Higher costs dent Tata Consumer's performance in September quarter

Cost pressures to sustain as company is committed to increasing advertising spends

A sharp rise in advertising and promotional expenses weighed on the operating performance of Tata Consumer Products in the September quarter. Operating profit margins (OPM) for the maker of Tata Tea and Tata Coffee slipped 50 basis points to 13.9 per cent as marketing expenses were up 27 per cent over the year ago quarter. On a standalone basis, advertising costs were up 47 per cent. The dip in OPM came in despite the rise in gross margins by 194 basis points y-o-y; this was aided by tapering in prices of tea and price hikes. 

The company indicated the marketing expenses will continue to remain elevated. The management intends to increase spends on premium end of tea segment, premium salt and on Sampann product portfolio. While this will push up costs, the company believes that it is essential to build competitive strengths and match its peers as the same (branding) is expected to benefit in the form of higher pricing power. Advertising costs as a percentage of sales is up 150 basis points y-o-y in the standalone business to 6.6 per cent.

Some of the higher spends is also helping it to expand its market share: while it gained 168 basis points in the tea segment, its gains in salt were 300 basis points on a moving annual total basis for the period ending August, according to market research firm Nielsen. In addition to brand building, the company highlighted how increased distribution, innovation and having a presence across the price spectrum in the tea segment helped it to increase its share over the last 18 months from the smaller regional players as well as the unorganised segment. While most of the gains in the India beverage segment came in the form of price hike with volume growth limited to 2 per cent on a high base, the company believes that the business would be able to sustain mid to high single digit growth over the medium term. 

While the tapering of tea procurement prices and price hikes has helped the company in the India beverage business with segment margins moving up by 40 basis points y-o-y, the India Foods business margins fell a steep 550 basis points. In addition to advertising costs, packaging, freight and logistics added to the pressure in this segment. The company is looking at addressing the same through cost optimisation and revenue management measures. 

The Tata Starbucks joint venture saw a recovery given the easing of restrictions with same store sales at 94 per cent as compared to the September 2019 levels. The NourishCo segment (Gluco, Fruski, Himalayan) too saw sharp gains as momentum in the out of home category picked up. The international business was flat due to higher base in the year ago quarter, though the situation is expected to return to normal with improving trends going ahead. On a consolidated and like to like basis the company posted a 11 per cent improvement in revenues over the year ago period. 

Going ahead, Abneesh Roy of Edelweiss Research believes Tata Consumer’s base businesses of salt and tea should provide steady revenue momentum while new businesses – pulses & spices – should provide a fillip to revenues. At the current price, the stock is trading at 56 times its FY23 earnings estimates. JM Financial believes valuations are rich considering higher proportion of revenues from mature categories in developed markets and much weaker return on capital employed profile as compared to sector peers.