New business to steer gains for Tata Consumer in growth aisle

Punchy valuations threaten to limit stock gains

The stock of Tata Consumer Products reached its alltime high on Thursday and has been the highest gainer in the National Stock Exchange Nifty and the Nifty FMCG over the past month. The sixth-largest consumer company by market capitalisation has gained 75 per cent over the past year, with about 44 per cent of those gains coming in the last three months.

Steady October-december quarter (Q3) performance, expectations of margin gains, new acquisitions, and a rally in Tata Group stocks have helped the company notch up gains over the past few weeks.

Led by the India-branded business, the company posted a 9.7 per cent growth in sales compared to the year-ago quarter. The India-branded business, comprising the beverage and food segments, accounts for 62 per cent of consolidated revenues.

The India beverage business saw a growth of 8 per cent, led by Nourishco (Tata Gluco/tata Copper, among others), which grew by 32 per cent. The single largest segment within beverages, tea, saw a growth of 5 per cent.

Volume growth of core brands (excluding Nourishco) came in at 2 per cent. This marks the fourth consecutive quarter of volume growth. While Nourishco ended the quarter with revenues of ~159 crore and has hit ~751 crore over the past four quarters, the company remains on track to achieve revenue of ~900 crore to ~1,000 crore in 2023–24 (FY24).

The India food business grew by 13 per cent on the back of volume-driven growth at Tata Sampann, which was up 40 per cent year-on-year (Y-O-Y). The salt portfolio, which reported its highest-ever quarterly volume market share in Q3, grew by 6 per cent.

Analysts of Elara Capital Research, led by Amit Purohit, believe that the growth portfolio and distribution expansion will be key growth levers for the company.

The growth portfolio (new business) comprising Nourishco, Soulfull, Tata Sampann, and Tata Smartfoodz was up 42 per cent Y-O-Y, and its contribution to the India-branded business has moved up to 17 per cent compared to 15 per cent in 2022–23 (FY23).

The company aims to take the contribution of new businesses, including the recently acquired companies of Capital Foods and Organic India, to 30 per cent of India-branded businesses, riding on an annual growth of 30 per cent for these businesses.

Gross margins for the India business rose by 125 basis points (bps) Y-O-Y and 209 bps sequentially to 40.2 per cent compared to 38–39 per cent in the past six quarters. Analysts Mehul Desai and Sumanyu Saraf of JM Financial Research say that gross margin surprised positively in the quarter, unlike during the first half of FY24, with a 64 bps gain versus its estimates.

Operating profit margin in the quarter expanded by 200 bps Y-O-Y to 15 per cent, led by a softening of input prices and a richer mix. The company indicated that a consolidated operating profit margin of 15 per cent could be considered a base, and there is scope for margin improvement.

Sharekhan Research believes that key drivers of margins would be strong growth in the new businesses, good recovery in the international business with high margins, and some of the key input prices, including salt and tea, remaining relatively stable and simplifying the existing structure.

Motilal Oswal Research has raised its FY24 operating profit estimates by 5 per cent on the back of its Q3 performance. The brokerage expects annual revenue growth of 12 per cent while operating profit and net profit growth are pegged at 18 per cent and 23 per cent, respectively, over FY23 through 2025–26.

While brokerages are bullish about the prospects led by growth businesses (70 per cent of analysts covering the stock have a ‘buy’ rating), some are cautious, given its premium valuations.

At 70 times its 2024–25 earnings estimates, Tata Consumer is the most expensive listed consumer company in the country.

The average price-to-earnings ratio of the Nifty FMCG is 35 times, and most of its peers are trading at sub-55 times their one-year forward earnings.

Analysts Ronak Soni and Ronak Shah of Equirus Securities say new product development and premiumisation in the India business would be key to sustained margin improvement and reducing dependence on the core business. For the third quarter, improved India business margins were a key positive. Rich valuations, though, leave little headroom for error, they add.