Helped by better in-home consumption and consumer preferences for known brands during the pandemic, Tata Consumer’s shares have been one of the best performing consumer stocks in 2020.
Shares of Tata Consumer Products Ltd hit a new 52-week high on Wednesday on National Stock Exchange (NSE) in early deals. According to a statement by NSE, the Tata Consumer stock will be included in the Nifty 50 index and will replace those of GAIL (India) Ltd from 31 March. From a near-term perspective, this is sentimentally positive for the Tata Consumer stock. “Stocks generally rally on this news in the short-term. Additionally, there is also buying compulsion for ETFs that track the Nifty when a stock enters the index and this supports the positive momentum," said an analyst requesting anonymity.
In any case, Tata Consumer’s shares have been one of the best performing consumer stocks in 2020. Shares of the company had appreciated by an impressive 84% last year. This was helped by better in-home consumption and consumer preferences for known brands as a result of the pandemic. To that extent, this also means valuations are not cheap. Based on Bloomberg data, the stock now trades at around 50 times estimated earnings for the financial year 2022. As such, meaningful upsides in the near-future may well be capped.
To be sure, higher year-on-year tea prices are expected to weigh on the company’s margins from a near-term perspective. In their December quarter results review on 3 February, Kotak Institutional Equities had said, “We incorporate higher-than-estimated impact of inflation in tea in H1 CY21 and moderate our margin forecast—net impact: 3-7% cut in FY2021-23E earnings per share."
Note that in the December quarter, while Tata Consumer performed well on the revenue front, its gross margins were adversely impacted primarily owing to the sharp inflation in tea prices.
Analysts from Motilal Oswal Financial Services Ltd said in a report on 3 February, “Performance during Q3 FY21 was impacted due to higher tea prices, which led to 570 basis points contraction in consolidated gross margin. The management expects Tea prices to stabilize by Q1 FY22 and thus ease down the pressure on gross margin going forward." One basis point is one-hundredth of a percentage point.