Tata Consumer Products Ltd - Research Report
Private Client Research
Rating
Buy
Sector
Tea/Coffee
Company
Tea/Coffee
March 25, 2020
Sensex: 28535.78
CNX Nifty: 8317.85
NSE: TATACONSUM
BSE: 500800
Reco Price
Rs. 266
Price Target (2 - 3 Years)
Rs. 450
Upside
69.17%
Date
March 25, 2020
Sensex
28535.78
CNX Nifty
8317.85
Exchange
Code
NSE
TATACONSUM
BSE
500800
Stock Data
CMP (Rs)
277.15
Face value (Rs)
1
52 Week Range (Rs)
408.00 - 193.60
Market cap (Rs Crores)
25499.34
Price To Book Value (x)
3.53
P/E Ratio (x)
64.64
EV/EBIDTA (x)
25.61
One Year indexed Stock Performance
Tata Consumer Products Ltd
Sensex
Return (%)
1m
3m
12m
36m
Absolute
-25.12
-11.54
41.14
86.08
Sensex
-29.16
-30.68
-24.53
-2.40
Shareholders
(in %)
11-Mar
Promoter
34.44
Public
65.56
Others
0
Total
100
+91 22 6639 3000
research@stockaxis.com
Profile
Tata Consumer Products is a focused consumer products company uniting the food and beverage interests of the Tata Group under one umbrella. It is home to key brands such as Tata Tea, Tetley, Tata Salt and Tata Sampann. With a combined reach of over 200 million households in India, it has an unparalleled ability to leverage the Tata brand in consumer products.
We are on a mission to create a premier diversified consumer products company. Our strengths lie in our deep understanding of our consumers in India and in international markets, iconic market leading brands and wide consumer reach. We are committed to delivering high-quality, innovative, tasty and convenient products with goodness at its core. Our portfolio of products ranges from tea, coffee, water and ready-to-drink to salt, pulses, spices, ready-to-eat and more.
In the Beverages business, Tata Consumer Products is the 2nd largest player in branded tea in the world with over 330 million servings everyday across the world. Our brands include Tata Tea, Tetley, Vitax, Eight O’Clock Coffee, Himalayan Natural Mineral Water, Tata Coffee Grand and Joekels.
Beginning with the iconic Tata Salt that pioneered the crusade for iodisation in India, our Foods business is one of the most trusted food brands in India and we have extended our portfolio to include salt variants and nourishing food items. With Tata Sampann we bring the traditional wisdom of Indian food in a contemporary package to deliver the best of taste, nutrition and convenience.
Tata Consumer Products has grown through innovation, strategic alliances and acquisitions, and organic growth. The Company has a joint venture with Starbucks called Tata Starbucks Limited, to own and operate Starbucks cafés in India. Since the inauguration of the flagship store in Mumbai in October 2012, this 50:50 JV has expanded to 10 cities, with many more Starbucks stores planned across the country.
The Company also has a JV with PepsiCo in India, called NourishCo, which produces non-carbonated ready-to-drink beverages that focus on health and enhanced wellness. NourishCo produces and markets Tata Water Plus — India’s first nutrient water, and Tata Gluco Plus — an energizing, glucose-based flavoured drink. Himalayan water is also marketed and distributed through NourishCo.
The high-growth contemporary 'single-serve' business is also an important play for Tata Consumer Products. In the USA we have an agreement with Green Mountain Coffee Roasters’ Keurig single-serve machines for Eight O'Clock Coffee, with K-Fee for MAP Coffee in Australia, and with Tassimo in Canada for Tetley tea.
Sustainability is at the heart of our plans for long-term success. As industry leaders, it is important for us to build a future-ready business that will continue to meaningfully touch the lives of millions of people. Sustainable sourcing, waste management and climate change are some of the key focus areas and through our various environment and community focussed initiatives, we intend to be the consumer’s first choice in sustainable foods and beverages.
Source: Company, StockAxis Research
Tea and Coffee continue to remain most preferable & durable beverage choice globally.
