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Equity Research : Tata Consumer Products Limited
TCPL future ambitions remain aggressive, At 17% EPS CAGR over FY22-25e, TCPL should deliver industry-leading growth within indian FMCG.
Tata Consumer Products Limited (TCPL) is a leading F&B company with a strong market position in branded tea and salt in India, along with international presence in branded tea & coffee. The company has undergone a transformation in the last two years, pivoting from a 'global beverages' company to an India-focussed F&B franchise, and has emerged as a platform for Tata Group's FMCG ambitions. Led by a new management, TCPL embarked on a '3S' agenda—'Simplify, Synergize, Scale'—in-line with the group's strategy. It has focussed on capacity building, expanding distribution reach, and entering new categories. EPS growth has been robust at 16% Cagr over FY20-22, despite a rise in raw-material costs, and TCPL has gained 3-5ppt market share in tea & salt. The share of the international business is down from ~48% of revenue in FY16 to <30% in FY22, even as profitability has improved. Balance sheet has been strengthened with a sharp decline in working capital and improved return ratios. A simplification of the organisational structure is also underway, to drive synergies, reduce costs and provide fuel to invest in new emerging categories.
While a lot has been achieved, TCPL's future ambitions remain aggressive. Management focus is strongly on growth, both in the core portfolio and in new emerging categories. With ~Rs23bn cash on the balance sheet, M&A is also an opportunity. We see TCPL as a multi-year growth story, as it leverages the 'Tata' brand and cash flows/ distribution reach of its core tea & salt portfolio to expand into newer categories. TCPL is likely to deliver a sector-leading 17% EPS Cagr over FY22-25e, led by the India branded business. We value TCPL based on SoTP at Rs920/share (~20% upside); the India business accounts for >70% of fair value.
Tata Group's consumer businesses' consolidation has transformed TCPL into a strong F&B play. India business (c.70% of rev.), has a diverse mix of leader brands (salt & tea) and high-growth segments (pulses, breakfast, RTE, etc), while slow- growing international business has improved profitability. Unique portfolio offers better margin visibility, a key differentiator vs peers. B/S is strong & net cash. We forecast FY22-25E EPS cagr at 17%.
Transformation: TCPL was formed in May 2019 following the merger of Tata Global Beverages (TGBL; tea & coffee) and Tata Chemicals' consumer business (salt & pulses). The merger drove synergy benefits through focus and scale.
Eye on India: Compared with a c.50% international exposure in TGBL, India now forms c.70% of TCPL's revenues (as of FY22); the company enjoys a strong position in salt & tea, and efforts are underway to seed and grow categories of the future (breakfast, staples, RTE, etc). The India beverages business forms c.40% of revenues (higher Ebit), while foods contribute c.23% (lower Ebit).
Salt & tea: These form the bedrock of TCPL's India business and share similar traits, albeit with some differences. In salt, TCPL leads the market with a c.38% share, and in packaged tea it's a strong #2 (22% share). Both categories, while high on penetration, have room for growth through formalisation, share gain, premiumisation and expansion of distribution. TCPL also has a small presence in packaged coffee.
High-growth portfolio: TCPL has a wide portfolio; the main constituents are:
- NourishCo: After acquiring PepsiCo's 50% JV stake in May-20, TCPL undertook a series of initiatives to drive strong growth; this business turned Ebitda-positive in FY21
- Sampann: Umbrella brand for staples & foods, Tata Sampann has been growing at 20%+ over FY19-22, a trend likely to continue in the medium term
- Soulfull: Acquisition in Feb-21, marking TCPL's entry into breakfast & snacks
- Tata Q: Inter-group M&A in Nov-21 in RTE foods
- Starbucks: In a JV structure, a strong food service play
International & plantation: At c.27% of revenues, International includes the global tea & coffee portfolio, mainly in developed markets, with strong market shares in a handful of categories and geographies. Focus on profitability has pushed up margins to >15% in FY22 (vs. ~10% in FY18). We expect a 4% revenue Cagr over FY22-25E, with slightly better Ebit growth. Tea & coffee plantation form c.10% of revenues and 6% of Ebit, spread across different subs.
Financials: It is forecasted c.8% revenue growth and c.17% EPS Cagr over FY22-25E. Working capital parameters have improved, B/S is net cash at Rs23bn. RoE is c.8% (in FY22) following a series of M&A (adj. for intangibles: >30%).
Tata Consumer Product - A Strong Player in the field:
Tata Consumer Products Limited (TCPL) is a leading food & beverages (F&B) company with a strong market position in the branded tea and salt categories in India. It also has a substantial international presence in branded tea and coffee segments. TCPL has emerged as the flagship platform for the Tata Group to pursue its growth ambitions in the Indian FMCG market. In the last two years, the company has undergone a substantial transformation, pivoting from a 'global beverages' company to an India-focussed FMCG player with a wider category presence. TCPL, earlier known as Tata Global Beverages (TGBL), was created through the merger of the consumer products business of Tata Chemicals with TGBL in May-2019. TGBL was largely a branded tea & coffee company, deriving nearly half of its revenue from international markets, notably US, UK, Canada, Europe and Australia. Post the merger and strategic initiatives taken over the last two years, TCPL now has a broader portfolio, straddling across food & beverages and deriving ~70% of its consolidated revenue from India. Going forward, TCPL plans to use its current distribution and scale to expand into new categories and build a large FMCG business in India.
