All eyes on execution after strong rally in Tata Consumer Products' stock

The stock has gained 27.5 per cent in the past month, outperforming the Nifty FMCG index, which has risen 1.5 per cent during the period
The stock of Tata Consumer Products (TCPL), which has seen a strong re-rating after the demerger of Tata Chemicals’ food business last year, continues to witness investor support amid robust growth potential.

The stock has gained 27.5 per cent in the past month, outperforming the Nifty FMCG index, which has risen 1.5 per cent during the period. It has risen 135 per cent since March 23 lows. Consumers’ preference for branded staples and aggressive distribution expansion are two key factors improving TCPL’s growth visibility.

While the pandemic has made the survi­val of many small and unorganised players difficult, it is aiding branded consumer companies like TCPL. Analysts expect a structural shift in consumers’ behaviour in favour of branded products. Therefore, according to a Credit Suisse report last month, the lockdown is likely to accelerate the market share gain for branded players (like TCPL) in categories like tea and salt.

This would mean significant growth and premiumisation opportunities for TCPL over the medium to long term. This is because its key categories — tea, salt, spices, and pulses — have a minimum of 35 per cent presence of unorganised and local players. In fact, TCPL is the only national salt player with around 30 per cent market share. TCPL, earlier Tata Global Beverages, now also includes the consumer products hived off from Tata Chemicals.

 

 
The company’s 13.4 per cent year-on-year (YoY) revenue growth to Rs 2,714 crore in the June quarter (Q1) was mainly led by higher demand for in-house consumption. Its branded tea and domestic foods businesses delivered 8 per cent and 19 per cent revenue growth, respectively, during the quarter. Both these categories clocked 4-8 per cent growth in volumes. Notably, TCPL’s international beverage segment (over 30 per cent of revenue) also grew by 15 per cent. The Indian food (Tata Salt and Tata Sampann) and beverages (Tata Tea, Tata Coffee Grand, Himalayan) segments account for 56 per cent of overall revenue.

What would also aid further growth is TCPL’s aggressive distribution expansion plan. It is looking to double direct distribution reach in the next 12 months. This, ICICI Direct analyst Sanjay Manyal says, augurs well for nascent categories like pulses and spices, as it would increase store availability. Further, the company’s new chief executive officer, Sunil D’Souza, who has a commendable track record of working with Whirlpool India as its managing director and 15-year experience at Pepsi, is also expected to focus more on such under-penetrated food categories.

This apart, estimated synergy benefits of 2-3 per cent of combined Indian branded revenue over the next 1-1.5 years would further support TCPL’s overall performance, including operating profit margin. However, higher tea prices could impact near-term margin performance. In Q1, the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin expanded by 312 basis points YoY to 17.8 per cent, led by a 176-bp gross margin expansion and lower advertising spend. Consequently, profit growth was stronger.

Overall, TCPL’s ability to cash in on potential growth opportunities, including integration of the merger, will be key. A failure on the execution front could lead to a correction in the stock, which is currently trading at around 47 times its FY22 estimated earnings, similar to Britannia’s.


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