Tata Consumer may find buffer in margins despite mixed Q1 results

Tata Consumer Products delivered a mixed performance in the April–June quarter (Q1), but brokerages remain optimistic about the stock, citing an improving margin trajectory. Though the stock is down 3 per cent from its monthly highs, gains on the gross margin front could limit further downside. At current levels, the stock trades at 53x its 2026–27 earnings estimates and is expected to maintain a valuation premium, backed by strong earnings growth expectations.

 

Q1 results fell short of Street estimates. Strong growth in the company’s core tea and salt businesses failed to offset the sluggish performance in its growth portfolio, dragging down overall numbers. Revenue rose 9.8 per cent year-on-year (Y-o-Y), driven by a 12 per cent uptick in India tea and 13 per cent in salt.

 

However, weak numbers from NourishCo (due to unseasonal rains), flat sales at Capital Foods (due to temporary issues), and a sharp decline in profitability in the unbranded business (due to falling coffee prices) weighed on the quarter. The double-digit growth in India tea and salt was value-led, with volume growth ranging between 1 per cent and 5 per cent. Tata Sampann also recorded strong Y-o-Y growth of 27 per cent.

 

Margins disappointed as well. Operating profit dropped 9.1 per cent, with margins contracting 260 basis points (bps) Y-o-Y to 12.7 per cent. Gross margins fell 480 bps to 40.1 per cent, hit by higher tea prices in India and a correction in non-branded coffee prices. Rising staff costs added further pressure.

 

Still, the company remains upbeat. It expects 7–8 per cent growth in its domestic business and a recovery in the growth segment — reverting to 30 per cent growth — from the July–September quarter (Q2). Margins are also projected to return to the mid-teen level as tea prices ease. 

 

Analysts Anurag Dayal and Binay Shukla of PhillipCapital believe the Q1 softness in the ‘growth’ portfolio is a one-off and see a rebound ahead. Strong secondary sales in Capital Foods (22 per cent Y-o-Y) and Organic India (32 per cent Y-o-Y) reinforce their confidence in the recovery.

 

Trade price corrections at NourishCo will reflect in the base from Q2, supporting value growth. A revival in the ‘growth’ businesses is expected to cushion any moderation in tea value growth.

 

So far, tea auction prices have remained favourable — down 13 per cent Y-o-Y — and the company expects this trend to continue. That should help margins return to normalised levels in the second half of 2025–26. Tata Consumer is targeting a 300-bp margin expansion over three quarters (Q1FY26–Q3FY26), assuming 10–15 per cent deflation in tea commodity prices and continued rational competition.

 

Kotak Securities, however, is more cautious. The brokerage believes the company’s guidance does not adequately bake in business volatility and competitive pressures. It has trimmed FY26–28 earnings estimates by 6–7 per cent, assuming 22 per cent annual growth in the growth portfolio versus the guided 30 per cent, and has lowered margin estimates by 70–80 bps.

 

While the stock enjoys a valuation premium thanks to its earnings outlook, analysts at Kotak Securities, led by Jaykumar Doshi, warn that execution slippages in acquired businesses or heightened competition in tea could threaten both earnings/valuations.

 

JM Financial has cut its earnings estimate by 3 per cent following the Q1 miss. It has a ‘hold’ rating on the stock, awaiting better execution in the ‘growth’ businesses. Domestic tea margins and coffee price trends — key to unbranded business profitability — will remain key monitorables.