Fortune Scrip

Published: July 15, 2022
Updated: July 15, 2022

TATA CONSUMER PRODUCTS - Indian HUL in offing?

This fortnight I have selected a relatively new Tata group company, which is heading to become a multi-bagger very soon, as the Fortune Scrip. It is Tata Consumer Products, the food and beverage arm of the illustrious $ 103 billion Tata group.

The company was formed a couple of years ago when Tata Global Beverages and the consumer business of Tata Chemicals were merged with it. Subsequently, it acquired Bangalore-based Kottaram Agro Foods (KAF), the owner of the cereal brand ‘Soulful’, the bottled-water business of Nourishco and Tata Smart Foods. Starting with selling Tetley tea, Eight o’Clock Coffee, Tata Tea and Tata Salt, TCPL started transforming into a FMCG company by taking up the sale of pulses, cereals, snacks and bottled water, among others. The company is continuously planning and executing organic and inorganic expansion, says its Chairman, Mr N Chandrasekaran. “TCPL will continue to look for the right acquisition opportunities in different categories to fuel its leveraging of its product portfolio, expanding distribution and product innovation, and entering new categories. By way of organic expansion, the company has already been transformed as an FMCG company and this transformal journey continues even now,” he notes.

With expanding business, the company’s financial performance is steadily improving. During the last seven years, its sales turnover has expanded from Rs 2,987 crore in fiscal 2016 to Rs 7,932 crore in fiscal 2022, with the operating profit climbing from Rs ——— crore to Rs 1,110.89 crore and the net profit shooting up almost four times from Rs 226 crore to Rs 886 crore during this period respectively

SOUND FINANCES

TCPL’s financial position is very sound, with reserves at the end of March 31, 2022 standing at Rs 11,648 crore – over 126 times its equity capital of Rs 92.16 crore. The company is cash rich and almost debt-free, with its interest burden in fiscal 2022 being negligible at Rs 29.78 crore – just around 0.375 per cent of its sales turnover. So far, it has offered bonus shares thrice – in a 1:2 ratio in 1992 and 1994 and in a 2:5 ratio in 1988. Besides, it pays handsome dividends, the rate for the last year being 605 per cent.

5 ratio in 1988. Besides, it pays handsome dividends, the rate for the last year being 605 per cent. But we have not selected TCPL as the Fortune Scrip for its past laurels. We are confident that its future prospects are highly promising and that it will be a prominent multi-bagger stock from the Tata stable. Consider: Starting with tea, coffee and salt, TCPL is expanding its product range through organic and inorganic expansion and is being transformed into an FMCG company. No doubt, tea and salt are the steady base business of the company, tea accounting for a 22.2 per cent marketshare and salt for 37 per cent in 2022. Besides promoting sales of these two major products, the company is striving to push up its coffee sales. At the same time, it has widened its range of packaged foods under brands such as packaged pulses, chickpea flour, spices, ready-to-eat mixes such as dosa and chilla mixes and poha under the Tata Sannpann brand, and snacking under the ‘Soulful’ brand, among others.

• The company is striving to further widen its product range. It is now testing plant-based meat products like chicken burgers, spicy fingers, burger patty and Awadhi ‘seekh kabab’. The plant-based meat market in India is estimated to around Rs 500 crore in the next three years. The company’s focus is on innovating and adding to Soulful’s existing portfolio, which includes cereals, muesli and plant-based protein drinks

ACQUIRING SPREE

• As if the existing and expected product range is not enough, the ambitious chairman N Chandrasekaran is keen to acquire more companies to expand its business. Two or three companies are already on the radar and a decision will be taken this year to further expand the product range. All this means that TCPL wants to be a full-fledged large FMCG company with the largest number of products.
• Besides expanding its product range, the company is striving to expand its marketing network. By now the packaged food and beverage company has multiple D2C (Direct to Consumer) platforms, including Tata Tea 1868, Tata Coffee Sonnets and Tata Soulful. It is also expanding its e-commerce channel
• Tata Starbucks, the 50:50 joint venture of TCPL and Starbacks of the US, has started doing well and has turned EBITDA-positive by the end of 2022, indicating good demand and likely resulting in faster store ramp-ups. From its presence in just 8 cities in fiscal 2019, Starbucks is now present in 26 cities, with the number of stores increasing from 221 in fiscal 2021 to 268 by the end of 2022. Last year it entered seven new places — Jaipur, Siliguri, Thiruvanthapuram, Guwahati, Nashik, Bhuvaneshwar and Goa. Expansion of Starbucks will add to the topline and bottomline from the next year.
• TCPL is an attractive dividend stock. While its 0.4 per cent dividend yield is not that attractive, its lengthy payment history is quite interesting and attractive. Dividends are usually paid out of company earnings. If a company is paying more than it earns, the dividend might not be sustainable. If we examine the dividend payments of TCPL for the last 20 years, they are well within our criteria. For example, last year’s dividend payment at 270 per cent is around 34 per cent of profit. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders handsomely.

DIVIDEND WISDOM

Besides, if reinvestment opportunities dry up, the company has enough room to increase the dividend. Dividend payout can also be measured against a company’s free cash flow to ensure enough cash was generated to cover the dividend. TCPL’s cash payout ratio was 16 per cent. This is quite conservative. Here, the dividend payment is covered by both profit and cash flow. This suggests the dividend is sustainable as long as earnings don’t drop precariously. Viewed in the context of the company’s ambitious growth plans, there is every chance of a higher dividend in the coming years.

With steady expansion, TCPL will emerge as a formidable FMCG company during the next 5 to 10 years and will earn the status of an ‘Indian’ HUL. Discerning investors should include this multi-bagger stock in their portfolio without any hesitation. The stock is priced now around Rs 1,044.