Capital Foods And Organic India Integration Will Improve Future Operations

Key Takeaways

• Operational improvements in distribution and planning systems are expected to enhance efficiency and positively affect net margins.
  
• New acquisitions and retail strategy adjustments, like e-commerce growth, are poised to boost revenue and earnings.
  
• Operational pressures from rising costs and demand issues in key segments could impact growth, market position, and revenue stability for Tata Consumer Products.

Catalysts

Produces, distributes, and trades in food products in India, the United States, the United Kingdom, and internationally.

• Tata Consumer Products is actively working to regain competitiveness in pricing and expects its Ready-to-Drink business to recover to normative growth levels of 25% to 30%, which could significantly boost revenue.
  
• The company has completed the integration of new acquisitions like Capital Foods and Organic India, which are now focusing on growth and showing quarter-on-quarter improvements, likely enhancing future earnings.
  
• Tata Consumer Products is implementing centralized planning and dispatch systems along with auto-replenishment systems for distributors, expected to increase efficiency and positively impact net margins.
  
• The company expects to see a positive impact on earnings as they have become debt-free after repaying short-term debt with proceeds from a rights issue, reducing interest expenses.
  
• Retail strategy adjustments, such as introducing new sales channels in food services and pharma, plus e-commerce growth of 50%, are set to boost future revenue streams.

Tata Consumer Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Consumer Products's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 10.0% in 3 years time.
• Analysts expect earnings to reach ₹22.7 billion (and earnings per share of ₹23.1) by about December 2027, up from ₹11.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹26.3 billion in earnings, and the most bearish expecting ₹17.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.5x on those 2027 earnings, down from 80.4x today. This future PE is greater than the current PE for the GB Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Tata Consumer Products Future Earnings Per Share Growth

Risks

• Declining tea volumes in India despite a 3% increase in beverage revenue indicates potential demand concerns, which could affect future revenue growth if not addressed.
  
• Margin contraction due to increased input costs, notably tea costs, suggests persistent cost pressures that may not be fully offset by price increases, impacting net margins and earnings.
  
• Competitive pricing pressures in the Ready-to-Drink business have affected growth, indicating that the company may struggle to maintain its market position, potentially impacting revenue.
  
• The stress in the soluble coffee segment, with demand softness as prices reach high levels, signals potential future revenue instability in this segment.
  
• Overall consumer demand softness, especially in urban areas, combined with high inflation rates, could suppress growth across multiple product lines, affecting total revenue and profitability.

Valuation

• The analysts have a consensus price target of ₹1203.19 for Tata Consumer Products based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1420.0, and the most bearish reporting a price target of just ₹963.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹226.9 billion, earnings will come to ₹22.7 billion, and it would be trading on a PE ratio of 73.5x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹935.05, the analyst's price target of ₹1203.19 is 22.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.