May27 , 2022

tata consumer: We are 10 minutes into a two-hour movie for Tata Consumer; we have just got started: Sunil D’Souza



“It is quite evident that in tea, despite margins being brought back on track, our market share is up by 100 bps. Tea we see broadly range-bound, having come off its highs. Coffee spiked to about Rs 230-240 and right now is range-bound at Rs 220-230. We have taken pricing in our US business as well as other geographies in which we operate to put margins back on track and we are continuing volume growth,” says Sunil D’Souza, MD & CEO, Tata Consumer Products

Let us first understand the big picture. I will get into the specific numbers, but there is concern in terms of high inflation, impact on raw material and a drop in demand. Are you experiencing these three pain points again?
Just to highlight the results that we have declared, all in all, given the macroeconomic scenario, the pandemic and all the volatility that we saw, we declared a pretty good set of results, cycling at 26% top line of last year; EBITDA came in plus 45 and group net profit was 200 plus. If you look at financial metrics, our EBIT came in at 400 bps PAT at 12.2 driven by PE which is now back on a firm footing on margins 21% moving to 36. Working capital is down 5, inventories in absolute terms are lower despite the higher volume with free cash flow of 100% of EBITDA.

There is cash despite all the investments that we have done and it is still slightly higher than last year’s. Even the strategic numbers, market shares, tea, salt are all positive. Outlet expansion continues. A&P is up by 29% for this year, innovation 3X where we started. Growth business is up by 52%. So all in all, we exited last year on a very good note.

Now to answer your specific question about inflation and impact on Tata Consumer, I will answer it in two parts. First is the raw material pieces. The good news for us is our three big commodities – tea, coffee and salt. In all these three commodities, we have seen a spike over the last 6 to 12 months and we have been taking judicious pricing to make sure we do not lose momentum and do not lose market share as we take that pricing.

It is quite evident that in tea, despite margins being brought back on track, our market share is up by 100 bps. Tea we see broadly range-bound, having come off its highs. Coffee spiked to about Rs 230-240 and right now is range-bound at Rs 220-230. We have taken pricing in our US business as well as other geographies in which we operate to put margins back on track and we are continuing volume growth.

In salt we saw a big spike with energy as well as lack of brine in Gujarat with extended monsoons. We have taken some aggressive price increases from last July. The last one we took was in April. Broadly on the margin and raw material fronts, we are okay. The good news is we are not exposed to the big spikes that are happening right now palm oil, sunflower oil, wheat and all those pieces.

Raw materials might see some ups and downs but small pluses and minuses and not the big numbers that we are hearing for other FMCGs.

But that said, we will see some impact of oil and related inflation like freight, logistics, packaging, etc, etc, but that is something we have got to deal with. We will continue to make sure that we take judicious pricing while maintaining momentum but most importantly not losing sight of the longer term picture of maintaining market share.

How much of the uptick in sales is largely because of volume growth and how much uptick is largely coming because of inflationary factors?
Overall, for last year, we did have volume growth in both our base businesses of tea as well as salt. So salt grew by about 8% and tea has grown by about 3% for the year. Now salt for the last quarter did have a dip but we have to remember we are cycling at about 20% growth of the same quarter the previous year. So, we have to look at it in respect of that and the fact that we took some price increases which did have an impact.

Overall, if I just look at it from a numbers perspective, in case of tea, January and March showed close to 5% growth. That means the tea business is back on track and therefore as long as we maintain stability in terms of pricing and execute well, we should be seeing that 5-7% as the long-term number.

In case of salt, dips have followed price increases but starting this quarter, we do expect things to come back to normalcy. So overall, we will see trending back to long-term growth rates for all our categories. That said, we will have to make sure that we are balancing that with some amount of pricing as required when we are seeing inflation creeping.

EBITDA margins year on year numbers has increased from 9.9% to 14%. But in between quarters, it has come down marginally by about 50 bps. Can I say that from 14%, the directional curve of EBITDA margins is going to be much, much higher?
I would live with just higher. Longer term, it will be much higher, but you have to remember fundamentally that we are a growing company and we have the core businesses of tea and salt which will probably grow in high single digits to low double digits. Like I said, we are investing in growth numbers.

Our Sampann. Soulfull, ready to eat, Tata Q and NourishCo businesses grew 52% this quarter. We are making sure we are investing behind this. The gross margins are healthy in all these businesses and we will make sure that they are healthy but we will invest behind these businesses on brands, infrastructure, distribution, etc, to make sure we are on a strong footing.

So EBITDA margins will trend higher in the short to medium term and definitely much higher medium to longer term.

