New businesses to boost growth momentum of Tata Consumer Products

Brokerages favour the stock, citing promising growth prospects and justified rich valuations

The stock of fast-moving consumer goods major Tata Consumer Products has been reaching new all-time highs on better-than-expected results for the July-September quarter (second quarter, or Q2), strong growth in the food business, and margin gains in the beverage/international business. Most brokerages are positive on the stock, given growth prospects, and believe that rich valuations are justified.

The near-term trigger has been the robust operational performance in Q2. Consolidated sales, up 11 per cent over the year-ago quarter at Rs 3,733 crore, were broadly in line with brokerage estimates.

Growth was led by the India food business, which posted a 16 per cent jump, while its NourishCo segment (energy drink portfolio) rose 25 per cent.

The performance of its single largest segment, tea, was stable, with volume growth of 3 per cent and revenue (value) growth of 5 per cent, compared to industry value growth of 6.2 per cent.

The company lost market share in the quarter, which was 37 basis points (bps) in volume terms and 95 bps by value. Demand is recovering, and there hasn’t been an increase in competitive intensity from unorganised players. With tea prices stabilising, the company is hoping to recover its lost share.

Research analysts Himanshu Nayyar and Chetan Mahadik of Systematix Research say, “The tea business has benefited from recent price cuts and distribution efforts and should stabilise at mid-single-digit volume growth.”

The company is eyeing mid-single-digit volume growth, coupled with premiumisation and an improved pack mix.

In the salt business, the company’s market share at the end of September was at 38 per cent, compared to 30 per cent three years ago. The segment is expected to maintain its mid-single-digit volume growth, while revenue growth would be in double digits on the back of premiumisation and market-share gains.

The key driver of growth for the company is expected to come from new segments of Sampann (packaged staples), Soulfull (healthy snacks/drinks), and NourishCo.

Growth segments account for 15 per cent of the India branded business sales in 2022-23, and Nuvama Research expects this to touch 20 per cent in 2023-24. The segment is expected to grow at 30-40 per cent annually.

The operating performance in the quarter was led by the international business. While the overseas business saw revenue growth of 13 per cent (8 per cent in constant currency), operating profit margins were up a robust 330 bps to 12.4 per cent, largely due to pricing intervention and savings from restructuring. The company is seeking to improve efficiencies and cost savings programmes to maintain high margins.

Research analysts Krishnan Sambamoorthy and Sunny Bhadra of Nirmal Bang Research remain positive about Tata Consumer over the medium to long term on the back of margin improvement, gradual recovery in volume growth in the core business for both India food and beverage business, premiumisation initiatives (particularly in salt), and robust growth in new engines.

Systematix Research believes that the company deserves a higher multiple than home and personal care peers, given the stronger growth expectations for food/beverage businesses, margin improvement potential, and consistent execution. The brokerage, however, believes that current valuations remain rich on both absolute and relative bases and thus have a ‘hold’ rating.