It has been less than 10 months since the Tata group announced a restructuring of its consumer products business under the umbrella of Tata Consumer Products Ltd. The markets, interestingly, have already warmed up to the move.
At the time of the announcement, the group’s main consumer business company, Tata Global Beverages Ltd, traded at a valuation of 28 times FY19 earnings, which was far lower than the sector’s average of 45 times earnings, according to numbers compiled by analysts at Motilal Oswal Securities Ltd.
Valuations have risen sharply since to 42 times earnings, which is incidentally higher than the current sector average of 41 times, according to Motilal Oswal.
In absolute terms, the market capitalization of Tata Chemicals Ltd and Tata Global Beverages stood at around ₹27,000 crore ahead of the restructuring. This has now risen to around ₹40,000 crore, a jump of about 48% since May last year when the proposed transaction was announced. The Nifty FMCG index, in comparison, has remained more or less flat during the period.
The transfer of the consumer products business of Tata Chemicals has transformed Tata Consumer from largely a beverages company to an FMCG (fast moving consumer goods) enterprise. It has brought new vigour to the company, which was otherwise stuck in a low growth trajectory.
“The developments illustrate renewed focus of the Tata group on the FMCG business. It used to be on autopilot mode. The focus now has come back,” said Sanjay Manyal, senior research analyst at ICICI Securities Ltd. The bigger reach should help the company grow faster in India.
Kaustubh Pawaskar, associate vice-president, research-consumer goods and discretionary at Sharekhan cited three immediate benefits of the restructuring. One, the merger will broaden the product portfolio, adding staples such as salt and pulses. The contribution of tea and coffee in Tata Consumer’s revenues will fall from 88% to 70%, based on FY19 sales. Two, the merger doubles the household reach. And, three, it raises the share of the more profitable and high-growth India business from 48% to 61%.
“Tata Chemical’s consumer business has better profitability. This should bring immediate profit margin benefits of at least 50-60 basis points at the consolidated level,” said Pawaskar.
That said, the rally in the Tata Consumer stock is not driven by the merger alone. The gains also reflect the larger transformation of the company.
Even as the merger is underway, the company has been reorganizing its overseas businesses. It is exiting loss-making countries, while consolidating and sharpening its focus on growth markets. “They are present in many countries. Of them, only India is seeing decent growth. Barring the UK and Canada, growth in overseas markets was tepid. As a consequence, the company began exiting loss-making countries,” said Manyal at ICICI Securities.
Tata Consumer is also bringing in Sunil Alaric D’Souza, currently with Whirlpool India Ltd, as its managing director and chief executive officer. Analysts said that D’Souza’s experience in the consumer goods industry augurs well for the company. “Under his leadership, Whirlpool delivered strong performance,” Sharekhan said in a note.
The changes reflect the broader strategy rethink at Tata Sons. As N. Chandrasekaran, chairman of the group, described in his 2019 New Year message, the focus is on simplification, synergy and bringing scale to group companies.
In similar fashion, the group consolidated its energy businesses under one roof with Tata Power Co. Ltd, besides consolidating its aerospace and defence businesses into a single entity. Tata Chemicals is now sharpening its focus on basic chemistry and specialty chemical products.
“The formation of Tata Consumer Products marks a new strategic direction, an accelerated expansion into India’s FMCG market,” Tata Sons said in a statement in February.
“The stock could still trade up over the coming months, in our view, subdued December quarter notwithstanding, given optimism surrounding the merger of Tata Chemicals’ consumer business that will increase the salience of domestic business in Tata Global’s revenue-pie and hopes being built that a new outsider CEO would make the business a much more growth-oriented and efficient one,” JM Financial Institutional Securities Ltd said in a note last month.
Of course, the task is cut out for the new CEO.
Tata Consumer’s operating profit margin of less than 15% lags the FMCG sector’s average of about 20%. With valuations already seeing significant expansion, the new CEO will have to quickly deliver merger benefits.
“The key now is how the India business performs. If India business delivers double growth and US stabilizes, performance of the consolidated entity will improve,” said Pawaskar at Sharekhan. “As efficiencies kick-in, we will see gradual improvement (in margins).”