TCPL, along with Tata Coffee (listed subsidiary, ~57% stake) currently operate across five key segments, as highlighted below:
- India Beverages: #2 player in branded tea; expanding into ready-to-drink beverages and packaged water
- India Foods: #1 in branded salt; expanding into branded staples (pulses, spices), ready-to-eat meals, breakfast cereals, etc. International Beverages: Branded tea in UK, Europe, Canada, South Africa under brands such as Tetley, Good Earth, Teapigs etc. Branded Coffee in the US under Eight O' Clock brand.
- Tata Coffee (incl. Vietnam): Unbranded B2B business; Includes plantations in India and coffee extraction in India and Vietnam.
- Tata Starbucks: 50:50 JV with Starbucks Corporation. Exclusive franchisee for Starbucks stores in India.
Tata Group, under the leadership of N. Chandrasekaran (Chairman - Tata Sons), has seen a change in strategy in the last few years. The group has adopted a '3S' agenda—Simplify, Synergize, Scale—to reduce complexity across its businesses, extract synergies and thereby making the organisation more agile and responsive. TCPL has followed a similar playbook, transforming itself from a packaged tea & coffee company until FY20 to a broader FMCG player with greater focus on India. While the transformation continues, substantial progress has been achieved, which also reflects in a robust 16% consolidated EPS Cagr over the last two years (FY20-22).
TCPL's transformation started with integration of Tata's group's FMCG businesses under one roof. Prior to FY20, Tata Global Beverages (TGBL) was largely a packaged tea & coffee company, with substantial presence outside India (international 48% of revenue in FY19) with brands such as Tetley, Good Earth, Teapigs and Eight O' Clock Coffee. While it was also a leading player in the Indian tea market, it had a limited presence in other FMCG categories. It also lagged peers in distribution, both on direct and overall numeric outlet reach. At the same time, the food business (largely salt) was operated by Tata Chemicals, a group company that is a leading manufacturer of inorganic chemicals such as soda ash. The Food business formed only 16% of Tata Chemicals' revenue, and apart from salt, the company had also forayed into staples under the 'Tata Sampann' brand. While both TGBL and Tata Chemicals had an FMCG business in India, individually, they were sub-scale compared with peers. In May 2019, Tata Group announced a merger of the consumer products business of Tata Chemicals with Tata Global Beverages to create Tata Consumer Products Limited (TCPL), which would represent a unified front for the group's FMCG business in India. The merger gave TCPL greater scale and strong market position in two categories—tea & salt. Following this simplification, the focus has been on driving synergies to increase distribution reach, optimise cost structures and expand the portfolio into new categories (scale). This was also led by a change in management, with Sunil D'Souza taking over as MD & CEO.
TCPL Showed a strong growth in last two year:
TCPL has seen strong growth in the last two years, led by 200-550bps market share gains in both its tea and salt portfolio, along with ramp-up of new growth drivers such as Sampann, value-added salt, NourishCo, Coffee, etc. Revenue has grown at 14% cagr, with the India business growing at 21%, partly due to inflation-led product price hikes. Ebitda has grown at 15% cagr, led disproportionately by the tea business, which has increased profitability sharply as tea prices correct. The salt business, however, was impacted in FY22 by input inflation and recovery here would help going forward. Note that Ebitda growth has been healthy despite investments in new growth drivers and ad spends growing at 11% cagr. Resultant EPS has also grown at 16% cagr over FY20-22.
Growth Drivers of TCPL:
Segment #1: India Beverages
TCPL's India beverages business comprises two key portfolios—packaged tea and coffee (~93% of segment revenue), and ready-to- drink (RTD) beverages (7% of segment revenue). Branded tea is the largest category for TCPL; the company is a #2 player in value terms. In the branded coffee market, TCPL is a relatively small but growing player. RTD beverages are also an emerging growth area for the company, and the business is housed under its wholly-owned subsidiary, NourishCo beverages.
The India beverages business has grown revenues at 13% cagr over the last five years, led by ~7% cagr in tea volumes, a sharp increase in tea prices (especially in FY21) and acquisition of stake in NourishCo beverages.
Segment #2: India Foods
TCPL's Foods business comprises its core salt portfolio (~85% of food revenue), along with new growth drivers which have been added in the last few years. These include three key brands—Tata Sampann (staples), Tata Soulfull (breakfast cereals and millet- based snacks) and Tata Q (ready-to-eat meals). The salt business and Tata Sampann were incubated by Tata Chemicals and came under TCPL's fold through the merger of Tata Chemicals' consumer business in FY20. On the other hand, Tata Soulfull and Tata Q are acquisitions made by TCPL in the last two years.