The Economic Times has reported that Tata Consumer has a big plan to move into home and personal care. If that is right, then what is the plan because that is a very competitive category. Are you looking at becoming a sizable player in that category?
I just dial back .Tata Consumer was created to fulfill the FMCG aspirations of the Tata Group. Tata is probably the most recognised brand name per se in India and therefore we have got every right to win as we expand across different categories. That said, we are measured and we are calculative in the moves that we are making.

As I said, we will first become a larger food and beverage company and then look at the full FMCG play. Now as we go there, we had to do two things: number one is we had to synergise all the different pieces that we had in our businesses, so the last piece that we put into place was the Tata coffee merger which we have just announced. That creates clear verticals across different businesses and simplifies all the businesses.

The other big piece is we are simplifying the number of legal entities. A large amount of the simplified synergised piece is largely in place. Now it is about scale and as we go towards scale, it is expansion of portfolio and playing in different pieces. There is a roadmap that we have drawn up. This involves both organic as well as inorganic. There are quite a number of pieces that we can do organically, but we do realise in many of the categories, that we either do not have the DNA or like you said it is a very competitive category or we do not have the technological knowhow,. So we will be looking at inorganic spaces. Ultimately the ambition is to become not just an F&B company, but a large FMCG company.

Isn’t FMCG a very competitive space? The categories which you represent salt, tea or beverage – have niches. But home care or personal care are very competitive categories with different dynamics. The gestation period would be very different. How does this sink in with the earlier guidance which you had given on the promise of higher ROCE coming through? If you are diversifying, then the return ratios will get compromised, would they not?
I would probably beg to disagree. It is not an and or game. We are sitting with cash, we could have done a lot of things, we look at a lot of businesses on a constant basis. We look at a lot of opportunities but we are very calculative. We enter a category with a very clear execution plan so that we can create value. If one looked across categories, I would say four, five things are very important like what is the size of the category, what is the fragmentation or the concentration in that category which then defines the margins that you make, are those margins good enough, are they accretive to the Tata Consumer? In the case of EBITDA, longer term we have got to grow and therefore the margins have to grow.

What does the Tata brand name bring in that category? There are many categories which are trust deficit and as the Tata brand name comes in, we can create value. Do we have the R&D or technological expertise? As we are looking at all these pieces, we are making sure they fall into play and then of course the important thing is everything that we do has to be accretive.

We realise we have got a long way to go in terms of coming up to best in class on gross margins, EBITDA margins, etc. But I will repeat it is an end game, it is a fine balancing act and we will need to continue to execute very strongly.

How is the Tata Neu App going to be a game changer? How is it going to benefit in the long haul?
The Tata Neu app helps bring the different businesses of Tata together in front of the consumer. You will see all the consumer facing businesses out there and the big thing is one can keep switching loyalty points, keep doing different things and it brings all the businesses on one simple app for the Indian consumer.

For Tata Consumer itself I think we participate in two different ways; number one is the Starbucks piece out there where the consumer has the ability to buy Starbucks and then the loyalty points get transferred.

The second thing is Big Basket which is already out there and we partner very strongly with Big Basket to make sure we accelerate from thereon. There are many more plans for Tata Neu per se and Tata Consumer’s play in Tata Neu per se but I will watch this space.

Next three years, what should we expect from Tata Consumer? Will it be expansion in non core categories? Will it be a lot of inorganic growth? I am just trying to understand the broad thought in terms of getting a roadmap?
We are probably 10 minutes into a two-hour movie right now for Tata Consumer, that is how I would frame it. We have just about got started. We have sort of synergised and simplified pieces and now it is about scale. As we go to scale, we will have organic and inorganic. There will be places in which organic probably is the right thing but in many other places, inorganic would be the right piece to do because a) either the time required to build it organically or the expertise required to succeed in those categories or the amount of money that we would spend growing organically would not make sense.

So we would expect to see significant scale up from Tata Consumer and bulking up in terms of top line but again, in a very measured manner, you will not see us like a headless chicken just bulking up for the heck of bulking up. It has to be a profitable flow through. The EBITDA margins have to go up and gross margin profile has to be accretive. The return ratios have to make sense and net-net ROCE, which is our big bugbear, has to move north. It has started inching up but not where it should be.

What is that ROCE number which will get this big smile on your face?
I would say we will continue to target double digit top line growth. Last year, we just missed the number by a whisker. India business did grow by 13% but overall we came in 9%. So we will target a double digit top line and significant increases in EBITDA and in terms of ROCE.

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