All-round performance is fuelling the rally in Tata Consumer Products

Top performer on the Nifty FMCG index; Up 86 per cent in last 12 months

Shares of Tata Consumer Products (TCP) have surged the most among FMCG (fast-moving consumer goods) peers in the past 12 months, aided by a healthy increase in volumes and realisations in the branded tea business, a strong performance of its foods business, and improvement in overseas operations.

Tata Consumer Products, a leading FMCG (fast moving consumer goods) player, has the largest market share by volume of the domestic branded tea industry. Nearly 2/3rd of its revenue comes from branded tea and coffee sales, as of March 2020. Healthy demand growth and market share gain from unorganised sector has boosted TCP’s earnings in recent quarters. In the first half of 2020-21, its volumes and realisation grew 8 per cent each as compared to 7 per cent and 1 per cent in FY20. Analysts expect this trend to sustain as unorganised players continue to witness pressure owing to higher tea prices.
 

“Half the Indian tea market is in loose tea packets. With increase in tea prices, many loose tea sellers are expected to face problems. As a result, the market share shift from unorganised to organised players is expected to accelerate,” said Sumant Kumar, research analyst, Motilal Oswal Securities.

A presence in various beverage categories, a strong brand pull, and a wide geographic reach are seen aiding the company’s overseas business.
 

Importantly, scaling up its foods business under the Tata Sampann brand is seen driving growth. In FY20, TCP had acquired the consumer products business of Tata Chemicals (TCL), comprising salt (the Tata Salt brand), and spices, pulses, and other food products (Tata Sampann).

“TCP has two strong legs in the India business — Tata Tea and Tata Salt. It is building its third leg — pulses and spices under the Tata Sampann brand — which should grow in high double digits,” said Kumar. The domestic market size of pulses and spices is estimated to be Rs 1.5 trillion and Rs 60,000 crore, with the unorganised sector forming 99 per cent and 70 per cent of the market, respectively. Thus, expect strong growth aided by market share gains from unorganised players, new launches, and widening distribution, say analysts.

TCP is currently under the process of integrating its food and beverages business segments, leading to revenue growth opportunities, cost savings, and margin gains.

“We believe that market share gains in branded tea and a steady build-up in the food business (also aided by revenue and cost synergies) would drive revenue and a compound annual growth rate in earnings before interest, tax, depreciation, and amortisation of 11 per cent and 15 per cent, respectively over FY20-23,” said IIFL.

All 13 analysts covering the stock have a buy recommendation. However, the sharp surge in share price means valuations — 50 times one-year forward earnings and at an 8 per cent premium to its 5-year average of 46.5 times — are not cheap.