 Non-core businesses: The company would continue to evaluate and exit them.
Starbucks: Will continue to expand it aggressively—39 stores opened in FY21. PRICE PERFORMANCE
775 53,000 E-commerce and synergies: TCPL plans to leverage the Tata super app to raise 695 49,200 its e-commerce game. The Tata group has acquired a majority stake in online 615 45,400 retailer BigBasket, which TCPL would leverage. 535 41,600 455 37,800 Capex plan: INR3.5–4bn per year. 375 34,000 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
TATACONS IN EQUITY Sensex
Outlook and valuation: Favourable base widening; maintain ‘BUY’ Explore: TCPL’s core businesses – salt and tea – should feed its steady revenue momentum while new businesses—pulses & spices—should provide the revenue fillip. The company has sharpened the focus on its key geographies and simplified its business model by exiting non-core markets and businesses. Progress on Sampann remains a key driver for long-term growth, although Q4FY21 disappointed. Integration of the Financial model Podcast Food & Beverage (F&B) business has widened the direct coverage of outlets by 30%
while integration of the F&B CFA network has led to cost reductions.
We retain ‘BUY/SO’ with a revised TP of INR880 (earlier INR770) while rolling forward the valuation to Dec-22E. The stock is trading at 44.8x FY23E EPS. Corporate access Video
Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected]
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TATA CONSUMER
Financial Statements
Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 96,374 1,16,020 1,33,392 1,49,548 Share capital 922 922 922 922 Gross profit 42,267 46,997 56,025 64,306 Reserves 1,37,227 1,44,424 1,51,670 1,60,484 Employee costs 8,848 9,702 10,938 12,113 Shareholders funds 1,38,149 1,45,345 1,52,592 1,61,406 Other expenses 13,731 14,595 16,674 18,394 Minority interest 10,925 10,925 11,025 11,125 EBITDA 12,922 15,438 19,342 23,329 Borrowings 11,825 7,206 7,806 8,406 Depreciation 2,417 2,547 3,058 3,346 Trade payables 9,440 16,255 11,658 12,845 Less: Interest expense 779 687 525 567 Other liabs & prov 9,628 16,061 15,961 15,861 Add: Other income 1,116 1,214 1,552 1,814 Total liabilities 1,85,026 2,02,559 2,05,809 2,16,410 Profit before tax 7,343 12,477 16,911 20,931 Net block 15,510 16,423 18,829 21,002 Prov for tax 2,742 3,173 4,362 5,350 Intangible assets 1,01,128 1,04,006 1,03,255 1,02,497 Less: Other adj 0 0 0 0 Capital WIP 876 932 876 876 Reported profit 4,598 8,567 12,548 15,580 Total fixed assets 1,17,514 1,21,360 1,22,960 1,24,374 Less: Excp.item (net) (2,748) (307) 0 0 Non current inv 4,893 4,827 4,827 4,827 Adjusted profit 7,346 8,873 12,548 15,580 Cash/cash equivalent 24,550 33,980 31,455 37,350 Diluted shares o/s 922 922 922 922 Sundry debtors 9,224 7,613 10,964 11,882 Adjusted diluted EPS 8.0 9.6 13.6 16.9 Loans & advances 2,898 3,015 3,015 3,015 DPS (INR) 2.7 4.1 6.1 7.6 Other assets 20,444 26,259 27,083 29,456 Tax rate (%) 33.9 24.2 25.2 25.2 Total assets 1,85,026 2,02,559 2,05,809 2,16,410
Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Gross margin (%) 43.9 40.5 42.0 43.0 Reported profit 4,598 8,567 12,548 15,580 Staff cost (% of rev) 9.2 8.4 8.2 8.1 Add: Depreciation 2,417 2,547 3,058 3,346 A&P as % of sales 7.0 6.3 6.8 7.0 Interest (net of tax) 779 687 525 567 EBITDA margin (%) 13.4 13.3 14.5 15.6 Others 5,133 3,993 3,210 3,836 Net profit margin (%) 7.6 7.6 9.4 10.4 Less: Changes in WC (820) 1,834 (8,772) (2,105) Revenue growth (% YoY) 33.4 20.8 15.0 12.2 Operating cash flow 10,822 16,564 6,208 15,875 EBITDA growth (% YoY) 64.4 19.5 25.3 20.6 Less: Capex (1,508) (1,792) (4,760) (4,760) Adj. profit growth (%) 66.4 20.8 41.4 24.2 Free cash flow 9,315 14,772 1,448 11,115
Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) 6.3 6.3 7.9 9.3 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) 9.1 8.7 10.7 12.4 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 112 105 110 110 India bev growth (%) 6.6 36.2 23.2 14.4 Receivable days 30 26 30 29 India food growth (%) 11.6 18.3 17.2 19.2 Payable days 54 68 55 55 Int biz growth (%) (0.4) 7.5 5.0 4.6 Working cap (% sales) 17.1 8.6 14.1 14.0 COGS % of consol rev 56.1 59.5 58.0 57.0 Gross debt/equity (x) 0.1 0 0 0 Other exp (% of rev) 14.2 12.6 12.5 12.3 Net debt/equity (x) (0.1) (0.2) (0.1) (0.2) Yield on cash 3.8 3.1 4.0 5.0 Interest coverage (x) 13.5 18.8 31.0 35.2
Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 95.1 78.7 55.6 44.8 EPS growth (%) 13.9 20.8 41.4 24.2 Price/BV (x) 5.1 4.8 4.6 4.3 RoE (%) 6.3 6.3 7.9 9.3 EV/EBITDA (x) 53.0 43.5 34.9 28.7 EBITDA growth (%) 64.4 19.5 25.3 20.6 Dividend yield (%) 0.4 0.5 0.8 1.0 Payout ratio (%) 54.1 43.6 44.6 44.7
Source: Company and Edelweiss estimates
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TATA CONSUMER
Trends at a glance
Trends at a glance Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Volume growth (%) India packaged beverages 5.0 4.0 12.0 10.0 23.0 India foods (1.0) 8.0 6.0 12.0 21.0 US coffee 15.0 27.0 (3.0) 7.0 (2.0) International tea 4.0 0.1 6.0 1.0 Tata coffee (including vietnam) (12.0) 14.0 8.0 (4.0) 31.0 Foodservice international (60.0) (19.0) (25.0) (31.0) Revenue growth (%) India packaged beverages 5.9 11.0 32.1 46.1 59.6 India foods NA 18.9 13.1 18.8 22.4 International - Beverages 6.5 15.0 7.3 8.8 0.1 Starbucks (87.0) 14.0 EBIT margin India - Beverages 11.5 21.5 13.3 6.2 4.3 India - Foods 10.9 19.4 16.0 14.8 13.5 International - Beverages 14.7 14.5 12.6 13.2 12.6 No. of stores Starbucks 185 187 196 209 221 Source: Company, Edelweiss Research Key positives from the AGM Strengthening product portfolio and aggressive acquisition During the year, TCPL acquired Kottaram Agro Foods, which it subsequently renamed Tata Consumer Soulfull. This acquisition opens up a significant market opportunity in the fast-growing breakfast, snacking and mini meals segment and fast-tracks the company’s entry into newer consumption occasions. The company also acquired PepsiCo’s stake in NourishCo Beverages Limited, enabling to widen the beverage offerings. The Tata Sampann brand portfolio has been broadened into health and wellness with new product development via Nutrimixes. Tata Starbucks, a joint venture, was impacted by the covid 19 pandemic. While the impact was higher in the initial months, the business largely recovered to pre-covid- 19 levels by the end of the financial year. Despite the pandemic, it added 39 new stores, entered seven new cities and launched new store formats. Eight O’Clock Coffee: Set for launch in DTC model TCPL is gearing up to launch Eight O’Clock Coffee in the DTC model (e-commerce) in India this week. Eight O’Clock Coffee is the fourth-largest roast and ground coffee brand in the US. It sells ground coffee apart from single-serve pods used in coffee machines. Eight O’Clock Coffee Co. Ltd is an unlisted subsidiary of Tata Coffee Limited. We believe this is a right move given e-commerce is nibbling away the share from physical retailers. And it is a low-cost model that can help to test waters, after which offerings can be scaled up. That said, incumbents in coffee are formidable: Nestle’s Nescafe and HUL’s Bru. They dominate the space, so TCPL’s entry could impact them over the long term.