Huge market share in Tea segment:
TCPL is been consistently having a huge chunk of market share in tea segment. Currently
TCPL has 20% market share in branded tea segment in India. TCPL continues to retain
this market share as well as it expects it to increase in upcoming years with the
help of new product launches, and increased reach of their premium products such
as Chakra gold, Activ+, Tata gold etc. Company has now also started new initiatives
such as providing out of home tea stores named TATA Cha, it has opened till date
6 stores in Bangalore.
New product launches in branded category:
TCPL’s (Pre-merger) 90% revenues comprises from banded category. TCPL’s
Tetley is the oldest and well known tea brand globally. TCPL recently launched Tetley
super teas in Canada. Tetley super teas are fortified with vitamins and minerals.
This product was also able to gain market share of 1.6% of non black tea quickly.
While in UK TCPL’s Tetley launched cold infusion products which can be brewed
with cold water. TCPL is focused in innovations of its branded product portfolio.
Tetley continues to expand its portfolio in non black tea by launching excited products.
Source: Company, Stockaxis Research
Merger will lead to unlock synergies:
TGBL and Tata Chemicals (TCL) have entered into an agreement to merge TCL’s
consumer products business into TGBL in an all-stock transaction. Where the swap
ratio is for every one share of Tata chemicals limited, TGBL will issue 1.14 shares.
This will lead to issue 246 mn fresh issue of equity which suggests around 46% of
equity dilution. TCL’s consumer products business portfolio includes
TATA salt, blended spices, pulses, ready to eat mixed and other nutrition products.
After the merger company would be renamed as TATA consumer products limited (TCPL).
This merger will help in widening distribution reach for their consumer products.
Source: Company, Stockaxis Research
With the help of this merger it will become a major FMCG player in market. This transaction will make company more India centric. Management is expecting to launch new products and expand its product portfolio by entering into new segments. As per management now from basic products they are going to enter in value added products.
Source: Company, Stockaxis Research
Strategic JV’s, Associations and Inorganic growth:
TCPL has currently to JV’s i.e. Starbucks a 50:50 JV, & Nourishco a 50:50
JV with PepsiCo India Company. While Starbucks is really doing good For FY19 its
topline grew by 30% and it added 15 new stores in same financial year. The store
count for starbucks till date stood at 146 stores. While nourishco’s top line
grew by 10%. Its product tata gluco plus got good traction and it posted double
digit growth for FY19.
TCPL is been ahead in inorganic growth; TCPL has done quite acquisitions previously and been able to run those companies efficiently. Recently TCPL had acquired Dhunseri tea & industries Limited for the amount of 101 crores. Dhunseri tea has 2 major brands i.e. Lal ghoda and Kala Ghoda tea which has 6% market share in Rajasthan. This acquisition enables TGBL to enter markets of rajasthan. As there are quite local players having large chunk of market share.
Eight o Clock (EOC) business to boost coffee business:
Tata coffee is a wholly owned subsidiary of TCPL. Tata coffee has started its Freeze-dried
coffee plant in vietnem, which will lead to boost its B2B coffee sales. In last
year it also launched two blends in it. Due to floods in kerala its domestic business
was affected in FY19. We expect that it would recover in FY20 and record higher
top line growth.
New MD to drive FMCG business well:
TCPL has appointed Mr Sunil D’Souza (current MD of Whirlpool India) as its
next MD and CEO from April 2020. This change in management personnel will definitely
lead to shape and drive TATA group’s FMCG ambitions. Mr Sunil comes with a
cross-functional experience of more than 25+ years; in past Mr Sunil has worked
with big MNC’s such as Pepsico, Coca Cola, and Brooke Bond Lipton India. We
believe this will help company to grow well in new FMCG categories.
