Tata Consumer Products: Retain ‘buy’ with TP of Rs 800

Tata Consumer Products (TCPL) which articulated ‘Platform for better’ in FY20, speaks about ‘Transforming for Better’ in FY21. It plans to invest in core business, unlock synergies, explore new opportunities and drive digital transformation and innovation. MD&A focuses on acceleration of trends such as (1) emergence of do-it-yourself, (2) convenience shopping and e-commerce adoption and (3) Health and wellness. It has continued to invest in distribution merger and expansion. It delivered material market share gains of 190bps and 160bps in India tea & salt, respectively in Mar’21. In our view, Mar’21 exit market shares in tea & salt were ~24% and ~35%, respectively.

Working capital days was reduced to 39 in FY21 from 87 in FY20 — driving strong FCF generation. Starbucks is now present in 18 cities with 221 outlets.

Reiterate buy: We model TCPL to report revenue and PAT CAGR of 12.6% and 25.5%, respectively, over FY21-23E. We retain ‘buy’ and value the stock on SoTP basis with target price of Rs 800. Key risk is execution — delays in realising integration gains, ramp up of distribution etc.

Transforming for better: From the stance as ‘Platform for Better’ in FY20, the company speaks about ‘Transforming for Better’ in FY21. It focusses on (1) strengthen and accelerate core business, (2) drive digital and innovation, (3) unlock synergies, (4) explore new opportunities, (5) create a future ready organisation and (6) embed sustainability.

Update on distribution synergies: The numeric distribution of Tata Tea and salt has increased 15% and 11%, respectively, in FY21. Direct coverage has moved up 30% and is likely to reach 1mn outlets by Sept’21. Revenues from modern trade and e-commerce were up 31% and 130%, respectively. The company’s market shares in tea and salt are up 190bps and 160bps, respectively YoY.

Highlights from MD & A: While consumer trends do not change overnight, the pandemic has accelerated some trends. (1) there is emergence of do-it-yourself and home chef, (2) convenience shopping and e-commerce adoption has accelerated and (3) health and wellness became a key area of focus for consumers having a direct impact on food and beverage choices.

Reduction in working capital and higher FCF generation: Post merger of distribution network, reduction in layers in distribution as well as expansion of direct coverage, the net working capital days have declined to 39 in FY21 from 87 in FY20 leading to strong FCF generation. We model steady improvement in working capital in FY21-23e.