Tata Consumer’s gung-ho investors get served lukewarm results in Q4
PremiumThe Tata Consumer stock fell about 4% on Friday after the firm’s Q4 results were announced last week
Tata Consumer Products Ltd’s shares have had investors’ attention for some time now. In calendar year 2020, the shares surged as much as 84% on the NSE, easily making it one of the best-performing consumer stocks. After the sharp re-rating, 2021 has begun on a relatively slow note with the shares gaining almost 7% so far.
Against this backdrop, valuations are no doubt expensive. In fact, they are now higher than that of peer Britannia Industries Ltd. Based on Bloomberg data, the Tata Consumer stock now trades at 49 times one-year forward price-to-earnings ratio versus 45 times of Britannia. Of course, this wasn’t always the case. Before the impact of the pandemic started reflecting, Tata Consumer’s shares traded at around 34 times one-year forward price-to-earnings ratio on 1 January 2020 vis-à-vis Britannia’s 46 times.
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As such, Tata Consumer’s investors appear to be factoring a good portion of optimism on the growth front. But March quarter (Q4FY21) results announced last week weren’t particularly encouraging, after which the stock fell about 4%. Consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) declined by 2.6% over the same period last year to ₹300 crore vis-à-vis Bloomberg consensus estimates of ₹353 crore. “Consolidated Ebitda growth for the quarter was impacted by tea inflation in India and increased A&P investments," the company said.
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Ebitda margins contracted by 294 basis points (bps) year-on-year to 9.9%. One basis point is 0.01%. While margins were expected to be hit due to a sharp rise in tea prices, Q4FY21 margin is lower than expectations. Nonetheless, Ebitda margin decline was better than the 623bps compression in gross profit margin.
Even so, analysts at JM Financial Institutional Securities Ltd point have noted two aspects in the March quarter report that merit attention and monitoring. One, Sampann portfolio grew just 2% during the quarter. Tata Consumer has said the volatility in the pulses market has impacted growth. According to JM Financial, “A business that is all of ₹400 crore in size p.a. should not have been impacted so badly by such macro events." It is also worth noting that the growth in salt revenue was robust in Q4FY21, boosting the firm’s India foods segment.
Second, the international beverages business was especially weak. “Whilst there is some high-base effect here due to pantry-loading in March quarter last year, the imputed ‘normalized’ growth rate seems to remind us that these are businesses that would continue to exhibit low-growth characteristics over the medium-term, once low-hanging fruits therein are plucked," said JM Financial.
Going ahead, the pandemic brings some uncertainty in the foreseeable future. Inflation in tea is expected to moderate with new crop and that would be a key monitorable for investors. The firm has said it will continue to drive competitive volume growth. For now though, valuations are pricey and that could limit upsides.
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