Tata Consumer Products – Taking A Pivot

Tata Consumer Products Rs 965

Tea and Coffee companies have been around for decades but have not been wealth creators as these are by and large low growth commodity businesses which go up and down in cycles. For example, Tata Coffee’s PAT increased only by 7% over ten years upto FY 2023. Mcleod Russel has done worse. It has been making losses since FY20 after being in black for several preceding years.

So, what is the equivalent of escape velocity for companies stuck in such an orbit to get away from it? Well, they can take a leaf out of ITC’s playbook which built a large FMCG vertical by using the cash flows of its low growth cigarette business.

Tata Consumer Products Ltd (TCPL), the second largest tea company and among top ten coffee companies in the world, seems to be doing just that. After investing only 3300 Cr in 10 years before 2024, it did a whopping 4170 Cr capex to acquire two FMCG companies in FY 2024. Before these acquisitions, TCPL was already building up what it calls ‘India Growth’ vertical with Sampann, Soulfull, Himalayan, Starbucks JV etc and with these buyouts, it has firmly taken a pivot into fast growing FMCG verticals.

The main interesting features of TCPL are as follows: –

  • Pulses, millets, dry fruits, organic products market in India is dominated by unorganized players. With customers becoming more quality conscious and the explosion of quick commerce, trusted brands like Sampann are witnessing high growth. In fact, TCPL management is expecting ‘India Growth’ vertical to grow at 30% CAGR. This can very well happen as seen in many industries in India like laptops, jewellery etc.
  • Its acquisitions, Capital Foods with brands like Chings and Smith & Jones and Organic India have strong connect with customers. Distribution through TCPLs huge network and marketing spend will only accelerate growth. Once these are integrated fully into TCPL, their margin profiles will also improve.
  • Presently there is a demand slowdown in the entire world including India. But this is not a structural demand reduction like the one that is unfolding in oil due to EVs. It is a cyclical pattern and it shall revert back to mean sooner or later upping the growth for all players.
  • Starbucks JV is not contributing anything yet. But in the long run it can become a meaningful profit center. This can be kept aside as a Call Option with limited downside.

If ‘India Growth’ vertical, which now constitutes 30% of its topline, clocks a CAGR of 30% as expected by the management and rest of the business chugs along at historic rates of 5%, then blended topline growth for TCPL would be around 15%. Bottom line is expected to move up at faster rates as the company pays off the debt taken for the acquisitions, amortizations of goodwill tapers off and synergy benefits are realized.

Assuming 20% CAGR in profits over next 5 years would increase its FY24 EPS of Rs 12 to Rs 30 in FY29. FMCG type exit PE multiple of 45 would mean @ 7% return from current levels. While this is not too great and it pre-supposes many positives playing out as expected, TCPL may be worth a dekko for high risk appetite investors looking for pivot stories.