Higher marketing and promo costs dent Tata Consumer's Q2 numbers

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 (Q2). Consolidated operating profit margins (OPM) for the maker of Tata Tea and Tata Coffee slipped 74 basis points (bps) to 13.6 per cent as marketing expenses spiked by 27 per cent over the year-ago quarter.

On a standalone basis, advertising costs were up 47 per cent. The OPM dipped despite the rise in gross margins by 194 basis points year-on-year (YoY). This was aided by tapering in prices of tea and price hikes.

The company indicated that marketing expenses will remain elevated, and the management intends to increase spends on the premium end of the tea segment, premium salt and on Sampann product portfolio.

Though this will push up costs, the company believes that it is essential to build competitive strengths and match its peers as it (branding) is expected to benefit in the form of higher pricing power. Advertising costs as a percentage of sales rose 150 basis points YoY in the standalone business to 6.6 per cent.

Some of the higher spends are also helping it expand its market share. While it gained 168 bps in the tea segment, its gains in salt were 300 bps 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 increase its share over the last 18 months from the smaller regional players as well as the unorganised segment.

Most of the gains in the Indian beverage segment came thanks to price hikes, with volume growth limited to 2 per cent on a high base, but the company believes that the business will be able to sustain mid to high single-digit growth over the medium term.

While the tapering of tea procurement prices and price hikes elsewhere have helped the company in the Indian beverage business with segment margins moving up by 40 bps YoY, the Indian Foods business margins fell a steep 550 bps. In addition to advertising costs, packaging, freight and logistics added to the pressure in this segment. The company is looking to address this through cost optimisation and revenue management measures.

The Tata Starbucks joint venture saw a recovery as restrictions eased with same store sales at 94 per cent of 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 trends improving. On a consolidated and like-to-like basis the company posted a 11 per cent improvement in revenues over the year-ago period.

Abneesh Roy of Edelweiss Research believes Tata Consumer’s base businesses of salt and tea should provide steady revenue momentum, while new businesses — pulses and 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 the higher proportion of revenues from mature categories in developed markets and much weaker return on capital employed as compared to sector peers.