Tata Consumer Products share price: Sharekhan maintains Buy rating with price target of Rs 685

Tata Consumer Products revenue grew by a strong 23% on a comparable basis to Rs 3070 cr (ahead of expectation of Rs 2810 cr) driven by a strong revenue growth of 46% (volume growth of 10%) in the India beverage business, 19% growth (volume growth of 12%) in India foods business, 11% growth in US coffee and 14% growth in the international tea business. Growth in India business was driven by market share gains of 94 bps and price led growth of 30%. Foods business grew by 19% led by 19% growth in salt revenues and double-digit growth in Tata Sampann brand.

Tata Consumer Products International business excluding food services grew by 11% during the quarter. A significant increase in domestic raw tea prices dragged down gross margins by 574 bps. However, lower ad spends and synergistic benefits from merger of Tata Chemicals consumer business led to just 99 bps decline in OPM to 11.8% (lower than our as well as street expectation of 13%).

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India business constitutes 67% of consolidated revenues and 57% of consolidated profits. Market share gains in the branded tea and salt segment, doubling of distribution reach, sustained higher in-house consumption and consistent product launches would be key growth levers for the domestic business. With fear of COVID-19 receding, a recovery in out of-home consumption businesses such as NourishCo (grew by 9%) and Tata Starbucks (reached 90% of pre-COVID levels) will be faster and will add-on to India business growth in the coming quarters. Increasing conversion from non-black tea to specialty tea would also drive growth in the international tea business.

Domestic tea raw tea prices have corrected by over 30% from its high but still remain above the last year levels. Tata Consumer Products Management expects it to normalise by Q1 FY22. The price hikes and synergistic benefits from integration (likely to be completed by Q4 FY21) will continue to support margins. The company acquired the Soulfull brand for Rs 156 cr (deal value at price to sales of 4x) in the domestic market. The acquisition will lead to domestic food portfolio expansion in on-the-table/ on-the-go categories. Acquisition is margin accretive and will be completed by Q4.

Tata Consumer Products Key positives:

India packaged business volume growth stood at 10%; market share gains of 90 bps in tea despite price hikes
Out-of-home businesses such as NourishCo posted revenues of Rs. 33crore (9% growth yoy), Tata Starbucks business recovered to 90% from 71% in September
Tata Salt grew by 19% (double digit volume growth); value-added portfolio grew by 2.7x

Tata Consumer Products Key negatives:

Significant increase in domestic tea prices dragged gross margins by 574 bps
Tata Coffee business stood flat due to lower extraction business at India level

Tata Consumer Products Key risks:

Any slowdown in domestic consumption; heightened competition from new players and a spike in key input prices would act as a key risk to our earnings estimates in the near term