Growth in food business may drive gains for Tata Consumer Products

Margin gains, however, will depend on raw material inflation, pricing action

The Tata Consumer Products stock has been an outperformer doubling in value (101 per cent gain) over the past year leaving its peer index, the Nifty FMCG as well as the benchmark Nifty with returns of 27 per cent and 59 per cent respectively, far behind. The rerating for the stock has been based on expectations of higher growth, market share improvement, and margin gains.

The company has been a strong beneficiary of the shift in consumer behaviour in FY21 from loose to packaged foods gaining market share across segments. The Indian beverage business, largely tea, posted a 32 per cent revenue growth led by a volume uptick of 12 per cent led by in-home consumption.

The Indian food business comprising salt, pulses, and ready-to-cook business too saw an 18 per cent sales growth on the back of an 11 per cent rise in volumes. While market share gains in the tea segment were 100 basis points, it was 180 basis points in the foods segment.

Most brokerages highlight the share gains came despite the price hikes taken by the company. especially in the tea segment which witnessed higher procurement costs. Say Mihir P Shah and Abhishek Mathur of Nomura, “While spending on advertising was revived in with a 19 per cent YoY jump in the March quarter, higher brand investments in an inflationary input cost environment is a positive that can drive superior volume growth and share gains from the unorganised segment.”

The double-digit growth in volumes and sales is hinged on the aggressive expansion the company is planning. The company intends to increase its distribution reach to 5-6 million points by September of 2023 from 2.4 million now. This includes doubling of direct distribution by September this year. Aditya Soman and Aditya Gupta of Goldman Sachs say that a widespread and established distribution network will allow the company to rapidly scale up its brands.

Further, the planned doubling in direct coverage will open up opportunities to cross-sell products without a similar rise in fixed costs. In addition to the physical expansion, the acquisition of Big Basket by the Tata Group could help the company capitalise on sourcing gains and reach of the online grocery company.

The food segment could be the biggest beneficiary of the shift away from the unorganised segment to branded players including Tata Consumer through brands such as Sampann. While for tea and salt the share of the unorganised segment varies between 45-60 per cent, the same in the case of pulses and spices is a high 70-99 per cent.

Goldman Sachs expects a long runway for growth in packaged food via its Sampann brand, as the company leverages its portfolio advantage, improving distribution and strong balance sheet to grow sales at 12 per cent annually over FY21-26.

While the international beverages segment, which accounts for 30 per cent of revenues, generated high single-digit growth in FY21, analysts expect growth and margins to be driven by new product launches/segments such as non-black and ethnic teas.

Margin gains could be another trigger for the stock. The company’s operating profit margins fell 290 basis points 9.9 per cent in Q4 and marginally in FY21 on the back of higher raw material costs and a lower proportion of higher-margin international business. Analysts believe that tea prices coming off peaks, further price hikes, synergy gains post-merger of food business of Tata Chemicals with it last year, improving product mix and digital initiatives should improve margins going ahead.

Given the sharp gains for the stock, valuations are at 49 times its FY23 earnings estimates. While its growth prospects are strong, near-term margin headwinds and sales trajectory of the food business need to be tracked before considering the stock.