Focusing on expanding ‘ready to eat’ product portfolio- Tata Consumer Products

Update on Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,562 (+0.9%). The top gainers on the index were JSWSTEEL (+6.0%), ONGC (+5.2%), and BAJAJFINANCE (+5.1%). The laggards were led by MARUTI (-2.5%), BPCL (-1.47%), and HEROMOTOCO (-1.2%). Among the sectoral indices, REALTY (+3.6%), METAL (+2.6%), and IT (+1.9%) led the gainers while AUTO (-0.5%), CONSUMER DURABLES (-0.2%), and PSU (-0.1%), led the losers.

Excerpts of an interview with Mr. Sunil D’Souza, MD & CEO, Tata Consumer Products on 20 September 2021 with Economic Times:

• Tata Consumer is seeing a month-over-month recovery in its packaged and out-of-home businesses on the back of higher consumer confidence and people venturing out. Packaged and out-of-home businesses are expected to recover to pre-pandemic levels.
• Tata Consumer translates about 75% of their costs into the price. As the curve on cost starts coming down, margins will improve. The improvement will be visible on a quarter-on-quarter basis which is already visible in Q1FY22 vs Q4FY21.
• The company is committed to delivering double-digit growth through portfolio growth, brand strengthening, and cost synergies. The company will maintain a tight focus on costs. This strong top-line growth will be driven by portfolio mix, pricing power, market share, cost reduction which then will translate into the bottom line.
• Tea prices in September-20 were roughly 70% – 80% higher than September-19 during the disruption. As things settled down tea prices declined. The second spike in tea prices was observed in June-21.
• Tea is a big part of the business; the company expects a gradual shift from unbranded to branded tea on the back of rising consumer income. In India, over 30-40% of the tea is unbranded. They aim to double their direct reach in 12 months and indirect reach in 36 months. They are on track to deliver of doubling their reach in 12 months. By end of September 2021, the company will be north of a million outlets covering directly.
• The company has increased focus on brand strengthening by increasing ad & promotion expenditure by 50% YOY in 1QFY21 creating consumer pull towards the brands.
• The company has initiated a series of launches with the most recent being Chakra Care and Gold care.
• Tata Sampann products offer quality nutrition for which they are priced at a premium, providing a good price-value equation to the consumer.
• Currently, the share of ‘ready to eat products’ is 5% of the revenue. As Convenience is a huge factor, Tata Consumer is looking forward to expanding their ‘ready to eat’ product portfolio by launching differentiated products in the organic and inorganic categories.
• Tata consumer bought Soulfull as there is a huge opportunity to expand it. Soullfull has a great brand built and they have mastered how to treat millets and make great products out of millets. After the acquisition, the number of outlets that they used to service has increased to 50,000 from 10,000 outlets.
• E-commerce sales were 2.5% of the total revenue pre-pandemic which grew to 5% in Mar-21 and 7% in June-21.
• The company has launched its flagship stores in Mumbai and Delhi. They are trying to perfect the whole mix. Once they perfect it they’ll launch it across India.
• In FY21 Starbucks added equal number of outlets as in FY20 and expects to continue the momentum. They were severely impacted by both the waves during the pandemic. However, the last 2 months were better and the company is already starting to see growth beyond pre-pandemic.

Asset Multiplier Comments

• Tata consumer has been expanding into different FMCG segments with differentiated premium products giving it an advantage over its competitors.
• A strong digital presence and product customization to meet the demands of diverse geographies will fuel future revenue development in the coming years.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of Tata Consumer Products was ₹ 860/- as of 21-Sept-2021. It traded at 72x/61x/48x the consensus EPS estimate of ₹ 12/14/18 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 779/- implies a PE multiple of 43x on FY23E EPS of ₹18/-

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