Industry
Tea Industry in India:
Indian tea is among the finest in the world owing to strong geographical indications, heavy investments in tea processing units, continuous innovation, augmented product mix and strategic market expansion. The main tea-growing regions are in Northeast India (including Assam) and in north Bengal (Darjeeling district and the Dooars region). Tea is also grown on a large scale in the Nilgiris in south India. India is one of the world’s largest consumers of tea, with about three-fourths of the country’s total produce consumed locally. Euromonitor estimates that the Hot tea category (excluding Ready-to-Drink) is a ~US$44billion industry; projected to grow at a CAGR of 5% between 2019 and 2023. Black/ Everyday Black tea forms the largest category sub-segment globally, accounting for ~42% of sales (by value) followed by Non-Black tea like Green, Fruit & Herbal, Rooibos, Decaf, etc. However, Non-Black tea commands a much higher value-perserve in comparison to Black tea. The Indian tea industry will see broad-based growth from unbranded as well as branded business, while more consumers shift to premium products. However, Everyday Black tea category in the developed markets will reflect a declining trend mainly due to change in consumer preference.
Important Facts regarding tea industry:
- Tea exports from India stood at US$ 837.33 million in 2017-18.
- Indian tea market turnover is Rs 10,000 Cr.
- India stands at 2nd in the world in tea production
- India has been producing tea for the last 150 years
- Assam – A small State produces more than 50 percent of India’s tea alone
- Assam also produces’ 16 percent of the world’s total tea.
Growth Drivers for Tea Industry:
- Urbanisation Rural per capita consumption in India will grow faster than its urban counterpart, emulating urban consumption patterns, as metros and emerging towns drive economic growth.
- Favourable Demographics India’s median age strongly indicates that it will remain one of the youngest nations in the world with one of the largest working-age populations.
- Premiumisation and Convenience World over, there is discernible shift in preferences towards premium products, with a conscious choice for healthier ‘good-for-you’ products. Convenience also continues to play a key role in international markets. Young consumers increasingly seek interesting flavours and functional benefits from their teas.
- Out-of-home Channels New quick-service restaurant concepts are steadily gaining ground in consumer mindsets across the globe; offering a niche variety of innovative meal and beverage options.
Source: Company, IBEF, Euromonitor.
Coffee Industry in India:
In India, coffee is grown in regions that receive 2,500–4,000mm rainfall across
more than 100 days, followed by a continuous dry period of a similar duration. Coffee
growing areas in the country have diverse climatic conditions, which are suitable
for the cultivation of different varieties of coffee. Globally, with a total size
of US$85 billion, the coffee industry is much larger than the tea industry. Coffee
has been able to better leverage premiumisation and is growing faster than tea,
with a rise in out-of-home consumption at retail outlets (e.g. Starbucks and Costa)
and a greater adoption of technology to recreate café experiences at home
(e.g. Nespresso). Coffee is also the favourite beverage in most developed countries
where affordability does not constrain consumption, as compared to tea which is
the preferred beverage in developing countries. The coffee industry has lately seen
a wave of consolidation driven by leading players like Nestle and JAB, across geographies.
Important Facts regarding coffee industry:
- India is the third-largest producer and exporter of coffee in Asia, The country accounts for 3.30 per cent (2017-18) of the global coffee production.
- The coffee production in FY18 is stood at 316,000 MT.
- In FY18, coffee exports from India stood at 395,014 MT valued at US$ 963.28 million.
- Top three importers of Indian coffee during 2017-18 were Italy (25.16 per cent), Germany (10.51 per cent) and Belgium (5.97 per cent).
- Of the total coffee produced in India, ~70 per cent is exported and ~30 per cent is consumed domestically.
Growth Drivers for coffee Industry:
- Maturing Coffee Preferences Coffee drinkers in developed markets seek to celebrate coffee for its unique flavours and specific origins. This transition is also attributed to the younger population who are more likely to consume out of home. In the US, market growth is being led by: (a) premium or quick-service brands (e.g. Starbucks and Dunkin Donut) who are over-investing in promotions and discounts; (b) small niche brands who are capitalising on the trend towards artisanal, single-origin coffees and (c) private label-retailers who are looking at improving their margins and providing consumers with ‘value for money’ offerings.
