Aim to double the number of direct outlets in 1 year – Tata Consumer Products

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Excerpts of an interview of Mr. Sunil D’souza, MD & CEO, Tata Consumer Products with CNBC-TV18 dated 27^th May 2021:

• Speaking about ROCE, Mr. Sunil D’souza said the aim is to achieve double-digit ROCE by end of FY22E.
• On tea prices, he said the drought-like conditions have kept the prices up. The tea prices are up ~60% YoY. The estimates suggest the prices will start coming down in 30-60days.
• The company will resort to gradual price hikes if tea prices do not correct. The aim will be to achieve a 33-35% EBITDA margin on Indian beverages by 2^nd half of FY22E.
• On logistical issues, he said the base tea and salt businesses are growth levers for the company. The Sampann and Soulfull brands are growing in the pantry space. The plan is to increase overall distribution. The target is to double the number of direct outlets in 1 year. The company will achieve 1mn outlets by Sept-Oct 21.
• On Starbucks, he said it witnessed a 14% revenue growth in Q4FY21 despite operations with 50% seating.
• Take away and delivery compensated for the affected dine-in capacity.
• The competitors are under pressure which will benefit Starbucks. The company has added 40 additional stores in FY21 despite the pandemic. There is an expansion in cities and different formats.
• Speaking about ad spends, he said currently it is ~6% of sales but it will increase to double-digit in the short to medium term. In the FMCG space advertising is important to build brand equity.
• On the rural segment, he said the 2^nd wave has impacted the rural segment as well. For the company it is acting as an opportunity as the share of rural for the company was smaller as compared to competitors. The target is to increase rural distribution to ~9,000 distributors from the current 2,000 distributors in FY22E.

Asset Multiplier comments:

• We believe rising tea prices and increased spends in advertising might put pressure on EBITDA margins in the near term.
• An increase in the number of direct dealers might lead to better product availability and visibility. It will also help to manage the competition.

Consensus Estimate: (Source: market screener website)

• The closing price of Tata Consumer Products Ltd was ₹ 650 as of 27-May 2021.  It traded at 53x/44x the consensus Earnings per share estimate of ₹ 12.1/14.7 for FY22E/FY23E respectively.
• The consensus average target price is ₹ 675/- which implies a PE multiple of 15x on FY23E EPS of 14.7/-.

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