Growth and margin outlook remain strong for Tata Consumer Products

Valuations are pricing in some of the growth

Tata Consumer Products posted a strong operational performance in the March (Q4FY22) quarter. Unlike major consumer companies which are grappling with higher commodity costs and have reported a dip in their profitability, Tata Consumer expanded its margins in the quarter.

The consolidated gross margins expanded by 540 basis points over the year ago quarter to  44.6 per cent, the highest in seven quarters, on account of profitability gains in the beverage business.The segment, which accounts for 60-70 per cent of revenues both on a standalone and consolidated basis, benefitted from the dip in tea prices. The North India tea prices have shed 20 per cent on a sequential basis. What aided the gains were the price hikes of 15 per cent taken in the foods business to counter the rise in raw material inflation.

Some of the profitability gains at the gross level reflected on the operating level as well. Operating profit margins were up 410 basis points to 14 per cent and was higher than what the street was working with. The gains at the operating level would have been higher but for the sharp increase in advertising and promotion expenses and cost inflation in the foods business. On cost inflation, the company expects tea prices to remain stable though margins in the foods business could come under pressure in the near term.

On the sales front, the company posted an increase of 4.5 per cent YoY, with the India beverage segment reporting marginal dip in growth while the food segment saw a growth of 19 per cent. While the India tea and salt business gained market share, the international business growth was weak due to higher base in the base quarter on account of a spurt in in-home consumption.

Most brokerages expect 10-19 per cent growth going ahead for the company’s revenues and operating profits over the next couple of years. The strong show, according to Vishal Gutka of PhillipCapital Research, will come from double digit growth in mainstream categories of tea and salt on market share gains and premiumisation. The other factors for the growth are foray into unorganised and fast growing multiple categories in line with its aspiration of becoming a food and beverage major and improving profitability of its international business by divesting loss making geographies and focusing on high margin non-black tea variants.

The reorganisation of group entities as well as bolstering its distribution should contribute to volume/revenue growth. Say analysts led by Sumant Kumar of Motilal Oswal Research, “The unlocking of sales and distribution synergies from the merger of group companies has started to yield results. This is evident from the market share increase in tea (100 basis points YoY) and salt (400 basis YoY) as of March 2022, backed by an increase in distribution reach.

IIFL Research has upgraded the earnings estimates of the company by 3 per cent for FY23 and FY24. The analysts at the firm, however, highlight that the stock which is trading at 53 times its FY24 earnings estimates seems to have limited upside. Similarly, YES Securities too likes the improved execution and multiple growth opportunities for the company. Like IIFL Research it has maintained its ‘Add’ rating given the relatively high absolute and relative valuations.