Tata Consumer hits all-time high; CS initiates coverage with 'Outperform'

Shares of Tata Consumer Products (TCL) rallied over 5.5 per cent to hit an all-time high of Rs 436 on the BSE on Wednesday after the global brokerage firm Credit Suisse initiated the coverage on the stock with an "outperform" rating. The target price has been set at Rs 490. 

At 01:30 pm, the stock was trading over 5 per cent higher at Rs 434.85 apiece on the BSE. In comparison, the benchmark S&P BSE Sensex was trading flat at 36,660.70 levels, down 0.04 per cent. Shares of Tata Consumer have been rising since last five sessions. 

"TCL is beginning a journey of transformation as the flagship FMCG business of the Tata group which is aiming to increase its consumer footprint. The first big change is the merger of the salt/foods business which has increased the share of India to 65 per cent of earnings before interest and tax (EBIT) and increased the addressable market by 6x. The second big change is the appointment of its new CEO with a strong track record," wrote Arnab Mitra and Pratik Rangnekar, research analysts at Credit Suisse in a report dated July 7. 

They see the potential for faster growth in the tea and salt business, rapid expansion in pulse/spices, and margin expansion from merger synergies. We expect a 16 per cent earnings compound annual growth rate (CAGR) over FY20-23 and an ROIC (return on invested capital) of 34 per cent by FY23.

In May last year, Tata Group had decided to demerge the consumer business of Tata Chemicals and merge it with Tata Global Beverages. Tata Global Beverages is now renamed as Tata Consumer Products. 

Credit Suisse notes that TCL has three businesses in different growth/profitability life stages: India core FMCG, international, and new food businesses/Starbucks. Given this, it has initiated the coverage on the stock with an "Outperform" rating and the target price of Rs 490. 

"Starbucks has strong long-term prospects in India with no national competition in the café market. The business is close to breakeven. While COVID-19 is expected set back the business by a year in FY21, long-term prospects are intact," it said. 

Meanwhile, competitive pressure in tea, the extended impact of Covid-19 on demand, and lack of brand pull in pulses are some of the risks to the company's growth prospects, the brokerage notes.