Tata Consumer Products results update

 The moderation in CTC Tea prices led to an expansion in the standalone gross

margin for TATACONS in the last five quarters. The average price from Jan’22

to Jun’22 declined by 11% YoY to INR147.6/kg. However, floods and extreme

weather events impacted production in Jun-Jul’22 (17%/15% decline YoY to

141.3/152.6m kg in Jun/Jul’22) and led to a surge in prices since Jul’22 (up

3.8%/11.7% YoY in Jul’22/Aug’22).

 Going forward, with an expected normalization in production, we expect Tea

prices to remain stable or moderate from current levels, thereby improving its

gross margin in FY23.

 We expect a sales/EBITDA/PAT CAGR of 11%/19%/31% over FY22-24.

Factoring in an in line performance in 1QFY23, we maintain our FY23 and FY24

earnings estimate. We arrive at our SoTP-based TP of INR890 per share and

maintain our Buy rating.

The moderation in Tea prices led to an expansion in the standalone gross margin for

TATACONS in the last five quarters. The average price of Jan’22 to Jun’22 declined by 11% YoY

to INR147.6/kg. However, floods and extreme weather events impacted production in JunJul’22 and led to a surge in prices since Jul’22. Going forward, with an expected normalization

in production, we expect Tea prices to remain stable or moderate from current levels, thereby

improving its gross margin in FY23. In this note, we have analyzed Tea prices and production

trends and its impact on TATACONS.

In the CY21 Tea season, production in India rose 7% YoY to 1,343m kg. This

eased the supply crunch that occurred in CY20 (a 10% YoY decline in volume to

1,255m kg), resulting in a moderation in prices till Jun’22.

 Tea production for the current season YTD (Feb-Jul’22) is flat YoY at 613.94m kg

with better production in South India (7% YoY growth), offset by a 2% decline in

North India (which contributes 82% of total Tea production in India). Production in

North India declined due to a 4% lower/flattish production in West Bengal/Assam

(which contributes 30%/50% of India’s total Tea production). As Assam and West

Bengal constitute ~80% (CY21 season) of total Tea production in India, a loss of

production in these regions led to an increase in Tea prices across India.

 All India Tea production during the first flush (Feb-Jun’22, contributes 32% of

the whole Tea cycle volume in CY21 and is the best quality) rose marginally (3%

YoY), led by a strong 23%/24% growth in production in Apr’22/May’22 but was

impacted by a 17% decline in Jun’22 due to floods and pest attacks in the main

producing regions.

 Heavy rainfall in Jun’22 flooded Tea gardens in Assam, making plucking of Tea

leaves difficult for workers. This resulted in lower production in Assam, down

19% YoY to 74.35m kg in Jun’22. Heavy rains in West Bengal’s Terai and Dooars

regions too impacted Tea production (down 21% YoY) in Jun’22.

 In Jul’22, several Tea gardens were impacted either by land erosion, rivers

changing course, and excess rainfall in the region. July is the start of the second

flush (i.e. July to September, and is of the second best quality) and contributes

38% to total volumes in CY21. In Jul’22, all India production fell by 15% YoY to

152.57m kg, with a major decline in Assam (down 20% YoY).

 All India Tea production in CY22 is expected to be higher YoY, with the impact

of the floods wearing off and no other extreme event expected. 

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