By Vivek Ananth
One of the first ports of call for Tata Sons Chairman N Chandrasekaran when he took over the Tata Group’s reins was to make the salt-to-software conglomerate, with its many subsidiaries, more cohesive. One of these was its consumer products business, housed under various group companies. The merger of Tata Chemicals’ salts business with Tata Global Beverages, was announced nearly two years ago, and boy has it unleashed value for shareholders in its new avatar as Tata Consumer Products.
Comparing the market capitalization would not be correct considering that the merger added quite a bit to its topline. More simply, two years ago, before the merger was announced, Tata Consumer Products’ erstwhile entity Tata Global Beverages wasn’t even a large cap stock. In April 2021, this stock has now been included in the Nifty 50.
The stock is currently trading at a TTM PE of over 80 times, which is one of the highest in the FMCG space. At one point Tata Consumer Products was trading at nearly 111 times TTM PE. Even though the stock has gone off the boil a little bit because of a spike in raw material prices, especially tea, the expectations of this FMCG company from the Tata stable are still sky-high.
Is the exuberance justified?
Pandemic’s divergent impact on core and other businesses
Tata Consumer Products’ main source of revenues, which was inherited from the erstwhile entity, is the tea business. The company is one of the largest players in the world, and anything that happens to its tea business will have an impact on the company as a whole.
The end of Q4FY20 shocked most businesses, and Tata Consumer Products was no different. The shutdown of the supply chains meant that the company slipped into losses during the quarter. And then came the impact of high tea prices to its India Beverages business. Although the company has posted decent revenues in each quarter till December 2020, the bottom line has been impacted due to the spike in tea prices, which in August and September 2020 were up by 70-80%. The inflation in raw tea prices have cooled off to around 15-30%.
This set back its quarterly profit growth, which has been on a declining quarterly trend in the nine months ended December 2020. The revenue performance of the India Beverages business was also aided by Nourish Co, which sells packaged water under the Tata brand name.
Most of the surge in revenues during this period came from in-house consumption of FMCG products. Many consumers who would order through e-commerce channels, started preferring branded over unbranded products for pulses, masalas, wheat, etc. Tata Consumer seems to have benefitted from this, like the rest of the industry.
The hit to margins due to a spike in tea prices did impact the company and Tata Consumer took price hikes to protect itself against the rise, but this does put a question mark on its ability to sustain high margins over a period of time. Tea prices have leveled off a bit in Q4FY21, which is some succour, and might aid margin recovery.
India Food Business is the key for future growth
Apart from synergies from efficient supply chains and marketing efforts for all the businesses housed under the Tata Consumer Products banner, the company is focussing on its foods business. Its recent acquisition of Kottaram Agro’s business which runs the Soulfull range of products is an effort in this direction.
The company wants to use its in-house research and development capabilities to enter into new product categories like it has done with its Sampann brand (pulses, flattened rice, etc), and apply that to the Soulfull range of products as well. The overall strategy, keeping with the Chairman Chandrasekaran’s view of leveraging the Tata brand, is to use it to enter into spaces where the unorganised market is huge.
The foods business has been growing at a double digit rate on a YoY basis (when we take the effective merger date of April 1, 2019). This shows that the strategy of leveraging the Tata brand is paying rich dividends. This furious growth rate in the FMCG space has inflated the company’s TTM PE, and has led to the inclusion of Tata Consumer Products into the Nifty 50.
What investors will look for now is consistency in the growth. The expectation of high growth in the foods business is what is keeping the stock at elevated levels. The new CEO Sunil D’Souza who joined the company from Whirlpool India has experience steering a consumer facing company. Whether he manages to deliver under the cloud of a global pandemic, and frequent lockdowns across India and the world, will be something that will be keenly watched.