Entry into new categories with Soulfull acquisition – Tata consumer

Update on the Indian Equity Market:

On Thursday Nifty closed 0.7% higher at 14,896. Among the sectoral indices, PSU Banks (+5.9%), FMCG (+2.5%), and Metal (+2.0%) closed higher. IT (-0.4%) was the only sector which closed in the red. SBI (+6.6%), ITC (+6.1%), and Bajaj Finance (+5.0%) closed on a positive note. Asian Paints (-1.9%), UPL (-1.7%), and Cipla (-1.6%) were among the top losers.

Excerpts from an interview of Mr. Sunil D’souza, MD & CEO, Tata Consumer with CNBC-TV18 dated 03^rd February 2021:

• Tea prices have not started to taper off and the company is confident that proper execution will deliver good results in the future.
• Starbucks and NourishCo Beverages are showing sequential improvement.
• On ‘Soulfull’ acquisition, he said the Company looked at strategic and financial filters. It will help to get into new categories including snacking, breakfast.
• This will lead to entry into new consumer occasions. The company was not previously present in these segments.
• These new products are margin accretive products. EBITDA margins for Soulful are higher as compare to the current basket.
• Speaking about the tea business, he said the margins are a transient issue. The company has increased its share by 90 bps (Y-0-Y).
• The company has also integrated its distributor and digitize its system.
• The account receivables days are down 50% from where the company started.
• On future acquisitions, he said the company is juggling around different pieces and the announcement will be made when the company gets closer to it.
• The gross cash of the company is around Rs 2,500 crores, the company makes judicious of the cash. The company around Rs 156 crore cash for the ‘Soulfull’ acquisition.
• The company expects double-digit growth across financials.

Consensus Estimate: (Source: market screener website)

• The closing price of Tata Consumer was ₹ 589 as of 04-February-2021.  It traded at 58x/47x/40x the consensus Earnings per share estimate of ₹ 10.2/12.5/14.7 for FY21E/FY22E/ FY23E respectively.
• The consensus average target price is ₹ 605/- which implies a PE multiple of 41x on FY23E EPS of 14.7/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”