Expanding Sampann And Soulfull Brands Will Strengthen Future Market Position

Key Takeaways

• Expansion in food service and international markets, along with improving distribution capabilities, aims to drive revenue growth and operational efficiencies.
  
• Focus on premium products and long-term tea pricing strategy may enhance margins and competitiveness, boosting future revenue and profitability.
  
• Rising input costs and interest expenses pose persistent threats to margins, with profitability at risk if tea and coffee costs and market competition persist.

Catalysts

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

• Tata Consumer Products is focusing on expanding in both core and growth businesses (such as Sampann and Soulfull) and new opportunities like Capital Foods, potentially driving revenue growth and margin expansion in the future.
  
• The company plans to accelerate the roll-out of its food service and pharma channels in businesses like Organic India, which could significantly enhance their revenue streams and profitability.
  
• Tata Consumer is investing in improving its execution and distribution capabilities by increasing its distributor base and implementing a more analytical approach, potentially leading to improved revenue growth and operational efficiencies.
  
• The company's strategy to prioritize long-term competitiveness in tea pricing, despite current margin pressures, suggests potential future margin recovery, impacting EBITDA positively when market conditions stabilize.
  
• The focus on premium product innovation and expansion in high-margin segments in international markets, such as K-Cups in the U.S., and continued brand-building efforts in the U.K., could lead to margin expansion and revenue growth internationally.

Tata Consumer Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Consumer Products's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 10.1% in 3 years time.
• Analysts expect earnings to reach ₹23.3 billion (and earnings per share of ₹23.68) by about April 2028, up from ₹11.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹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 77.3x on those 2028 earnings, down from 91.4x today. This future PE is greater than the current PE for the GB Food industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 3.79% 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

• There is ongoing margin pressure due to high tea costs in India; if tea prices remain elevated or do not decrease as expected next year, this could negatively impact net margins.
  
• The company’s EBITDA was flat due to high input costs, particularly in tea, which indicates that continued input cost inflation without proportionate pricing action could suppress earnings.
  
• Elevated coffee prices, which are at a historical high, pose a risk to the cost structure of both International and non-branded businesses. A potential price correction in coffee could adversely affect revenue if not managed properly.
  
• High interest costs have impacted profit before tax, affecting overall profitability. Although the company is building cash, sustained high interest expenses could limit earnings growth.
  
• If competitive actions in the ready-to-drink segment intensify, Tata Consumer Products might have to adjust its pricing strategy further, which could impact revenue and net margins.

Valuation

• The analysts have a consensus price target of ₹1144.321 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 ₹1315.0, and the most bearish reporting a price target of just ₹970.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹231.5 billion, earnings will come to ₹23.3 billion, and it would be trading on a PE ratio of 77.3x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹1062.7, the analyst price target of ₹1144.32 is 7.1% 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.