- Sustainable Sourcing There is also an increased emphasis on sustainable methods of roasting and brewing, on the relationship of the farmer to the coffee industry and on the desire to inform coffee drinkers on where their coffee is sourced.
Source: Company, IBEF, Euromonitor.
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
| DESCRIPTION | Mar-17 | Mar-18 | Mar-19 | Mar-20 E | Mar-21 E | Mar-22 E |
|---|---|---|---|---|---|---|
| Net Sales | 6780.00 | 6815.00 | 7252.00 | 7614.60 | 10660.44 | 11513.28 |
| % Growth | 0.02 | 0.00 | 0.06 | 0.05 | 0.40 | 0.08 |
| Raw Material Cost | 3248.00 | 3416.00 | 3726.00 | 3883.00 | 5543.00 | 5987.00 |
| Gross Profit | 3531.00 | 3399.00 | 3526.00 | 3731.00 | 5117.00 | 5526.00 |
| Gross Profit Margin (%) | 0.52 | 0.50 | 0.49 | 0.49 | 0.48 | 0.48 |
| Employee Cost | 835.00 | 821.00 | 806.00 | 839.00 | 872.00 | 890.00 |
| General and Administration Expenses | 199.00 | 189.00 | 229.00 | 228.00 | 320.00 | 345.00 |
| Selling and Distribution Expenses | 728.00 | 669.00 | 739.00 | 838.00 | 1279.00 | 1382.00 |
| Other Expenses | 978.00 | 881.00 | 965.00 | 990.00 | 1386.00 | 1497.00 |
| Total Expenditure | 5988.00 | 5976.00 | 6466.00 | 6778.00 | 9400.00 | 10101.00 |
| EBITDA (Excl OI) | 791.00 | 839.00 | 786.00 | 836.00 | 1260.00 | 1413.00 |
| Growth(%) | 0.21 | 0.06 | -0.06 | 0.06 | 0.51 | 0.12 |
| EBITDA Margins(%) | 0.12 | 0.12 | 0.11 | 0.11 | 0.12 | 0.12 |
| Depreciation | 126.00 | 116.00 | 123.00 | 145.00 | 195.00 | 264.00 |
| Other Income | 83.00 | 94.00 | 157.00 | 165.00 | 173.00 | 173.00 |
| EBIT | 748.00 | 817.00 | 820.00 | 856.00 | 1238.00 | 1322.00 |
| Interest | 92.00 | 43.00 | 52.00 | 80.00 | 67.00 | 70.00 |
| Exceptional Income / Expenses | 5.00 | -21.00 | -33.00 | 0.00 | 0.00 | 0.00 |
| Profit Before Tax | 662.00 | 753.00 | 735.00 | 776.00 | 1171.00 | 1252.00 |
| Provision for Tax | 198.00 | 186.00 | 261.00 | 224.00 | 337.00 | 360.00 |
| Tax rate(%) | 30.00% | 25.00% | 36.00% | 28.80% | 28.80% | 28.80% |
| Profit After Tax | 464.00 | 567.00 | 474.00 | 553.00 | 834.00 | 891.00 |
| PATM (%) | 0.07 | 0.08 | 0.06 | 0.07 | 0.08 | 0.08 |
| Adjusted EPS | 6.20 | 7.90 | 6.50 | 8.80 | 9.00 | 9.70 |
Source: Stockaxis Research, Company Data
Valuation
TCPL is a flagship company of TATA group; TCPL has a wide geographical reach and has a huge diversified business. We believe TCPL will continue to drive business well on the back of strong fundamentals, good brand recall, discontinuation of less profitable business and new management personnel. We expect that merger will help in unlock synergies such as expanding distribution reach, product portfolio and operational efficiencies etc. Currently the stock trades at 37.8x TTM PE. We assign a TP of 295 based on 32.41x FY21E EPS.