Over the past couple of years, Tata Consumer Products’ stock has become one of the most expensive fast-moving consumer goods (or FMCG) stocks among Indian listed companies. At a TTM PE of nearly 110, it most definitely is the most expensive. Investors are definitely eyeing phenomenal growth at the Tata Group’s attempt to cobble together its consumer products businesses.

What is keeping investors interested in this company’s shares, even at these elevated levels, is the resilient performance of its ‘India Foods’ business. Although its India Beverages business makes up over 40% of its consolidated revenues, its food business is what is piquing investor interest.

India Foods posts robust volume growth

The year-on-year volume growth for most of Tata Consumer’s business segments over the past five quarters has been erratic. Do note that Q1FY21 was marred by the lockdown in the first phase of the pandemic in India and the world. In Q1FY22, as many states imposed their own lockdowns, business was hit again. But the company adapted to the new normal and e-commerce now makes up nearly 7% of the company’s revenues at the end of Q1FY22.

This doesn’t mean that the company didn’t struggle with lockdowns reducing movement and economic activity. India Beverages and, within that tea, contribute the most to the company’s business. And the lockdowns impacted its revenue growth -  the India Beverages business grew only 3% in volume terms during Q1FY22 but saw a 28% YoY rise in sales value during the same period.

This means that the company’s India Beverages revenues were boosted mainly by price hikes. High raw tea prices have affected all players in the marketplace, and each and every player, including Tata Consumer’s Tata Tea is calibrating its price hikes to support the bottom line.

 Tata Consumer’s management is confident that it will be able to pass on the rise in raw tea prices to customers over the next few quarters. The company is also betting big on its Tata Sampann brand, which includes some of its best-performing products like poha, pulses, spices, among others.

The international tea business saw a significant fall in Q1FY22 due to two reasons—higher pantry loading in Q1FY21 by users in those markets and closure of some operations in Q1FY22. That is why both the segments saw volumes and sales value fall on a YoY basis..

In all of this, is the high valuation of Tata Consumer’s stock justified considering its actual performance? We sift the tea leaves to make sense of the company’s sky-high valuation and its future prospects.

High tea prices to sustain, and so will investment in brands

Since Q1FY21, prices of raw tea have skyrocketed. This has impacted margins and profits. The company hiked prices over the past 12-15 months to pass on the rise in raw tea costs to consumers. But not all of it has been passed through.

The hike in prices of packaged tea helped the company’s consolidated EBITDA margins recover on a QoQ basis in the June 2021 quarter, although margins are lower than Q1FY21.

The robust growth in the India Foods business in Q1FY22 YoY, even though it is compared to Q1FY21 with its severe lockdowns, bodes well for Tata Consumer. This is because both the businesses grew on a QoQ basis, despite headwinds of higher tea prices and lockdowns being pervasive during most of the quarter.

The management expects tea prices to moderate over the next few quarters. This is expected to help margins in case the company doesn’t hike the price of packaged tea. Price hikes however are not off the table.

To build durable brands, the company plans to continue investing in advertising and promotion expenses. In Q1FY22, the company said in its earnings conference call with analysts that its advertising and promotion expenses grew by 50% YoY in Q1FY22. This will be for both its core categories like tea and salt, and also for other brands.

During July 2021, operations for its India Beverages and Foods businesses were much better than June 2021 according to the company, indicating a strong start for Q2FY22. The company also said it expects its international businesses to return to pre-Covid19 demand levels, which include the UK, US, and Canada. 

Tata Consumer to chase profitable growth

The company adapted to the new normal under the lockdowns and has now made sure that consumers can get its products through any channel, be it e-commerce or through stores. This is especially true for its joint venture Tata Starbucks, which is maximising sales as much as possible via home deliveries.

Once Tata Consumer reaches 1 million direct-to-customer outlets, and brings its supply chain up to speed, investors are hoping volumes of other products will also rise. This includes its newly acquired brand Tata Soulfull, which is completely integrated into the Tata Consumer fold.

The company has also set up a cutting-edge data analytics platform and a robust ERP system that is integrated with all its supply chains. This it expects will keep it on its toes to respond to the market quickly.

The overhang of higher tea prices which existed for all of FY21 will persist, but the impact might not be as severe as last year unless drought or floods damage the tea crop. The company said it expects the high tea prices to level out, and this can be margin accretive. But investors will hope the robust YoY growth in the India Foods business will continue to support Tata Consumer’s bottom line.