Tata Consumer's Q2 growth led by India business, margins to improve

Tata Consumer Products reported strong revenue growth led by its India business. Analysts expect margins to improve in H2FY26 as tea prices moderate and premium segments expand.

Led by the India-branded business, Tata Consumer Products posted better than expected revenue dur­ing the September quarter. Margins were under pressure as gains at the India standalone operations were offset by the international and unbranded business. 

Brokerages are positive on the outlook for the stock, given expectations of margin gains in the tea segment, improved product mix and growth spurt from the foods business. The stock has outperformed peers over the past year with a return of 18.4 per cent. Its peer index, the Nifty FMCG, is down 5 per cent over this period. 

The company posted a revenue growth of 18 per cent Y-o-Y at ₹4,966 crore aided by volume growth of 14 per cent. The India business, according to the company, posted double digit growth in both tea and salt for a second consecutive quarter. 

Within key segments, the India beverages business reported a growth of 15 per cent year-on-year (Y-o-Y). While the tea business posted a 12 per cent revenue growth on the back of a 5 per cent volume growth, the coffee business saw a 56 per cent Y-o-Y growth. The ready-to-drink (RTD) segment saw a 31 per cent volume growth and aided revenue growth of 25 per cent. The gains came despite headwinds from unseasonal rains and heightened competitive intensity. 

The key growth driver, however, was the India foods business which grew 19.3 per cent Y-o-Y. Among key categories, salt saw a revenue growth of 16 per cent during the quarter, backed by strong 9 per cent volume growth. Value-added salts saw a robust growth of 23 per cent in Q2. Tata Sampann stood out with a sales growth of 40 per cent. 

Its Capital Foods and Organic India businesses delivered growth of 8.3 per cent and 30.4 per cent, respectively, leading to an overall growth of 16 per cent for the two businesses. The Capital Foods business was impacted by the goods and services tax (GST) transition across modern trade. 

The international business grew 15 per cent Y-o-Y with a constant currency growth of 9 per cent. Revenue growth in the UK business was down 5 per cent on account of a high base and was offset by strong performance in the US business. It saw a 21 per cent Y-o-Y growth with Eight O’Clock coffee gaining market share. The Canadian operations grew 7 per cent on the back of gains in specialty tea. 

While the revenue performance was strong, consolidated gross margins fell by 152 basis points (bps) to 42.1 per cent. Though standalone margins were better due to a softening of tea prices, this was offset by the unbranded and international business. The pressure at the international segment was due to high coffee prices and lack of price hikes to recover the same. 

Operating profit margins were down 133 basis points Y-o-Y to 13.5 per cent though the management expects them to move up. 

The company has guided for margins of 15 per cent by Q4 on account of a moderation in tea prices and price hikes in international and non-branded businesses. 

Analysts led by Sumant Kumar of Motilal Oswal Research expect margins to expand in H2FY26, led by softening tea prices, improving product mix in the tea business (higher sales of premium tea). Also, because of the scale-up of growth businesses, including RTD, Tata Sampann, Capital and Organic India, which accounted for 30 per cent of revenue contribution in Q2. 

The brokerage has a buy rating with a price target of ₹1,450. JM Financial Research is building in healthy sales growth of 11 per cent, margin expansion of 120 bps and earnings growth of 21 per cent over the FY26-28 period. 

Analysts led by Mehul Desai of the brokerage believe that upsides are limited. This is given the recent run-up in stock prices at 12 per cent in the last three months and valuations at 60 times FY27 earnings’ estimates.