Equity Research INDIA August 9, 2020 BSE Sensex: 38041 Tata Consumer Products ADD ICICI Securities Limited Maintain is the author and Appointment of P. B. Balaji as Director is (another) distributor of this report potential re-rating event Rs518 Company Update and Rarely do we publish a report about the appointment of a non-executive, non- TP change independent director to a company in our coverage. We believe Mr P.B.Balaji's (Group CFO of Tata Motors, Ex-CFO of HUL) appointment as Additional Director of Consumer Staples & Tata Consumer (TCPL) is significant and increases our (already high) confidence Discretionary in the TCPL story. During his tenure in HUL as CFO, Balaji, in our view, is credited Target price Rs550 with working with business managers in driving the premiumization agenda (particularly the well-appreciated "Surf detergent powder story") and also on the Target price revision implementation of ZBB, significant cost reduction etc. Sunil D’Souza, MD & CEO Rs550 from Rs510 of TCPL and Balaji - both are PGDM from IIM-Calcutta batch of 1993. Reiterate ADD. Shareholding pattern Dec Mar Jun ‘19 ‘20 ‘20 We believe that Balaji's expertise in supply chain, finance, IT and beverage Promoters 34.5 34.7 34.7 Institutional business (HUL is a competitor to TCPL in India tea) will immensely help TCPL. investors 40.9 38.9 39.3 MFs and others 12.2 14.9 13.4 Banks/FIs 0.1 0.1 0.1 He is alumnus of IIT Chennai and IIM Calcutta. He has served in multiple managerial Insurance 2.4 6.1 5.6 roles in supply chain, finance & IT in HUL in a career spanning from 1993-2017. He FIIs 26.2 17.8 20.2 Others 24.6 26.4 26.0 was Executive Director of Finance & IT and CFO of Hindustan Unilever from Source: BSE Jul’2014 to Nov’2017. Currently, he is Group CFO of Tata Motors. Price chart Balaji’s tenure as CFO of HUL (Jul’2014 to Nov’2017): HUL’s EBITDA margin 600 improved to 20.6% in 9MFY18 from 15.9% in FY14. Key reasons, in our view: (1) 500 tighter cost controls, (2) efficiency gains in supply chain, (3) premiumization and 400 eventual margin expansion in detergents: In our view, Balaji was a key member of (Rs) 300 the core team in HUL which drove premiumization agenda. During his tenure, 200 operating margins expanded ~470bps and another ~150bps in the ~12 month period 100 after he moved on from HUL. Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 Reiterate ADD: We model revenue and PAT CAGR of 10.3% and 16.8%, respectively over FY20-22E. We value TCPL stock on SoTP basis with target price of Rs550. Key risk is execution - delays in realizing integration gains, ramp-up of distribution etc. Market Cap Rs475bn/US$6.3bn Year to March FY19 FY20 FY21E FY22E Bloomberg TATACONS IN Revenue (Rs mn) 72,515 96,374 106,143 117,191 Shares Outstanding (mn) 916.2 Adj. Net Profit (Rs mn) 4,382 6,870 7,786 9,368 Research Analysts: 52-week Range (Rs) 437/214 Dil. Rec. EPS (Rs) 6.9 7.5 8.4 10.2 Manoj Menon Free Float (%) 65.3 % Chg YoY (5.5) 7.4 13.3 20.3 [email protected] FII (%) 20.2 P/E (x) 74.6 69.5 61.3 51.0 +91 22 6637 7209 Daily Volume (US$'000) 24,449 CEPS (Rs) 8.9 10.1 11.2 13.1 Aniruddha Joshi [email protected] Absolute Return 3m (%) 51.9 EV/EBITDA (x) 40.8 36.2 32.7 29.3 +91 22 6637 7249 Absolute Return 12m (%) 92.5 Dividend Yield (%) 0.5 0.5 0.6 0.7 Vismaya Agarwal, CFA Sensex Return 3m (%) 21.7 RoCE (%) 7.0 7.9 5.9 5.8 [email protected] +91 22 2277 7632 Sensex Return 12m (%) 4.9 RoE (%) 6.1 6.5 4.6 4.6 Please refer to important disclosures at the end of this report Tata Consumer Products, August 9, 2020 ICICI Securities See our recent report on TCPL - Link here. Summary reproduced below. Consensus (including us) believes (and hopes) in ‘value creation story’ of TCPL, a 92% and 214% stock returns over 1 yr and 3 yrs is testimony. 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. Essential variables for incremental stock returns – Tata Tea (India) needs to sustain 6-8% volume growth via formalization, market share gains due to regionalization and premiumisation, Tata Salt volume growth needs to accelerate to 8% (from ~5% earlier). It generates lowest revenue/grammage among packaged food products in India and hence distribution was capped due to higher freight costs. Merger of distribution (mixed load) will help to reduce freight cost and leverage the brand potential (awareness > availability), Packaged staples incur additional cost of c.15% compared to loose products. Hence, Tata Sampann’s ability to recruit and retain consumers (in normal consumer behavior conditions post COVID) is crucial and Synergy benefits of a minimum of Rs2bn 2 Tata Consumer Products, August 9, 2020 ICICI