Growth, margin outlook strong for Tata Consumer
However, analysts say its valuation is pricing in some of the growth
Tata Consumer Products posted a strong operational performance in the March quarter of financial year 2021-22 (Q4FY22). Unlike major consumer companies that are grappling with higher commodity costs and have reported a dip in their profitability, Tata Consumer expanded its margins in Q4.
The consolidated gross margins expanded by 540 basis points (bps) over the year-ago quarter to 44.6 per cent, the highest in seven quarters, on account of profitability gains in the beverage business. The segment, which accounts for 60-70 per cent of revenues both on standalone and consolidated bases, benefitted from the dip in tea prices. North Indian tea prices have dropped 20 per cent sequentially. What aided the gains were the 15 per cent price hikes in the foods business to counter the rise in raw material inflation.
Some of the profitability gains at the gross level reflected on the operating level as well. Operating profit margins rose 410 bps to 14 per cent and were higher than what the Street expected. The gains at the operating level would have been higher but for the sharp increase in advertising and promotion expenses and cost inflation in the foods business.
On cost inflation, the company expects tea prices to remain stable, though margins in the foods business could come under pressure in the near term.
On the sales front, the company posted an increase of 4.5 per cent YOY, with the Indian beverage segment reporting marginal dip in growth while the food segment grew 19 per cent. Though the Indian tea and salt businesses gained market share, international business growth was weak due to higher base in the base quarter on account of a spurt in in-home consumption.
Most brokerages expect 10-19 per cent revenue and operating profit growth over the next couple of years. The strong show, according to Vishal Gutka of Phillip Capital Research, will come from double-digit growth in mainstream categories of tea and salt on market share gains and premiumisation. The other factors aiding growth are the foray into unorganised and fast growing multiple categories in line with its aspiration of becoming a food and beverage major and improving profitability of its international business by divesting loss making geographies and focusing on high margin non-black tea variants.
The reorganisation of group entities as well as bolstering its distribution should contribute to volume/revenue growth. Say analysts led by Sumant Kumar of Motilal Oswal Research, “The unlocking of sales and distribution synergies from the merger of group companies has started to yield results.
This is evident from the market share increase in tea (100 bps YOY) and salt (400 bps YOY) as of March, backed by an increase in distribution reach.”
IIFL Research has upgraded the company’s earnings estimates by 3 per cent for FY23 and FY24. Analysts at the firm, however, say the stock, which is trading at 53 times its FY24 earnings estimates, seems to have limited upside. Similarly, YES Securities, too, likes the improved execution and multiple growth opportunities for the company. Like IIFL Research it has maintained an ‘add’ rating, given the relatively high absolute and relative valuations.