India Foods And E-commerce Expansion Will Secure Future Success

Key Takeaways

• Focus on India Foods segment and new business channels suggests potential for continued revenue and earnings growth driven by consumer demand and strategic innovations.
  
• Stabilizing tea costs and expanding international operations indicate potential for improved margins and sustained profitability through geographical diversification.
  
• Vulnerability to input cost inflation and international recession risks could pressure margins, while expansion plans could strain resources and limit revenue growth.

Catalysts

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

• Tata Consumer Products is focusing on its India Foods segment, which showed a significant 27% growth with 17% organic growth, showing potential for continued revenue growth driven by consumer demand and innovative product launches in this category.
  
• The company anticipates margin improvements as tea costs stabilize, with management noting that adjusted EBITDA margins could have expanded by 80 bps without tea inflation. This indicates potential for higher net margins as commodity pressures ease.
  
• Strong growth in new business channels such as modern trade (26% growth) and e-commerce (66% growth) can enhance revenue streams, especially as these segments become a larger part of the sales mix.
  
• Continued expansion of growth businesses, including Tata Sampann, which saw a 30% growth, and Soullfull (32% growth), leveraging innovation and distribution expansion, suggests robust future earnings potential driven by diversified product offerings.
  
• International business showed solid EBIT margin expansion, with a focus on maintaining accretive contributions to the overall profitability of the company. This international strategy is likely to sustain earnings growth through geographical diversification.

Tata Consumer Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Consumer Products's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 10.5% in 3 years time.
• Analysts expect earnings to reach ₹25.0 billion (and earnings per share of ₹25.49) by about May 2028, up from ₹12.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹27.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 77.1x on those 2028 earnings, down from 90.2x today. This future PE is greater than the current PE for the GB Food industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 3.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Tata Consumer Products Future Earnings Per Share Growth

Risks

• The increase in tea and coffee costs, which the company has only partially passed on to consumers, could continue to pressure EBITDA margins if input prices remain high or rise further. This impacts net margins.
  
• Despite high growth in certain segments, the decline in consolidated EBITDA during the quarter indicates vulnerability to input cost inflation, which could weaken earnings growth if not managed effectively.
  
• The company's international business, particularly in the U.S. and U.K., is susceptible to recessionary risks that could affect revenue momentum, especially in a competitive environment where consumer spending might reduce.
  
• The ambitious expansion and innovation plans in newer categories within Tata Sampann could strain resources and focus if not executed with precision, impacting overall revenue growth and margin improvement.
  
• There could be potential challenges in sustaining recent growth rates in categories like NourishCo, given heavy reliance on distribution expansion and price reindexing strategies, which might not consistently drive revenue growth.

Valuation

• The analysts have a consensus price target of ₹1225.963 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 ₹1360.0, and the most bearish reporting a price target of just ₹1044.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹238.5 billion, earnings will come to ₹25.0 billion, and it would be trading on a PE ratio of 77.1x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹1165.8, the analyst price target of ₹1225.96 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.