Securities Induction of P.B. Balaji as Non-executive and Non-Independent director has strengthened the leadership of TCPL. He successfully drove efficiencies in supply chain and cost savings in his managerial tenure at HUL. Key highlight of his career was premiumization and expansion in profitability of detergents. We believe his expertise & experience in supply chain, finance and Beverage business will be helpful to TCPL. Balaji’s tenure in HUL An alumnus of IIT Chennai (1991) and IIM Calcutta (1993), he joined HUL in 1993. He worked in multiple senior management roles in Finance and Supply chain in India as well as globally. He was Executive Director of Finance & IT and CFO of Hindustan Unilever from Jul’2014 to Nov’2017. Chart 1: Balaji’s tenure in HUL Joined HUL as Group Chief Executive Director- Non Executive Management Accountant, Finance & IT and Director - trainee London CFO- HUL TCPL 1993 Jun’07 Feb’11 Oct’13 Jul14 Nov’17 Aug’20 VP, Treasury, VP Finance, Americas CFO- Tata Unilever Singapore Supply Chain Motors Source: I-Sec research Focus on premiumization in detergents, rest of the portfolio Balaji was a key member of the core team at HUL which drove the premiumization strategy agenda (category, channel, brand). Table 1: Surf emerged as fastest growing detergent brand for HUL FY11 FY13 FY14 FY15 FY16 FY17 FY18 Rin Rin Surf Excel Surf Excel Surf Excel Surf Excel Surf Excel Surf Excel Surf Excel Rin Brooke Bond Brooke Bond Brooke Bond Brooke Bond Wheel Wheel Fair & Lovely Wheel Wheel Wheel Wheel Fair & Lovely Fair & Lovely Brooke Bond Rin Rin Rin Lifebuoy Brooke Bond Brooke Bond Lifebuoy Lifebuoy Lifebuoy Lifebuoy Fair & Lovely Lifebuoy Lifebuoy Vim Fair & Lovely Fair & Lovely Fair & Lovely Rin Lux Lux Clinic Plus Lux Lux Lux Lux Dove Ponds Dove Dove Dove Dove Ponds Dove Clinic Plus Clinic Plus Clinic Plus Clinic Plus Clinic Plus Lux Ponds Ponds Ponds Ponds Wheel Vim Vim Vim Vim Lakme *Grey shade indicates market size more than Rs20bn #Key brands of HUL Source: Company, I-Sec research HUL’s EBITDA margin expands during Balaji’s tenure as CFO Balaji was CFO of HUL during Jul’2014 to Nov’2017. We note HUL’s EBITDA margin improved to 20.6% in 9MFY18 from 15.9% in FY14. Key reasons: (1) tighter cost controls, (2) efficiency gains in supply chain and (3) improvement in profitability of detergents. 3 Tata Consumer Products, August 9, 2020 ICICI Securities Chart 2: Improvement in EBITDA margin of HUL when Balaji was CFO 21 20 19 18 (%) 17 16 15 FY14 FY15 FY16 FY17 9MFY18 Source: Company, I-Sec research Balaji’s induction strengthens TCPL’s leadership team Table 2: TCPL’s key management team Person Company Designation & Role Previous / Current roles Tata Non-Executive (Non- P.B. Balaji Group CFO of Tata Motors currently, CFO of HUL earlier Consumer Independent) Director Tata Sunil D’Souza MD & CEO CEO of Whirlpool for 4 years, Earlier worked in Pepsico & Brooke Bond Consumer L Krishna Tata CFO of TCPL for 8 years, Earlier CFO of Indian Hotels for 4 years, GM- CFO Kumar Consumer Finance at L&T Amit Tata GHRO of TCPL for 2 years, Earlier SVP Human resources-Tata Sons, Global Human resource officer Chincholikar Consumer Global HR Head - Novelis Ajit Krishna Tata COO of TCPL for 5 months, Earlier - SVP M&A Tata Sons, Director - COO (Beverages) Kumar Consumer Rothschild UK Tata Richa Arora COO (Foods) Earlier Head of marketing Britannia and Director -Balsara Consumer Tata Sushant Dash President - India & ME beverages Earlier Global brand director of TCPL, Research at ORG Marg Consumer Tata President - International business Adil Ahmed Earlier multiple leadership roles in Reckitt Benckiser (20 years) Consumer (Ex ME) Tata Earlier India Head of Proterra Investments, Partner Motilal Oswal PE Rakesh Sony Head of Strategy Consumer fund Chacho Tata Coffee CEO Earlier worked as CEO of Kannan Devan Hill Plantations Thomas N. Venkat Tata Coffee CFO CFO -Tata Coffee for 6 years, Earlier VP-Finance of TGBL Naveen CEO Starbucks for 1.5 years, Earlier - President White Tiger Starbucks CEO Gurnananey Entertainment Source: Company, I-Sec research 4 Tata Consumer Products, August 9, 2020 ICICI Securities Key charts – Quarterly (Consolidated) Chart 3: Revenues and growth rates Chart 4: Net profit and growth rates Revenues YoY Growth (%) Net profit YoY Growth (%) 30000 40 3000 700 35 600 25000 2500 30 500 20000 25 2000 400 20 15000 1500 300 15 (Rs mn) (Rs (Rs mn) (Rs 200 10000 10 1000 5 100 5000 500 0 0 0 -5 0 -100 Jun-18 Jun-19 Jun-20 Jun-18 Jun-19 Jun-20 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 5: Gross margin (%) Chart 6: PAT margin (%) Gross margin PAT margin 47 12