India Equity Research Consumer Staples June 29, 2021 TATA CONSUMER COMPANY UPDATE KEY DATA From sips to gulps: Beefing up execution Rating BUY 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] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 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 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 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.