The food business has delivered strong growth (18% revenue cagr over FY18-22), with both the salt portfolio and new categories doing well. Profitability for the business is also healthy, with Ebitda margin in the 15-18% range, although FY22 saw a dip due to input inflation and investments behind new growth drivers. Food business Ebitda grew at 23% cagr over FY18-21 before declining ~24% in FY22.
The Food business is likely to sustain strong growth, led by TCPL's initiatives in distribution expansion, brand investments and scaling up of new growth drivers. We build in 13% revenue cagr for the foods business over FY22-25e. Ebit growth is likely to be higher (>30% Cagr), as margins recover after a dip in FY22.
Segment #3: Tata Q - Ready-to-eat meals
In Nov-2021, TCPL acquired 100% stake in Tata SmartFoodz Limited (TSFL), which owns and operates the 'Tata Q' brand of ready-to- eat meals. The brand commenced operations in 2019 and has established itself as the #2 player in the Ready-to-Eat (RTE) segment in India. MTR (Orkla Group) is the largest player in this category.
With this acquisition, TCPL also gets access to TSFL's manufacturing unit and its differentiated MATS technology, which according to the company helps retain taste, texture and nutrients of products. The RTE market in India is still small, at ~Rs1.5bn (as per management), although growing strongly, given tailwinds from urbanisation, growing disposable incomes and demand for convenience, nutrition and hygienic food on-the-go. With TCPL's distribution and capabilities in MT/e-commerce, Tata Q can scale up its franchise at a rapid pace, in our view. It also provides a platform for TCPL to drive innovation in the RTE category. TCPL has been able to integrate the acquisition within three months of closure of the transaction. Management also considers exports a big opportunity for this category and is seeking requisite approvals. The export market from India is sized at Rs17-18bn (as per management) vs. Rs1.5bn in the domestic market.
Segment #4: International Beverages
The international beverages segment comprises TCPL's portfolio of global tea brands (Tetley, Teapigs, Good Earth, Joekels, Vitax) and Eight O' Clock coffee brand in the US, together accounting for 27% of consolidated revenues. US, UK and Canada are key geographies for this business. TCPL's international presence dates nearly two decades back, when it (then known as 'Tata Tea') acquired the Tetley brand in the year 2000. The portfolio was ramped up over the years with a series of acquisitions, most notably Good Earth in 2005, Eight O' Clock coffee in 2006 and Vitax in 2007. Organic growth however has been subdued in the last decade, and as TCPL pivots more towards India FMCG, share of international beverages has reduced from ~48% in FY16 to 27% in FY22. TCPL's focus has been on improving profitability, which had led to better op. margins over the last five years.
Segment #5: Plantations and Extractions
TCPL also has a presence in tea/coffee plantations and extractions; this business accounted for 10% of consolidated revenue in FY22. This is an unbranded B2B business, which also acts as a supplier for the group's branded business (incl. Starbucks). Profitability is also lower (6-8% Ebit margin), and hence its share of consol. Ebit is lower at ~6%. The plantations & extractions business is housed across several entities, although most of it (~90%) is in Tata Coffee and its Vietnam subsidiary. Details highlighted below:
- Tata Coffee Standalone (57.5% stake): Houses 25 plantation estates across ~10,000 hectares, growing coffee, tea and pepper in South India. Also operates 2 instant coffee plants in South India and two roast & ground facilities.
- Tata Coffee Vietnam (100% owned by Tata Coffee): Instant coffee freeze-dried facility with 5,000 MT of annual capacity, which was inaugurated in FY19.
- Tata Tea Extractions Inc. : Tea extraction business in the US. Wholly owned by TCPL.
- Kanan Devan and Amalgamated Plantations: TCPL has a 41% stake in Amalgamated Plantations (APPL) and 28.5% stake in Kanan Devan Hills Plantations (KDHP), which own and operate plantations in India. These entities are not consolidated and only share of profit is included in TCPL's P&L. Hence, these are not part of consolidated revenue or Ebit.
Segment #6: Tata Starbucks
TCPL operates the India franchise of Starbucks Coffee through Tata Starbucks, a 50:50 JV between TCPL and Starbucks Coffee International Inc. The JV was incorporated in FY12, with the first store opened in FY13. The franchise has expanded strongly over the years, with 268 stores now operational across 26 cities (as on Mar-22). In revenue terms, Tata Starbucks has grown at 27% cagr over FY14-22 to Rs6.3bn despite Covid-19 pandemic impacting operations in the last two years. Profitability however remains weak, with a loss at the PAT level.
At 17% EPS cagr over FY22-25e, TCPL should deliver industry-leading growth (within Indian FMCG). TCPL is on a transformation journey, with ambitious plans to expand its franchise in the Indian FMCG market, which in turn should deliver strong growth over the medium term. Put together, It offers ~20% upside potential on CMP.