Tata Consumer’s shares re-rate after Jun qtr; valuations match Britannia’s2 min read . Updated: 09 Aug 2020, 09:48 PM IST
- Around 90% of its revenues came from branded business, of which India beverages and foods sales together contributed 65%.
- The Indian beverages business grew 11%, benefitting from the strong double-digit growth in May and June. The India foods segment grew 19%
Tata Consumer Products Ltd’s shares have undergone a massive re-rating since the restructuring of the Tata group’s consumer businesses last year. This has continued and even accentuated after the company’s June quarter results.
The non-alcoholic beverages and food company delivered a strong set of results, with pre-tax earnings increasing by 42% year-on-year (y-o-y). But the stock’s 15% jump in three trading days is clearly taking things a bit far. Tata Consumer shares now trade at 47 times estimated FY22 earnings based on Bloomberg data. Valuations are now on a par with packaged foods company, Britannia Industries Ltd’s stock, which trades at 47.5 times FY22 estimated earnings. Britannia’s pre-tax earnings had increased by 81% for the June quarter, as a result of a spike in at-home food consumption as people stayed indoors.
The jump in Tata Consumer’s profits has been lower, but its stock is now 30% higher than its pre-covid highs, while Britannia shares are up about 21%. In other words, Tata Consumer’s is now the top consumer goods stock in the market this year.
Some analysts believe that Tata Consumer’s good run is likely to continue. “We expect Tata Consumer’s India growth rate to accelerate as supply chain disruptions are behind and in-home consumption of food continues to grow because of the consumer caution about eating out. Several levers such as distribution expansion and price increases in tea will kick in," analysts from Credit Suisse Securities (India) Pvt. Ltd said in a report.
However, not all business segments are firing away. The international business may play spoilsport. “International business growth may moderate in the second half of the year, as consumers in US/ UK/ Canada increase out-of-home consumption of beverages," according to Credit Suisse.
The Indian beverages business grew 11% in the June quarter, benefiting from the strong double-digit growth in May and June. The India foods segment grew 19% and saw high double-digit growth each month of the quarter, despite operational challenges. International beverages accounted for the remaining branded revenues, and grew 15% as consumers stocked up due to the covid-19 pandemic.
Overall, earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded 312 basis points to 17.8%. One basis point is one-hundredth of a percentage point.
“While the numbers are good amid this uncertainty, the stock movement seems like an overreaction," said an analyst commenting on Tata Consumer’s shares.
All is not hunky dory. “India tea volume growth of 4% was somewhat disappointing, given the strength seen in some of the other packaged foods businesses," point out analysts from JM Financial Institutional Securities Ltd.
Investors need to watch how margins shape up. In the near-term, strong tea prices in India pose a threat to margins as well.