The $104-billion Tata group on Wednesday announced that it was demerging the consumer products business of Tata Chemicals into Tata Global Beverages as part of a larger mandate to bring food and beverages under one unit. The announcement brings to an end days of speculation and comes nearly two months after Tata Sons Chairman N Chandrasekaran restructured operations under 10 verticals at the conglomerate in a bid to streamline its business.
Tata Global will be renamed Tata Consumer Products after the demerger and will see its turnover rise 25 per cent to Rs 9,099 crore with earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 1,154 crore. The market capitalisation of the new entity will be Rs 18,000 crore at the current share price of Tata Global, said analysts, which is an increase of nearly Rs 5,800 crore over its Wednesday’s market capitalisation, which stood at Rs 12,500 crore.
Under the demerger process, 114 shares of Tata Global will be issued for every 100 shares of Tata Chemicals, taking the latter’s post-demerger share base to 920 million from 631 million now.
Also, Tata Chemicals will see its revenue (including inter-segment sales) decline by 15 per cent to Rs 10,336 crore.
Apart from Tata Salt and Tata Sampann, which is into spices, pulses and snacks, the demerger will see the transfer of a little-known brand called Tata Dx, a detergent powder, to Tata Global. Launched by Tata Chemicals on a pilot basis in West Bengal in the March quarter, this brand is likely to get an aggressive push from Tata Global in future as it eyes a foray into home care. Top sources in the group say this is one of the key legs of the consolidation drive in consumer, which will unfold in the months ahead.
Tata Global will also be able to extract nearly Rs 150 crore of synergies from the transaction over the next 18-24 months, which is 2-3 per cent of the combined branded business, the company said during a conference call after the announcement. These synergies will improve Ebitda of the combined business.
Bank of America Merrill Lynch advised Tata Global on the deal, while Tata Chemicals was advised by JP Morgan. On Wednesday, the stocks of Tata Global and Tata Chemicals were down 0.8 per cent and 2.9 per cent to Rs 198.75 and Rs 557.40 per share, respectively, on the BSE, even as the broader market remained weak. Investors are likely to react positively to the news on Thursday, sector analysts said.
“This is the first step in our endeavour to grow in a broader set of categories. In addition to tea, coffee and water, we will now have food brands such as Tata Salt and Tata Sampann as part of our portfolio, giving us a presence in segments such as salt, spices, pulses and snacks,” Ajoy Mishra, MD & CEO, Tata Global, said during the call.
Tata Chemicals will continue to manufacture Tata Salt, while the brand will now be owned and marketed by Tata Global, the group clarified on Wednesday. Tata Chemicals will also have a smaller but “focused” portfolio, including a presence in chemistry and specialty products such as soda ash, bicarbonate and silica.
“This is an amalgamation of the fast-moving consumer goods businesses of the two companies (Tata Global and Tata Chemicals) and the idea was to ensure that synergistic units came together,” said Harish Bhat, brand custodian, Tata Sons.
The Rs 1,847-crore consumer products business of Tata Chemicals contributed 15 per cent to the company's top line (including inter-segment revenue) in 2018-19 (FY19). Contribution to the profit before interest and tax was nearly 18 per cent at Rs 314 crore in the year under review.
The coming together of food and beverages under Tata Global will lend a significant heft to the latter and will see it compete with the likes of Hindustan Unilever, Nestle and Britannia, said Abneesh Roy, senior vice-president, research, institutional equities, Edelweiss. "The company may also look at acquisitions in the space like it has in beverages," he added.
The move to get into foods was first mooted during Ratan Tata's chairmanship, but was never executed as Tata Global chose to consolidate its core beverage business after a string of acquisitions between 2000 and 2010, largely in foreign markets.
Tata Global closed FY19 with a top line of Rs 7,252 crore, a year-on-year growth of 6.4 per cent, while profit after tax declined 16.4 per cent from a year earlier to Rs 474 crore due to exceptional items. Under Chandrasekaran, it has switched focus to its India business, which contributes 49 per cent to its branded business. The overall branded business gave the company nearly 89 per cent of its revenue in FY19. This contribution is expected to go up in the next few years as it gets out of tea estates, which make up its non-branded operations in addition to its subsidiary Tata Coffee.