With rally in Tata Consumer Products' stock, all eyes on execution

Street bets on strong demand for branded staple products, aggressive distribution expansion and new CEO's focus on underpenetrated categories

The stock of Tata Consumer Products (TCPL), which has seen a strong re-rating after the demerger of Tata Chemicals’ food business last year, continues to witness strong investor support amid a strong growth potential. The stock has gained 27.5 per cent in the past month, outperforming the Nifty FMCG index, which has risen 1.5 per cent during the period. Consumers’ preference of branded staple products and aggressive distribution expansion are two key factors improving TCPL’s growth visibility.

While the pandemic has made the survival of many small and unorganised players difficult, it is actually paving the way for branded consumer companies like TCPL. Analysts expect a structural shift in consumers’ buying behaviour in favour of branded product. Therefore, according to a Credit Suisse report last month, the Covid-19 lockdown is likely to accelerate the pace of market share gain for national branded players (like TCPL) in categories like tea, salt, etc.

This would mean massive growth and premiumisation opportunity for TCPL over the medium to long term. This is because TCPL’s key categories – tea, salt, spices and pulses – have a minimum of 35 per cent presence of unorganised and local players. In fact, TCPL is the only national salt player with around 30 per cent market share.

The company’s 13.4 per cent year-on-year revenue growth to Rs 2,713.9 crore in the June quarter was mainly led by a higher demand for in-house consumption. The company’s branded tea and domestic foods businesses delivered 8 per cent and 19 per cent revenue growth, respectively, during the quarter. Both these categories rose by 4-8 per cent in volume terms. Notably, TCPL’s international beverage segment (over 30 per cent of revenue) also grew by 15 per cent. The Indian food (Tata Salt and Tata Sampann) and beverages (Tata Tea, Tata Coffee Grand, Himalayan, etc) segment accounts for 56 per cent of the company’s overall revenue.

What would also aid TCPL’s growth is its aggressive distribution expansion plan. The company plans to double its direct distribution reach in the next 12 months. This, ICICI Direct analyst Sanjay Manyal says, augers well for nascent categories like pulses and spices, as it would increase store availability and drive penetration-led growth.

Further, the company’s new chief executive officer, Sunil D’Souza, who has a strong track record of working with Whirlpool India as its managing director and 15-year experience at Pepsi, is also expected to focus more on under-penetrated food categories like pulses, spices, etc.

This apart, estimated synergy benefits of 2-3 per cent of combined Indian branded revenue over the next 1-1.5 years would further support TCPL’s overall performance, including operating margin, though higher tea prices would impact near-term margin performance. In the June quarter, the company’s earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by 312 basis points year-on-year to 17.8 per cent, led by a 176-basis-point gross margin expansion and lower advertising spend.

Overall, TCPL’s execution ability to cash in on potential growth opportunities, including integration of the merger, would be key. A failure on this front could lead to a correction in the stock, which is currently trading at around 47 times its FY22 estimated earnings, similar to Britannia’s.