Tea prices not going up further – Tata Consumer Products

Update on the Indian Equity Market:

On Monday, Nifty closed in the green at 16,794 (+0.8%) near the intraday high of 16,816. METAL (+4.9%), OIL & GAS (+2.6%) and IT (+1.1%) were the sectoral gainers, while AUTO (-0.7%), BANK (-0.6%), and FINANCIAL SERVICES (-0.5%) were the sectoral losers for the day. Among the NIFTY 50 stocks, HINDALCO (+7.2%), TATASTEEL (+6.3%), and POWERGRID (+5.6%) were the top gainers and HDFCLIFE (-3%), DRREDDY (-2.7%), and AXISBANK (-2.2%) were the top losers for the day.

Edited excerpts of an interview with Mr. Sunil D’Souza, MD and CEO, Tata Consumer Products (TCPL), with ET NOW on 25^th February 2022:

• 3QFY22 was a decent quarter for the company. Despite a high base of 3QFY21 TCPL delivered ~6%/28%/22% YoY growth in revenue/ EBITDA/ net profit respectively. The cash generation was up by ~30% and the working capital also improved by 14 days.
• TCPL has seen good volume growth in India as well as market share gains across the beverage and food segment. The company increased its number of outlets and continues to focus on brand building. The advertising and promotional spending has increased. Strong growth in the food volumes was due to its focus on expanding Sampann which is the company’s foray into the pantry of Indian consumers.
• The company is seeing a little bit of pressure on demand due to inflation but the company has different businesses and they are playing out differently. The company also tackled the demand situation in various ways, but the stress on the semi-urban and rural consumers dragged the demand under pressure.
• The company seeing demand pressure on brands that cater to the mass markets, but the mass premium brands are performing well. Lower volume SKUs are doing better than higher volume SKUs.
• TCPL continues to focus on the medium to longer-term to build a large food and beverage and FMCG business as well as company focusing on geographical expansion.
• In the beverage segment, TCPL has good opportunities to gain market share and premiumise their portfolio and this is primarily driven by distribution, innovation, and brand building process. in the food business, TCPL launched lots of new products to cater to the market and Sampann will the big growth lever in the food business. The NourishCo which operates in ready to drink segment also growing more than ~100%.
• Starbucks also performed well in 3QFY22 and delivered positive EBITDA from the last several quarters and in 3QFY22 posted positive EBIT and PAT. PBT reached breakeven levels. As the omicron wave subsides, the company expects Starbucks will grow at a good pace.
• Despite all disruptions, volatility, and inflationary pressures the company delivered volume growth of 5% in tea.
• Over the last 18-24 months company saw huge volatility in the tea prices, the prices were up by ~70%. The tea prices came down but it’s still higher by ~15%-20% from the pre-covid levels due to the droughts in Assam in May and November-20.
• The company doesn’t expect the tea prices to go up further. After the 1^st half of the year, one can expect to see softening in prices as the entire crop comes in. The company expects to be in a stable environment.
• As the situation gets back to normal, the company expects good volume growth visibility and it has a clear focus on market share gaining and premiumization and aims of outperformance.
• The international business delivered good margins in 3QFY22 despite the inflationary pressure of tea and coffee prices. To maintain its margins the company alters the prices as per the input costs trends accordingly.
• Extended monsoons are impacting the salt drying process that leading to pushing up the prices. Oil-related inflation is affecting the food business but the company took price hikes of ~15% between August to November. As the volumes are starting to come back to normalcy company expects that they will maintain margins over there.
• The company is in a comfortable space as they don’t expect any huge deviation in tea prices and is well placed in a good position on packaging, freight, and oil front.

Asset Multiplier Comments

• We think the new products launches including premium and mass premium products will strengthen the product portfolio of the company. It is expected to drive the demand and open newer markets and growth opportunities for the company. TCPL is expected to maintain its leadership position in the salt business and focusing on strong selling and distribution channel will be the key positive for the company.
• We belives that the company’s focus on Tata Sampann will strengthen its position in the underpenetrated Indian branded food industry and lead to gaining market share.
• We think the commodity cost will continue to be an area of concern for the company because the Agri commodities such as tea, coffee, spices, and pulses have huge exposure to natural disasters, seasonality and market cyclicality and the unavailability of the raw material also might be a threat for the company.
• The current Russian-Ukraine crisis affects the Indian tea exporters as Russia is the largest buyer of tea from India. The imposition of sanctions on Russia, depreciation of the Russian ruble, and increasing fuel cost badly affect the Indian tea planters and exporters.

Consensus Estimate (Source: market screener website)

• The closing price of Tata Consumer Products was ₹ 716/- as of 28-February-2022. It traded at 62x/50x/42x the consensus EPS estimates of ₹ 11.5/14.4/16.9 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 843/- implies a P/E Multiple of 50x on the FY24E EPS estimate of ₹ 16.9/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”