Fortune Scrip     

Published: Nov 30, 2022
Updated: Nov 30, 2022

Tata Consumer Products

Taking on HUL for top FMCG slot

Consumer products companies are very much in the news since the outbreak of Covid-19 a couple of years ago and a new comer in this space – Tata Consumer Products – is making headlines of late. It was born in 2020, after the consumer products business of Tata Chemicals, also a Tata group company, was merged with Tata Global Beverages (which was earlier called Tata Finlay and subsequently Tata Tea) under the reorganization of the group’s business to bring all food and beverages businesses under one roof. The company, rechristened Tata Consumer Products, soon resorted to an acquisition drive and took over Bangalore-based Kottaram Agro Foods – the owner of cereal brand ‘Soulful’ — the bottled-water business of Nourishco and Tata Smart Foods. Maintains the architect of the reorganization of the Tata group, Chairman N Chandrasekaran, “Tata Consumer Products will continue to look for the right acquisition opportunities in different categories for leveraging of its product portfolio, expanding its distribution network and product innovation, and entering new categories.”

By way of such organic expansion, TCPL has already been transformed into an FMCG company and this transformed journey continues. The company has already acquired BigBasket, a well-spread distribution company, and is now in the process of acquiring number one bottled water company Bisleri.

By now, the company has emerged as a leading FMCG player selling Tata Salt, Tata Tea, Tetley, Eight O’Clock Coffee, Good Earth Tea, Tata Sampanna Pulses and Spices, and Tata Starbucks. Today, Tata Tea is the biggest selling tea brand in India and Tetley is the biggest selling brand in Canada and the secondlargest selling brand in the UK and the US. Says a consumer market veteran, “With a combined reach of over 200 million households in India, TCPL has an unparalleled ability to leverage the Tata brand in consumer products.”

The mission of the Tata group under the leadership of Mr Chandrasekaran is to create a premier, welldiversified consumer products company. Its strengths lie in the group’s deep understanding of consumers in India as well as abroad with its iconic market-leading brands and wide consumer reach.

The management is keen to strive for sustained growth of the company through innovation as well as organic and inorganic expansion. The company’s sustainability strategy encompasses initiatives towards sustainable sourcing, natural resource management, a net zero circular economy and community development.

20.2% CAGR

TCP is doing well on the financial front, recording a profit growth of 20.2 per cent CAGR over the last five years. What is more, future prospects are all the more promising. Consider:

• Within a couple of years, the company has emerged as a leading FMCG entity offering tea, coffee, pulses, spices, bottled water (Himalayan), ready to eat, ready to drink products and salt. 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 company’s focus is on innovating and adding to Soulful’s existing portfolio, which includes cereals, muesli and plant-based protein drinks.
• Tata Starbucks, the 50:50 joint venture of TCPL and Starbucks 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.
• The company now proposes to acquired Bisleri, India’s largest selling water brand, at a price of Rs 7,000 crore. Negotiations are stated to be in the final stage. If this deal is finalised, it will add Rs 25,000 crore to the company’s topline and Rs 220 crore to its bottomline. The company is also in discussions with Bisleri International for growth and expansion of the business. It is said that the company can potentially look at scaling up Bisleri beyond water, given its capabilities. The acquisition of Bisleri will convert the Tata group company into an undisputed leader in the fast growing bottled-water segment as the company already has brands like Himalayan natural mineral water and Tata Copper-plus.
• The company has a distinct investor-friendly approach. In fact, 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.

DIVIDEN CUSHION

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 organic as well as inorganic expansion, and widening the product profile, the company is emerging as a formidable FMCG company and will during the next one decade or so to earn the status of an Indian HUL. Discerning investors should include this stocks in their portfolio as they are bound to reap rich profits in due course.