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TATA CONSUMER
Ensuring availability and improving reach TCPL’s portfolio now covers tea, coffee, water, salt, pulses, spices, ready-to-cook offerings, breakfast cereals, snacks and mini meals. To achieve the next level of growth by leveraging this expanded product portfolio, the company is taking the following steps. Widening and integrating its distribution network with supply chain to drive efficiencies
Undertaking end-to-end digitalization of its channel partners and field force
Bolstering e-commerce capabilities; a few products have been already launched in the direct-to-consumer model
Leveraging data analytics for strategic planning In focus: Immunity-boosting health products The company has launched a number of products focusing on immunity and health as the pandemic is driving trend towards more immunity-boosting products. Tata Tulsi Green Tea, Tetley Immune, Tata Fruski and Haldi Doodh are some of its products based on natural ingredients with focus on health. Tata health product launches
Source: Company Focusing on core while divesting non-core businesses The company has adopted the ‘One Tata’ approach, with 3S strategy comprising: simplifying portfolio and reducing complexity, synergising operations to become a force multiplier and scaling businesses through growth and consolidation. TCPL has sharpened its focus on its key geographies and simplified its business model by exiting non-core markets and businesses. Over the past three years, it has exited Sri Lanka and Russia. This year too, the company exited the non-core out-of-home foodservice businesses in the US and Australia, and Tata Consumer Products in USA has divested its stake in Emperical Group LLC and Southern Tea LLC. These simplification initiatives are enabling the company to focus on its core branded businesses. As a group, Tata has consolidated its foods & beverages business under TCPL. The integration of businesses has been largely done and has started yielding synergies,
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TATA CONSUMER
particularly in sales & distribution with a 30% increase in direct coverage of outlets and integration of Food and Beverage CFA network leading to cost reduction. Exits and restructuring by TCPL
Year Businesses Actions Restructuring of sales and FY16 Poland distribution network FY17 JV in China Divest FY17 Eastern Europe Restructure FY18 Plantation business in Sri Lanka Divest FY18 Russia Divest EMEA (UK, Europe, Middle east and Africa) and CAA Merged into one International FY18 (Canada, Australia and Americas) divisions business division Source: Company
The Indian tea market is INR260bn. As much as 35% of the overall tea market is still in the loose form. Management has been noticing a shift from loose to packaged forms in all other foods segments, and is convinced a similar shift is underway in the tea segment as well, which will benefit the company. Starbucks: Time to accelerate growth momentum The Tata Starbucks JV was inked in 2012. It had 185 stores in 11 cities as of FY20. Despite the pandemic, it added 39 new stores, entered seven new cities and launched innovative store formats. The JV clocked a strong revenue CAGR of 26% over FY15–20 driven by a 21% CAGR in store expansion. Starbucks is clearly a name to reckon with among millennials. With the coffee culture burgeoning and competing players struggling, Starbucks is in an almost monopolistic position. The decline of Café Coffe Day too has worked to TCPL’s advantage. The JV was impacted by the covid-19 pandemic. While the impact was higher in the initial months, the business had largely recovered to pre-covid levels by the end of the financial year (Mar-21). Encouragingly, post-FY22, management expects Starbucks to revert to a 30% revenue CAGR trajectory. Starbucks makes a healthy gross margin of 67.3%; hence, as revenue growth builds up, operating leverage would kick in and drive up profitability. Focus on e-commerce platform growth “The focus of TCPL will be to come up with E-commerce, among the least affected by the pandemic, has recovered further over more products and push it through a the last two months as consumers returned to buy goods online. Easing of state- strong distribution network, both offline wide lockdowns has further helped e-tailers to overcome logistical hurdles. and e-commerce, its own e-commerce According to data, from e-commerce solutions provider Unicommerce, overall platform and to leverage our Tata Super online order volumes in June so far have been 14% higher than in the same period App also," N Chandrasekaran, Chairman, last month. In May, it was around 16.5% higher for the full month than in April. TCPL said during the AGM. TCPL is also strengthening its play in e-commerce besides scaling up traditional distribution network. It is noteworthy that Tata group subsidiary, Tata Digital Ltd. has acquired a majority stake in the online grocery store BigBasket. The same subsidiary operates Tata Cliq, which is an e-commerce portal that sells apparels and electronics. The portal allows Tata to push its brands directly to consumers and since it directly owns the channel it is much cheaper for Tata, as it has complete control over pricing and discounts. BigBasket will similarly enable TCPL to push its brands over the platform.
