High tea prices could impact near term margins of Tata Consumer Products

Topics Tea prices | tea auctions | Lockdown

Growth going ahead is expected to be driven by the India business which accounts for over 60 per cent of revenues and profits.
After rising 83 per cent from mid-April to its highs in early September, the stock of Tata Consumer Products has shed some of its gains. While the long-term growth story remains intact, the near-term concern is about margins which could be hit on account of rising tea prices. 

Tea auction prices, according to analysts at Spark Capital, have almost doubled since the lockdown, which are expected to impact the gross margins in the September quarter. Analysts expect the gross margins in the tea business to be impacted by 450-500 basis points (bps) in the quarter. 

However, what should mitigate the increase in raw material prices is the price hike of 15 per cent taken by the company between May and September, and a rise in volumes led by in-home consumption. 

Branded tea consumption has gone up during the lockdown, while the unbranded segment (largely out-of-home sales) was more impacted due to the Covid-19 pandemic. 
In addition, restructuring of the distribution set-up is also expected to offset the pressure on margins. Analysts at Motilal Oswal Research believe that once tea prices stabilise, realisations should be better than pre-Covid levels driving value growth, which was not the case over the past five years when they were more volume driven. 

In fact, despite the pressures on the Indian tea business — which accounts for over a third of revenue — at a consolidated level, analysts expect the gains from the acquired consumer business, lower advertising spends, and cost-cutting measures to help expand margins by 100 bps to about 14 per cent in the quarter. 

Growth is expected to be driven by the India business, which accounts for over 60 per cent of revenue and profits. 

Within this, the company expects the Tata Tea and Tata Salt businesses to post low double-digit growth, led by cross-selling between distribution channels of Tata Chemicals and Tata Consumer products, as well as expansion into new geographies. 

Market-share gains from unorganised players, on the back of expanding distribution reach, should help achieve high double-digit growth in pulses and spices business under the Tata Sampann segment. 

While the stock has seen sharp gains, given the growth triggers, investors can consider it on dips.

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