Home >Markets >Mark To Market >Tata Consumer's shares fall 5% post muted Q4; but valuations still pricey

MUMBAI : Tata Consumer Products Ltd’s (TCPL's) shares have had investors’ love for some time now. In calendar year 2020, the shares had appreciated as much as 84% on the National Stock Exchange, easily making it one of the best performing consumer stocks in the country.

After the sharp re-rating, 2021 has begun on a relatively slow note with the shares gaining around 5% so far. This is after accounting for nearly a 5% drop in early deals on Friday, after the company’s March quarter financial results disappointed the Street.

Consolidated earnings before interest, tax, depreciation, and amortization (Ebitda) declined by 2.6% over the same period last year to Rs300 crore vis-à-vis Bloomberg consensus estimates of Rs353 crore. Ebitda margins contracted by 294 basis points year-on-year to 9.9%. One basis point is one-hundredth of a percentage point.

True, margins were expected to take a hit considering the extraordinarily sharp spike in tea prices. Even so, margin is lower than expectations. Tata Consumer said, “Consolidated Ebitda growth for the quarter was impacted by tea inflation in India and increased A&P investments, which more than offset the strong Ebitda growth in India food and international business." A&P refers to advertising and promotion expenses.

Even so, JM Financial Institutional Securities Ltd’s analysts point out, there are two aspects in the March quarter report that merit attention and monitoring. One, Sampann portfolio grew just 2% during the quarter. Tata Consumer has said the volatility in the pulses market has impacted growth. According to JM Financial, a business that is all of Rs400 crore in size per year should not have been impacted so badly by such macro events. It is also worth noting that the salt revenues saw robust growth in the March quarter, boosting the company’s India foods segments.

Two, the international beverages business was especially weak. “While there is some high-base effect here due to pantry-loading in March quarter last year, the imputed 'normalized' growth rate seems to remind us that these are businesses that would continue to exhibit low-growth characteristics over the medium-term, once low-hanging fruits therein are plucked."

Overall, Tata Consumer’s revenues grew by 26% year-on-year to Rs3,037 crore. Weaker operating profit meant pre-tax and exceptional item earnings grew at a much slower pace of 5.8%.

Meanwhile, the sharp appreciation in Tata Consumer’s shares since 2020 has understandably increased its valuations. As things stand, the Tata Consumer shares are higher than peer Britannia Industries Ltd’s. For perspective: Tata Consumer stock trades at 49 times financial year 2022 estimated earnings, based on Bloomberg data. The same parameter for Britannia stands at 45 times. As such, Tata Consumer’s high valuations could well limit upsides hereon.

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