Tata Stock: 17% Potential Upside In Tata Consumer Owing To Rights Issue, Acquistions, Tata Coffee

Tata Group-backed FMCG player, Tata Consumer Products is on the radar of brokerages after the company had a busy last week filled with major announcements of mergers, acquisitions including Tata Coffee, and fundraising plans including Rights Issue. Brokerages have recommended buying Tata Consumer, implying a potential upside of 17% ahead.

Tata Consumer's Busy Week:

Foods and beverages space:

Firstly, Tata Consumer Products has agreed to 100% acquisition of two popular brands namely Organic India, and trademark 'Ching's Secret' and 'Smith & Jones' owner Capital Foods. The transaction of two acquisitions is together for a consideration of Rs 7,000 crore.

Of the total Rs 7,000 crore, Tata Consumer will pay Rs 5,100 crore for Capital Foods, and Rs 1,900 crore for Organic India.

This acquisition is in line with the company's strategic intent of entering into new adjacent high-growth/ attractive margin categories in the food and beverage space.

Tata Coffee:

Additionally, Tata Consumer's board approved the allotment of fully paid-up Equity Shares of the face value of Re. 1/- each of the Company to the eligible shareholders of Tata Coffee.

As per the share entitlement ratio, the company y has issued and allotted 1 (one) fully paid-up equity share of Re.1/- each of TCPL for every 22 (twenty-two) fully paid-up equity of TCL held by the Member (except to TCPL) as on the Record Date. Accordingly, 36,09,571 fully paid-up equity shares of Re.1/- each of the Company have been allotted.

Also, the company has issued and allotted 14 fully paid-up equity shares of Re.1/- each of TCPL for every 55 (fifty-five) fully paid-up equity shares of TCL, held by the Member (except to TCPL) as on the Record Date. Accordingly, 2,02,13,595 fully paid-up equity shares of Re.1/- each of the Company have been allotted.

The record date to identify eligible shareholders in the merger of Tata Consumer-Tata Coffee was set on January 15, 2024.

Commercial Papers, Rights Issue

The company also received the board's approval for raising funds for the issuance and allotment of Commercial Papers, for an amount not exceeding Rs. 3,500 crores, to be utilized for bridge funding to facilitate the payment of consideration for the proposed acquisition of stakes in Capital Foods and Organic India.

Also, it will raise funds by issuing equity shares of the Company of face value Re. 1 each through Rights Issue for an amount not exceeding Rs. 3,000 crores to the eligible equity shareholders of the Company as on the record date (to be determined by the 'Capital Raising Committee' of the Board in due course) subject to receipt of statutory/regulatory approvals.

To give effect to the rights issue, the detailed terms of the rights issue including but not limited to issue price, rights entitlement ratio, record date, timing and terms of payment will be determined in due course by the Board, or the 'Capital Raising Committee' constituted by the Board, following applicable laws, subject to receipt of necessary approvals, as may be required.

Tata Consumer Share Price:

On Saturday, Tata Consumer's share price stood at Rs 1,150.50 apiece, down by 0.95% on BSE with a market cap of Rs 1,06,882.79 crore.

In a year, Tata Consumer shares have rallied by over 55%.

What do brokerages say about Tata Consumer?

In its research note, JM Financial said, "TCPL's acquisitions of Capital Foods and Organic India signify aggression to tap white spaces with a clear intent to build a more comprehensive premium F&B portfolio with high growth potential. The acquisitions are at c.6.8x and c.5.2x FY24E sales of Capital Foods and Organic India vs TCPL's valuation at c.7x at CMP, c.5-5.5x at 3-6M ago prices, and add c.6% to TCPL's Sales and EBITDA. Capital Foods has scaled well in the past (5-year sales CAGR 15%) and has strong margin potential but a lot more work needs to be done in the case of Organic India (patchy growth profile, falling margin - could require prolonged category-development work)."

Further, the brokerage added, "The immediate task would be to leverage TCPL's distribution scale to unlock value in estimated large TAMs, and also correct cost-structures (including trade-related) to improve profitability. This, in our view, could take a couple of more years' work vs management's guidance of Year-2 break-even."

Meanwhile, Elara Capital said, "We lower our PAT by 4.4% in FY25E and raise it by 6.2% in FY26E to factor in the effects of the acquisitions. We reiterate Accumulate with a higher SOTP-based TP of INR 1,246 from INR 1,030 as we assign 50.0x (from 48.0x) FY26E P/E to the standalone business & new acquisitions, 6.0x (from 5.0x) price/sales to NourishCo & Soulfull businesses, 2.5x (unchanged ) price/sales to the international beverages business and Eight O'Clock, and 1.0x price/sales to the Tata Coffee unbranded business as we roll forward to March 2026E."

Lastly, Motilal Oswal said, "TATACONS's holistic strategy aims at transforming by: i) strengthening and accelerating its core business, ii) exploring new opportunities, iii) unlocking synergies, iv) digitizing the supply chain, v) expanding its product portfolio and innovation, vi) enhancing its focus on premiumization and health & wellness
products, vii) embedding sustainability, and viii) expanding its sales and distribution infrastructure, supply chain, and capability building towards being a multi-category FMCG player."

Motilal's research note added, "In line with its strategy of new opportunity exploration, TATACONS acquired the CF and OI businesses that will contribute ~8%/9% of the incremental PAT for FY25/26 and is expected to support margin expansion backed by the synergies.."

"We have factored in the financials of both the companies, assuming a fundraise via a rights issue amounting to INR35b, which is 50% of the total deal value (or 61% of the immediate funding requirement of INR57.25b). This is leading to an EPS dilution of 3%/2% in FY25E/26E and it will be EPS accretive from the third year of operations," Motilal's note added.

On the valuation, Motilal said, "We expect a CAGR of 13%/18%/25% in revenue/EBITDA/PAT over FY23-26. We arrive at our SoTP-based TP of INR1,350 and reiterate our BUY rating on the
stock."

From the current price level, there is a potential for over 17% upside.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.