India Equity Research Consumer Staples August 4, 2021 TATA CONSUMER PRODUCTS RESULT UPDATE KEY DATA Robust sequential margin improvement Rating BUY Sector relative Outperformer Price (INR) 768 12 month price target (INR) 880 Tata Consumer Products’ (TCPL) Q1FY22 revenue (up 10.9% YoY) came Market cap (INR bn/USD bn) 707/9.5 in line with our estimate, but EBITDA (down 17% YoY) surpassed it. Free float/Foreign ownership (%) 65.3/19.5 What’s Changed India beverages business (up 28.2% YoY) was impacted, to some Target Price ⚊ extent, by second wave. India foods grew 19.6% YoY despite a high Rating/Risk Rating ⚊ base and Tata salt gained market share. International business (down QUICK TAKE 12.7% YoY) slowed due to pantry loading in the base quarter last year. Above In line Below Tata Sampann portfolio grew 12% YoY due to pantry loading in the Profit base quarter, bringing the two-year CAGR to ~30%. Margins Revenue Growth The new leadership has infused vigour in execution. And, on the Overall whole, we remain positive on the stock over the medium to long term. Maintain ‘BUY’ with TP of INR880. FINANCIALS (INR mn) Robust domestic revenue growth; margin improves QoQ Year to March FY21A FY22E FY23E FY24E What we liked: India beverages and food businesses recorded strong double-digit Revenue 1,16,020 1,33,392 1,49,548 1,66,213 growth and tea and salt made market share gains of 170bps and 370bps, EBITDA 15,438 19,342 23,329 27,591 Adjusted profit 8,873 12,548 15,580 18,742 respectively. On two-year basis, revenue and EBITDA grew 25.7% and 13.8%, Diluted EPS (INR) 9.6 13.6 16.9 20.3 respectively. E-commerce recorded significant growth of 153% YoY and contributed EPS growth (%) 20.8 41.4 24.2 20.3 7.3% to domestic sales. India foods business registered 19.6% YoY revenue growth RoAE (%) 6.3 7.9 9.3 10.6 and 17% YoY volume growth despite a high base. The company is witnessing V P/E (x) 79.7 56.4 45.4 37.7 shaped recovery since the later part of June. Consolidated gross and EBITDA margin, EV/EBITDA (x) 44.1 35.3 29.1 24.3 Dividend yield (%) 0.5 0.8 1.0 1.2 though down YoY, improved 153bps and 339bps, respectively, QoQ; possibly worst is now behind, in our opinion. PRICE PERFORMANCE What we did not like: International business dipped (down 12.7% YoY), reverting to pre-covid demand trends in tea and coffee as there is no more pent-up demand or 800 54,000 pantry loading. 725 50,400 650 46,800 575 43,200 Q1FY22 conference call: Key takeaways 500 39,600 Tea prices have further come off INR20-30 since June end hence margin should 425 36,000 continue to improve QoQ. Demand in July has come back stronger than June. In Aug-20 Nov-20 Feb-21 May-21 Aug-21 terms of Sampann, biggest traction is in poha, followed by Pulses and then spices. TATACONS IN EQUITY Sensex Outlook and valuations: Favourable tide’s brewing; maintain ‘BUY’ Explore: TCPL’s base businesses of salt and tea should provide steady revenue momentum, while new businesses—pulses & spices—should provide the additional revenue fillip, in our view. We maintain ‘BUY/SO’ with a TP of INR880. The stock is trading at 45.4x FY23E EPS. Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 30,085 27,139 10.9 30,372 (0.9) EBITDA 3,995 4,827 (17.2) 3,002 33.1 Adjusted Profit 1,891 2,822 (33.0) 1,178 60.5 Video Corporate access Diluted EPS (INR) 2.1 3.1 (33.0) 1.3 60.5 Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited TATA CONSUMER PRODUCTS Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Total operating income 1,16,020 1,33,392 1,49,548 1,66,213 Share capital 922 922 922 922 Gross profit 46,997 56,025 64,306 72,303 Reserves 1,44,424 1,51,670 1,60,484 1,71,038 Employee costs 9,702 10,938 12,113 13,297 Shareholders funds 1,45,345 1,52,592 1,61,406 1,71,959 Other expenses 14,595 16,674 18,394 