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TATA CONSUMER
Company Description Tata Consumer Products (TCPL) is a packaged foods company unifying the food and beverage interests of the Tata Group under one umbrella. It is home to brands such as Tata Tea, Tetley, Tata Salt and Tata Sampann. In the beverage business, Tata Tea is the number one player by volume and number two by value. Other beverage brands include Tata Tea, Tetley, Vitax, Eight O’Clock Coffee, Himalayan Natural Mineral Water, Tata Coffee Grand and Joekels. TCPL has a presence in the water business through its fully owned subsidiary NurishCo, which has three major brands: Himalayan, Tata Gluco Plus and Tata Water Plus. The company also has a 57% stake in Tata Coffee, a coffee plantation company. In FY20, the company acquired the consumer products business of Tata Chemicals, which includes Tata Salt and Tata Sampann. Tata Salt is the undisputed leader of the salt category in India. The company sells spices and pulses under the Tata Sampann brand. TPCL also has an equal joint venture with Starbucks (called Tata Starbucks) to own and operate Starbucks cafés in India. Following its merger with Tata Chemicals, TPCL’s revenue from India accounts for 62% of its overall consolidated revenue; the balance comes from outside India.
Investment Theme Tata Consumer Products (TCPL) is a mature—genetically modified— consumer play that unifies the food & beverage interests of the Tata Group. The ‘staples-beverage’ merger along with change in top management has infused new energy in the company. The new entity boasts a better mix of global and India businesses that are geared for growth and profitability, rendering it a formidable consumer company. TCPL has two steady base businesses in salt and tea, wherein it has market leadership. The newer businesses—pulses and spices—are currently small but are a play on humungous categories that imply great growth potential. The merger has created a robust consumer business platform, which can yield synergistic benefits and readily tap into Tata Sons’ online grocery and e-commerce ambitions. Besides, the new MD, Mr. Sunil D’Souza, who comes with vast experience in the consumer goods space, and Tata Group’s focus on having a large presence in the consumer goods space imply TCPL has the right ingredients to dish out growth—by exploiting the huge opportunity in the Indian consumer goods sector.
Key risks Apart from macroeconomic risks, the other key risk for TCPL is a failure to create brand pull for its Tata Sampann brand, which is still very small. The other risk for Tata Sampann is competition from private label and channel partners. In terms of its Tea and Salt businesses, a rise in competitive intensity could pose a challenge although TCPL has strong market positions in both the categories. That said, we see rising competitive intensity among existing players, either via launches or at price points that could pressure margins in the short term
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TATA CONSUMER
Additional Data Management Holdings – Top 10* CEO Mr. Sunil D'souza % Holding % Holding CFO Mr. L. Krishnakumar Govt pension fu 1.40 Mirae Asset Glo 1.73 HDFC AMC 1.39 BlackRock 1.72 COO Mr. Ajit Krishnakumar Norges Bank 1.14 LIC 1.67 Chairman Mr. N. Chandrasekaran First State Inv 1.86 Vanguard 1.45 Auditor Deloitte Haskins & Sells LLP Nippon Life Ind 1.77 Axis AMC 1.45
*Latest public data
Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Revenue robust; margin under Fortune at bottom of pyramid; 07-May-21 629 Buy 17-Jun-21 Consumer Staples pressure; Result Update Sector Update Healthcare and innovation focus; 06-May-21 Margins under pressure; Oven fresh 653.1 Buy 15-Jun-21 Dabur India Company Update Structurally sound despite margin New boss and possible priorities; 02-Feb-21 575.35 Buy 10-Jun-21 Godrej Consumer shock; Result Update Company Update
Rating Interpretation Daily Volume TP 70 775 750
655 56
535 42 (INR)
415 (Mn) 28
295 14 175 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 0 TATACONS IN EQUITY Buy Hold Reduce Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
Source: Bloomberg, Edelweiss research Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage Rating Rationale
Buy Hold Reduce Total Rating Expected absolute returns over 12 months
Rating Distribution* 168 55 19 243 Buy: >15%
>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%
Market Cap (INR) 209 44 3 256 Reduce: <-5% *1 stocks under review
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TATA CONSUMER
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TATA CONSUMER
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Aditya Narain Head of Research [email protected]
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