Tata Consumer Products - 'Show me' vs 'Trust me' story #1 - ICICI Securities

Consensus (including us) believes (and hopes) in 'value creation story' of TCPL, a 60% and 140% stock returns over 1 yr and 3 yrs is testimony. The phase of "Trust me" story is over. With TCPL's FY22 valuations at a premium to Colgate, GCPL, Marico, it's now a "Show me" story. We stay believers; retain ADD. We present essential variables for incremental stock returns -

(1) Tata Tea (India) needs to sustain 6-8% volume growth via formalization, market share gains due to regionalization and premiumisation,

(2) Tata Salt volume growth needs to accelerate to 8% (from ~5% earlier). It generates lowest revenue/grammage among packaged food products in India and hence distribution was capped due to higher freight costs. Merger of distribution (mixed load) will help to reduce freight cost and leverage the brand potential (awareness > availability),

(3) Packaged staples incur additional cost of c.15% compared to loose products. Hence, Tata Sampann's ability to recruit and retain consumers (in normal consumer behavior conditions post COVID) is crucial and

(4) Synergy benefits of a minimum of Rs2bn

Tea volume growth needs to sustain: Tata Tea is an established brand with healthy RoCE. While the category penetration is high, we believe the TCPL can sustain 6-8% volume growth due to (1) category formalization, (2) market share gains due to 'Regionalization strategy' and (3) premiumization.

Merger of distribution and synergies necessary for growth of Tata Salt: Tata Salt generates lowest revenues per gram among the packaged food products in India. Thus there are certain restrictions on its distribution as freight cost can hurt profitability. Merger of distribution can help to leverage the distribution and use mix load to reduce freight costs. Higher revenue share of Tata Salt is crucial as it generates one of the highest operating margins among all products of TCPL.

Tata Sampann has tailwinds in FY21. While consumer willingness to pay a premium (versus loose products) for staples like Tata Sampann is high at this point, the real test will be after the threat of COVID gets over. Packaged food products incur (at least) an additional cost of c.15% than loose products (GST, packing costs and SG&A). Sustainability of ramp-up depends on the quantum of household penetration improvement in FY21 and the ability to differentiate by adding value.

Change in revenue mix- Higher share of India business: Higher revenue share of India Business is crucial for geography and category mix-led margin expansion. We model the revenue share of India business to move to 68% in FY25 from 59% in FY20.
Retain ADD: We model revenue and PAT CAGR of 6.3% and 11.4%, respectively over FY20-22E. We value the stock on SoTP basis with unchanged target price of Rs450. Key downside risk is lower-than-expected integration synergies.

Shares of Tata Consumer Products Limited was last trading in BSE at Rs.422.8 as compared to the previous close of Rs. 410.35. The total number of shares traded during the day was 122094 in over 3803 trades.

The stock hit an intraday high of Rs. 424.75 and intraday low of 411.95. The net turnover during the day was Rs. 51008517.

Source : Equity Bulls

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