Soft quarter sharply impacted by tea inflation, rich valuations can lead to some correction
View - Tata Consumer posted a weak set of numbers with tea inflation and losses at Starbucks being the major culprits, partially offset by positives like strong growth and margins in plantations and India foods businesses. While the medium-term drivers remain intact, the stock now looks fully valued at about 43x FY23 earnings after a strong performance over the past year with most positives now priced in. While we await management commentary on the call tomorrow, the stock looks set for a period of underperformance.
Weak operational results with revenue growth of 26% and EBITDA/PAT decline of 2.6% yoy.
Consolidated revenue growth beat expectations with 26.3% (24% in constant currency) growth led by a sharper than expected 38.5% growth in India revenue with 59.6% pricing-led growth in India beverages and 22.4% growth in India foods business, 7.8% growth in Tetley, 30% growth in Tata Coffee led by the plantations business and 7% growth in EOC + Vietnam.
Consol EBIDTA margins surprised negatively and were down to 9.9% (our expectation at 12%), down 290bps despite strong cost savings and controls mainly due to the unprecedented tea price inflation (gross margins down sharply by 620bps); India beverages EBIT margins down to 4.3% vs 11.5% due to absorbed tea inflation, India foods margins improved to 13.5% from 10.9%, Tetley EBITDA margins down to 10.7% vs 12.8%, Tata Coffee margins up to 11.1% vs 0.4% led by higher tea plantation profitability and EOC/Vietnam EBITDA margins down to 18.8% vs 21.9%.
Higher tax due to base effect and losses on JVs/associates of Rs 590mn (mainly due to losses at Starbucks offsetting higher tea plantation profitability) led to poor earnings performance posting a decline of 2.6% to Rs 1.38bn.
Exceptional costs of Rs 639mn include costs of business restructuring and loss on disposal of overseas subsidiary.
The company declared a dividend of Rs 4.05. Management pointed out near-term risks due to the pandemic like market closures, supply constraints and commodity cost volatility.
We will revisit our call and estimates post the earnings call scheduled on Friday, 7 May at 6.30pm.
Shares of Tata Consumer Products Limited was last trading in BSE at Rs.653.4 as compared to the previous close of Rs. 649.4. The total number of shares traded during the day was 376066 in over 12085 trades.
The stock hit an intraday high of Rs. 655 and intraday low of 638.15. The net turnover during the day was Rs. 242303524.