19,946 Minority interest 10,925 11,025 11,125 11,225 EBITDA 15,438 19,342 23,329 27,591 Borrowings 7,206 7,806 8,406 9,006 Depreciation 2,547 3,058 3,346 3,633 Trade payables 16,255 11,658 12,845 14,151 Less: Interest expense 687 525 567 609 Other liabs & prov 16,061 15,961 15,861 15,761 Add: Other income 1,214 1,552 1,814 2,109 Total liabilities 2,02,559 2,05,809 2,16,410 2,28,869 Profit before tax 12,477 16,911 20,931 25,157 Net block 16,423 18,829 21,002 22,894 Prov for tax 3,173 4,362 5,350 6,415 Intangible assets 1,04,006 1,03,255 1,02,497 1,01,732 Less: Other adj 0 0 0 0 Capital WIP 932 876 876 876 Reported profit 8,567 12,548 15,580 18,742 Total fixed assets 1,21,360 1,22,960 1,24,374 1,25,501 Less: Excp.item (net) (307) 0 0 0 Non current inv 4,827 4,827 4,827 4,827 Adjusted profit 8,873 12,548 15,580 18,742 Cash/cash equivalent 33,980 31,455 37,350 44,747 Diluted shares o/s 922 922 922 922 Sundry debtors 7,613 10,964 11,882 13,206 Adjusted diluted EPS 9.6 13.6 16.9 20.3 Loans & advances 3,015 3,015 3,015 3,015 DPS (INR) 4.1 6.1 7.6 9.1 Other assets 26,259 27,083 29,456 32,069 Tax rate (%) 24.2 25.2 25.2 25.2 Total assets 2,02,559 2,05,809 2,16,410 2,28,869 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Gross margin (%) 40.5 42.0 43.0 43.5 Reported profit 8,567 12,548 15,580 18,742 Staff cost (% of rev) 8.4 8.2 8.1 8.0 Add: Depreciation 2,547 3,058 3,346 3,633 A&P as % of sales 6.3 6.8 7.0 6.9 Interest (net of tax) 687 525 567 609 EBITDA margin (%) 13.3 14.5 15.6 16.6 Others 3,993 3,210 3,836 4,606 Net profit margin (%) 7.6 9.4 10.4 11.3 Less: Changes in WC 1,834 (8,772) (2,105) (2,630) Revenue growth (% YoY) 20.8 15.0 12.2 11.2 Operating cash flow 16,564 6,208 15,875 18,546 EBITDA growth (% YoY) 19.5 25.3 20.6 18.3 Less: Capex (1,792) (4,760) (4,760) (4,760) Adj. profit growth (%) 20.8 41.4 24.2 20.3 Free cash flow 14,772 1,448 11,115 13,786 Assumptions (%) Key Ratios Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E GDP (YoY %) (8.0) 9.0 7.0 7.0 RoE (%) 6.3 7.9 9.3 10.6 Repo rate (%) 4.0 4.0 4.3 5.3 RoCE (%) 8.7 10.7 12.4 14.0 USD/INR (average) 75.0 73.0 72.0 71.0 Inventory days 105 110 110 110 India bev growth (%) 36.2 23.2 14.4 11.9 Receivable days 26 30 29 29 India food growth (%) 18.3 17.2 19.2 18.6 Payable days 68 55 55 55 Int biz growth (%) 7.5 5.0 4.6 4.6 Working cap (% sales) 8.6 14.1 14.0 14.1 COGS % of consol rev 59.5 58.0 57.0 56.5 Gross debt/equity (x) 0 0 0 0 Other exp (% of rev) 12.6 12.5 12.3 12.0 Net debt/equity (x) (0.2) (0.1) (0.2) (0.2) Yield on cash 3.1 4.0 5.0 5.0 Interest coverage (x) 18.8 31.0 35.2 39.3 Valuation Metrics Valuation Drivers Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Diluted P/E (x) 79.7 56.4 45.4 37.7 EPS growth (%) 20.8 41.4 24.2 20.3 Price/BV (x) 4.9 4.6 4.4 4.1 RoE (%) 6.3 7.9 9.3 10.6 EV/EBITDA (x) 44.1 35.3 29.1 24.3 EBITDA growth (%) 19.5 25.3 20.6 18.3 Dividend yield (%) 0.5 0.8 1.0 1.2 Payout ratio (%) 43.6 44.6 44.7 44.8 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited TATA CONSUMER PRODUCTS Trends at a glance Trends at a glance Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Volume growth (%) India packaged beverages 5.0 4.0 12.0 10.0 23.0 3.0 India foods (1.0) 8.0 6.0 12.0 21.0 17.0 US coffee 15.0 27.0 (3.0) 7.0 (2.0) (16.0) International tea 4.0 0.1 6.0 1.0 (9.0) Tata coffee (including Vietnam) (12.0) 14.0 8.0 (4.0) 31.0 (6.0) Foodservice international (60.0) (19.0) (25.0) (31.0) NA Revenue growth (%) India packaged beverages 5.9 11.0 32.1 46.1 59.6 28.2 India foods NA 18.9 13.1 18.8 22.4 19.6 International - Beverages 6.5 15.0 7.3 8.8 0.1 (12.7) Starbucks (87.0) 14.0 371.0 EBIT margin India - Beverages 11.5 21.5 13.3 6.2 4.3 11.9 India - Foods 10.9 19.4 16.0 14.8 13.5 13.6 International - Beverages 14.7 14.5 12.6 13.2 12.6 12.5 No.