Consumer Staples & Discretionary - Inflation in tea prices; a transitory impact (if any) - ICICI Securities

Tea prices were up 63% in Q2FY21, YoY. While it is likely to impact margins of TCPL in near term, we expect it to be transitory. Importantly, our "cost of cup" analysis indicates that price inflation for a cup of tea is just 13% (as sugar prices are flat and milk prices have declined). Also, note that TCPL improved its market share (~23% now) and gross margins (~37%) over FY2009-2020. It has demonstrated the ability to pass on commodity inflation with a lag of 1-2 quarters. Furthermore, sharp inflation in input prices also hurts the unorganized companies (35% of total market) creating market share gain opportunities for TCPL. It has strong brands in all four sub-segments (economy, popular, sub-premium and premium) of organized tea market.

India tea business and International tea segment accounted for 37% and 21%, respectively of TCPL's FY20 revenues. Our long-term positive view on Tata consumer is intact. Reiterate ADD.

- "Cost of cup" analysis indicate a 13% inflation in price for a cup of tea: Most Indian consumers prefer to drink tea with milk and sugar instead of just black tea. While the higher tea prices may impact the consumers / road side tea vendors, we believe the inflation in 'cost of a tea cup' is limited. The tea prices were up 63% in Q2FY21, YoY. However, milk prices have declined 6%, YoY (25% from Mar'20) and sugar prices are flat YoY. There is just 13% inflation in cost of a cup compared to 63% increase in tea prices assuming a consumer needs 8 grams of sugar, 5 grams of tea powder, 50ml of milk and 50ml of water to prepare a cup of tea.

- Steep increase in tea prices: Tea procurement prices in Q2FY21 were up 63%, YoY. The chief reasons were reduction in tea production during lockdown and issues in logistics. While the inflation may impact tea companies such as TCPL, we believe it will be largely transitory in nature. TCPL (always) passes on the inflation in input prices with a lag of 1-2 quarters and we expect FY21 to be similar story.

- TCPL maintains market shares in-spite of volatile tea prices: Tea prices were volatile over FY2009-2020 and have reported annual inflation as high as 28.6% in FY09 and deflation of 3.2% in FY11. In-spite of this, TCPL has maintained market share (value) of c.20% over FY09-20. The regionalization strategy (variants as per tastes / preferences of different states) is expected to help TCPL to gain market share. Acquisition of Dhunseri tea brands (Lal Ghoda & Kala Ghoda) in FY20 may also lead to higher market shares in Rajasthan.

- TCPL maintains gross margins in-spite of volatile tea prices: While there was extreme volatility in tea prices, TCPL maintained standalone gross margins in a narrow band of 34.9-40.9% over FY09-20. The coefficient of variation (Standard deviation/Average) was just 0.05 over a long period of 12 years which indicates tea prices do not impact margins much. However, quarterly volatility is unavoidable.

- Large product portfolio to arrest the down-trading (if any): The size of total Indian tea market is estimated to be Rs265bn and the organized market is <65% of total market. The inflation in tea prices impacts unorganized players more and creates opportunities to gain market share for organized players such as TCPL. We also note TCPL has strong presence in all the four sub-segments of organized tea market which allows it to arrest impact of any down-trading.

Source : Equity Bulls

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