Tata Consumer Products Ltd’s likely acquisition of packaged water brand Bisleri is the topic that is all the rage in Indian market circles now.
Ramesh Chauhan is trying to sell the brand he acquired half a century ago for Rs 4 lakh to Tata Consumer for Rs 7,000 crore. For the Tata group, it will mean venturing into a whole new growth market.
But is it really a great deal for the Tata group company?
At Rs 7,000 crore, the figure being speculated on as the sale price of Bisleri, it is seemingly a steal at 2.5X FY23 sales. Yet, analysts are concerned about how it can weigh on Tata Consumer’s profitability.
The acquisition can saddle Tata Consumer Products with sizeable debt and place the company in a market segment marked by thin margins, intense competition and minimal pricing power.
How do Bisleri’s projections look?
Before we look at Tata Consumer’s bottomline, let’s take a quick look at Bisleri’s topline. The water-bottler’s revenue estimate seems ambitious.
According to media reports, Bisleri expects to earn Rs 2,500 crore in revenue in FY23. Data from startup data platform Tracxn suggests the company had revenue of Rs 1,472 crore in FY20.
So, while it took the company more than 50 years to expand revenue to Rs 1,472 crore, it is expecting to increase the topline by 70 percent in just three years.
Even a back-of-the-envelope calculation will show that this is an unrealistic target. An industry expert says that the bottled-water market is worth about Rs 15,000 crore and that 65 percent of that is unorganised.
This means that organised players have to fight for a Rs 5,250-crore market.
Bisleri has a 32 percent market share in the organised segment, which means it could be clocking sales of around Rs 1,680 crore as of now.
Then, to achieve a Rs 2,500 crore topline target, it will have to expand its revenue by nearly 50 percent by the end of this fiscal year.
What could be the growth trigger? There is little clarity on that.
The emerging segment is fizzy drinks. In 2016, Bisleri entered this market with new launches such as Spicy, Limonata and Fonzo.
“If Tata Consumer can successfully scale these, then volumes for its beverage business can shoot up and bottomline can grow,” said Manish Khanna, co-founder of Unlisted Assets, a platform to buy and sell unlisted securities.
But can this business be scaled up to drive revenue to meet the Rs 2,500 crore target by the end of this fiscal year?
Look, for instance, at Varun Beverages’ energy drink Sting, which has been a big success. Analysts have said that it has been a major driver for the Pepsi bottler’s revenue in the second quarter of financial year 2023. Yet, Varun Beverages’ topline grew only by 32 percent in the quarter ended September.
How do the numbers stack up for Tata Consumer?
Firstly, to complete the deal at Rs 7,000 crore, Tata Consumer may have to take on sizeable debt. The consumer business has net cash of about Rs 2,000 crore while the valuation of the entire stake is Rs 5,000 crore higher.
“If Tata Consumer acquires Bisleri only via debt, interest cost may significantly dent profits from Bisleri,” said a report by Nuvama Wealth Management.
Secondly, the bottled water business is low on profitability. Bisleri reported a net profit of Rs 102 crore on revenue of Rs 1,472 crore in FY20, which was the pre-COVID year. That indicates a net profit margin of 7 percent.
In FY22, Tata Consumer’s consolidated net profit margin was about 9 percent.
“While the long-term story may still pan out, it looks like there could be some margin contraction for Tata Consumer Products (from the Bisleri buy),” said Sonam Srivastava, co-founder of Wright Research, a Mumbai-based investment advisory firm.
Moreover, bottled water is a price-sensitive product. “The moment you raise the price from Rs 18 to Rs 21, people will look for another alternative. So, Tata Consumer cannot play on pricing power here, despite Bisleri commanding 32 percent market share in the (organised) segment,” Unlisted Assets’ Khanna explained.
While the beverage business forms a large portion of the Tata company’s revenue pie, it is actually the Tata Sampann segment (pulses, poha and spices) that boosts margins.
Before merging with Tata Chemicals’ consumer business, Tata Global Beverages had a net profit margin of around 5-6 percent, analysts said. Margins expanded only after Tata Sampann came into the picture. So beverages had always been a low-margin segment for the company, they added.
What’s in a name?
Bisleri does have a brand name. Like Xerox is synonymous with photocopies, Bisleri is with packaged water. Even so, competition and counterfeiting is rampant in the industry. You may ask a shopkeeper for a Bisleri bottle, but are you really getting one?
“Every 100 kilometres you travel in India, you will find a new bottled water brand. It is a highly competitive market. Unscrupulous entities can easily copy your label colour and misspell the name slightly to give a false impression,” said Shirish Pardeshi of Centrum Broking. He was a FMCG marketer, now turned into financial services professional.
When counterfeits started affecting Bisleri’s sales, the company began modifying the bottle’s look.
"They pivoted from the earlier conical shape, they integrated stripes on the body and also introduced lock caps. But there’s only so much that a company can do,” Pardeshi explained.
So Bilseri, Belsri, Brislei will continue to exist and the buyer of Bisleri will have to deal with it.
“Water is an impulsive category. When people are on the move, they won’t care if it’s the original brand or counterfeit,” said Pardeshi.
Analysts see growth potential in the 20-litre water jars of Bisleri that one can find in offices, malls and so on. This B2B segment can generate greater profits, they believe.
Also with the acquisition, TCPL will tap into Bisleri's strong network of 4,500 distributors and 5,000 distribution trucks across India and neighbouring countries.
If Tata Consumer can leverage this network for its products, it could be another growth driver, analysts added.
In sum total, Tata may seem to be getting a bargain in acquiring a market leader. It will have to contend with intense local competition, low margins and low pricing power point in the immediate aftermath.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.