Benefits of lower commodity cost are passed on to the consumers- Tata Global Beverages

Update on the Indian Equity Market:

On Thursday, NIFTY closed 0.5% higher. Among sectoral indices NIFTY Metal (+2.4%), NIFTY PSU Bank (+2.2%), and NIFTY Auto (+1.3%) closed higher. NIFTY IT (-1.0%) closed on a negative note. The biggest gainers were Tata Motors (+6.9%), Yes Bank (+5.8%), Vedanta (+3.7%), whereas Infosys (-2.6%), TCS (-1.9%) and ONGC (-1.6%) ended with losses.

Excerpts from an interview of L. Krishnakumar – Executive Director and Group Chief Financial Officer with CNBC- TV18:

• Mr Krishnakumar said the company is exploring synergies between the consumer business of Tata Chemicals and Tata Chemicals business, and the integration as a larger Food & Beverage company is exciting.
• The merger will give an opportunity to build scale, both in the existing portfolio that they have in tea, and expand the salt and pulses portfolio of Tata Chemicals.
• The distribution strength of both the companies will come together to have a direct and indirect reach. It gives an opportunity to cross-sell different products.
• It will help to innovate and bring new products, as it comes with a lot of intellectual property and people with research and development (R&D) experience in the F&B space.
• The volume growth in India is strong; it is growing more than 8%. Tea is doing well. In overseas markets, Tetley as a brand had share gains. Teapigs, which is a premium brand, continues to do well.
• New product launches such as Cold Infusions, has got about 25% market share in the UK. Overall in developed markets, the company is growing in single digits. In India, the growth rate is much higher, at more than 8%.
• The commodity environment is soft. While volumes are growing, there is no price action that the company is taking. The realisations are lower than in the previous year. The price benefits of lower commodity cost are passed on to the consumers.
• Commodity cost, especially for tea, is similar to what it was in the first half of the year. Coffee prices in the recent weeks have seen an upward trend. Overall the commodity environment, at this point, is pretty much similar to what it was in the earlier part of the year.
• Tata Gluco Plus is doing well and it is growing in double digits. It was recently launched in the Eastern markets and it is successful in Odisha, as well as the markets in the North. There are opportunities to scale up the product.
• The acquisition of Dhunseri Tea and Kalaghoda is doing well.
• Speaking about Starbucks, Mr Krishnakumar said the stores are more than 160 in number and it is growing at about 30%. Increasing trend of delivery-based sales is improving profitability. The business is growing very fast and company plans to reach to 180-190 stores by the end of financial year.

Consensus Estimate (Source: market screener website)

• The closing price of Tata Global Beverages was ₹ 323/- as of 12-December-2019. It traded at 37.5x/ 32.6x/ 29x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 8.6/ 9.9/ 11.1 respectively.
• Consensus target price of ₹ 308/- implies a PE multiple of 27.7x on FY22E EPS of ₹ 11.1/-.