ICICI Securities in its recently published report recommended investors buy the stocks of Tata Consumer Products Ltd for a target price of Rs 925/share. Tata Consumer Products Ltd's transformational journey continued in FY22. It achieved rapid progress in distribution expansion - 2x direct reach in FY20-22 and introduced multiple innovative products to drive premiumization and market share gains.
June 23, stocks of the company surged 1.28% from the previous close and ended at Rs 718.45/share. It was opened at Rs 710/share. The stock touched the 52-week low at Rs 650.20/share on 7 March 2022, and 52 weeks high at Rs 889/share. The stocks have given positive returns of 174.43% in the last 3 years and massive multi-bagger returns of 375.32 in 5 years.
Potential Gains - According to the estimated target price and the CMP, the stock could see a jump of 29% in share price in 12 months.
On course for better
In continuation of its stance as 'The platform for Better' in FY20 to 'Transforming for Better' in FY21, Tata Consumer Products Ltd has revealed its new stance as 'On course for Better' in FY22 annual report. TCPL plans to continue the focus and invest in (1) Enhanced Distribution, (2) Expanded Portfolio, (3) Agile and Digital organisation, (4) Increased Innovation, (5) Efficient supply chain and (6) Stronger brands.
India business share rising
The revenue share of India business has increased to ~70% in FY22 from 62% in FY20. Key reasons were (1) Higher growth of India Beverages and India Foods than International Beverages, (2) acquisitions such as Soulfull in India and (3) divestment of businesses in some geographies. Increase in India business share is RoCE and DCF accretive.
Tata Consumer Products Ltd invested in multiple distribution initiatives in FY22. It strengthened presence in e-commerce channel. It now accounts for 7.3% of sales compared to 2.5% in FY20. Modern trade revenues crossed Rs10bn (up 30%) in FY22. Total direct distribution expanded from 0.6mn outlets earlier to 1.3mn outlets at end of FY22, and Tata Consumer Products Ltd plans to expand it to 1.5mn at end of FY23. Number of Urban and Rural/Semi-urban distributors were up 25% and 400%, respectively. Numeric outlet reach for Tea and Salt increased by 18% and 15%, respectively.
Update on Starbucks: Tata Starbucks is on track to become a major national (urban) brand. From presence in just 8 cities in FY19, it is now present in 26 cities at end of FY22. The number of stores increased from 221 in FY21 to 268 at end of FY22. We remain enthused by the fact that in spite of expansion (adding negative operating leverage in short term), Tata Starbucks remained EBITDA positive during FY22 - indicating good demand likely resulting in faster store ramp-ups.
Increase in ad-spend as % of net sales but lower than pre-covid: While ad spend as % of net sales has increased from 6.3% in FY21 to 6.8% in FY22, we note it is still lower the pre-covid level of ~7.7% (average of FY17-20). However, we note the company has been able to gain market share with lower ad-spend which is a good performance.
Increase in net working capital days: The net working capital days have increased in FY22 to 71 days from 39 days in FY21. We note the increase in working capital is largely attributable to higher short-term loans and also due to inflation in raw material prices (higher holding cost).
Brokerage Suggests buy for target price of Rs 925/share
ICICI Securities said, "We model Tata Consumer Products Ltd to report revenue and PAT CAGR of 12.7% and 21.4%, respectively over FY22-24E. We maintain BUY and value the stock on SoTP basis with a target price of Rs 925."
According to the brokerage, the key risk is execution - delays in realising integration gains, ramp-up of distribution, etc.
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