Growth triggers should augur well for Tata Global stock: Analysts

Improvement in international business, merger of Tata Chemicals' consumer business are positive

The stock of Tata Global Beverages (TGBL) has gained about 32 per cent in the last three months, outperforming the Nifty FMCG index, which was down 5 per cent during the same period. Factors like the merger of Tata Chemicals’ consumer business, restructuring of international businesses in the past couple of years, and appointment of new MD and CEO are keeping investor interest high in TGBL.

The company last week announced the completion of the merger process (consumer business of Tata Chemicals). Apart from direct synergy benefits, the merger has given a strong growth opportunity to TGBL in the consumption space. According to analysts at Motilal Oswal Securities, the merger of Tata Chemicals’ consumer business with itself marks TGBL’s entry into an additional segment of staples with the addressable market size of Rs 77,000 crore.

In fact, in the December 2019 quarter (Q3), TGBL’s domestic business reported a steady performance in Q3 despite the consumption slowdown. Its branded tea business (over 45 per cent of its revenues) reported a 7 per cent volume growth led by market share gains and the Dhunsera Tea acquisition last year. However, poor pricing power pulled down the overall revenue growth to around 6 per cent. But what helped TGBL at the Ebitda (earnings before interest, tax, depreciation and amortisation) level is benign input costs, resulting in 191 basis point year-on-year (YoY) expansion in the Ebitda margin to 12.2 per cent despite higher advertising spends. Raw material tailwind is likely to continue for TGBL going ahead, according to analysts.

Though TGBL’s international business (around 40 per cent of revenues) witnessed some pressure in Q3 with a 3-4 per cent YoY fall revenues, it is expected to improve going ahead. Sanjay Manyal, analyst at ICICI Securities, believes that TGBL’s restructuring of international business, including exit from loss-making units, is expected to yield good results. Some brokerages also believe that Unilever’s (parent company of Hindustan Unilever) decision to review its global tea business augurs well for TGBL, which could gain market share. Tea is TGBL’s key business accounting for over 80 per cent of its overall revenue.

The Street also has high expectations from TGBL’s newly appointed MD and CEO Sunil D’Souz, who is currently managing director of Whirlpool India and has vast experience in the consumer segment.

The growth triggers should augur well for the stock, which is currently trading at 41x its FY21 earnings per share estimates.