Highlights:
- Consolidation of consumer facing businesses from Tata Chemicals to Tata Global Beverages
- Opens the possibility for moving beyond beverages, food ingredients to other FMCG products
- At present margin accretive for TGB, though salt business constitutes bulk of new business
- Food and nutritional solutions businesses holds promise; substantial scope for supply-chain synergy
- Long-term scope and strategy holds key for a re-rating
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As anticipated, the business rejig in the consumer facing businesses of the Tata group is moving towards a logical end after about two years of restructuring of Tata Global Beverages (TGB). Consolidation of consumer facing businesses from Tata Chemicals to TGB creates a platform with a wider scope for businesses. While it sounds similar to the trend witnessed in other business houses – Britannia Industries (from cookies to a total food company) and Bajaj Consumer Care (from hair oil to an FMCG company) – the scale of possibilities could be much wider. Read: Why this Indian MNC beverage company is looking attractive at current levels?
Demerger details As per the scheme, the consumer products business (CPB) of Tata Chemicals will be first demerged and then merged with Tata Global Beverages (TGB). The CPB (FY19 revenue- Rs 1,847 crore) constitutes 16 percent of Tata Chemicals' total revenue and comprises of businesses like edible salt, spices, protein foods and certain other food products. The key brand addition is that of Tata Salt and Tata Sampann for TGB. Nutritional solutions such as artificial sweeteners and prebiotic products are also part of the products been transferred.
Under this transaction, shareholder of Tata Chemicals would receive 114 share of the resulting company for every 100 share held. This brings the valuation of CPB to about Rs 5,779 crore, or three times sales. This is ahead of the beverage sub-segment multiple, but below that for the FMCG sector.
Short/medium-term implications Few immediate implications for the TGB’s business are as follows.
First, as TGB’s portfolio extends from beverages (coffee, tea and water) to food ingredients, it helps in de-risking its portfolio from vagaries of the individual beverage business cycle.
Numbers at a glance
Second, going by pro-forma calculations, new business for TGB is not margin dilute as was earlier feared. However, one should note that in FY19, sales from salt constituted 88 percent of incremental sales, which is now getting added to TGB. Therefore, in the near term, one should not expect a major improvement in both sales and operating margin as bulk of the additional business is commoditised in nature.
During FY17-19, Tata Salt posted sales CAGR of 7.6 percent only. This is unlike existing tea and coffee businesses which generally commands better topline growth and wherein value-added beverages can command better operating margins, given the market conditions.
Salt manufacturing stays with Tata Chemicals as salt is a byproduct of the chemical production process. So margin share between manufacturing (Tata Chemicals) and marketing (TGB) business in the salt business would be an element to watch out for.
Having said that, the rest of the businesses such as protein foods and spices appear more promising. In recent years, there has been a sharp increase in Tata Chemicals’ share in besan and pulses trade volumes in modern trade to nine percent in FY18 from 2.6 percent in FY17.
Its nutritional solutions products are also a part of the portfolio. This is an interesting space as here the company is targeting the niche food ingredient space (fructooligosaccharide and galactooligosaccharide), which can fetch higher margin. Here Tata Chemicals has been majorly expanding by building a 5,000 tonne capacity plant in Nellore, which would be nearly three times its FY18 production.
Also, current consolidation of the consumer facing businesses should also bring in various synergistic benefits in terms of distribution reach (20-30 percent more reach), logistics alignment and optimisation of over-lapping infrastructure such as R&D. TGB expects 18-24 months for this synergy to play out, which could be in the two-to-three percent range of the India branded business at the profit before tax level.
Longer term focus It opens up a larger canvas for TGB in terms of positioning in the FMCG universe. The renaming of Tata Global to Tata Consumer Products clearly points to the group's ambition. Addition of newer categories, which are more complimentary such as macro snacks (Britannia), other beverages such as juices (Dabur) or other staples products (ITC’s portfolio) cannot be ruled out in future.
In the existing business, the company is focusing on few areas: 1) In spices, pulses and its derivatives, it plans to enhance portfolio and distribution expansion; 2) In liquid beverages, it continues to grow Tata Gluco Plus and scale-up the Fruski platform; and 3) Expand its healthy snacks portfolio and aggressively grow the category.
Going forward, following areas are under the radar -- dairy business, entry into high growth/high margin home and personal care categories. It plans to pursue a mix of organic and inorganic strategies.
To fulfil these ambitions, the balance sheet restructuring is almost done with. Over the last two years, various business restructuring initiatives have helped TGB mend its balance sheet (debt-to-equity at 0.15 times in FY19 versus 0.22 times in FY16).
A repositioning of TGB in the FMCG universe can help it bridge the valuation gap to some extent. At present, TGB trades at 20 times FY20 estimated earnings, which is about 50 percent discount to the trading multiples of frontline FMCG stocks.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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