Tata Consumer: Good acquisitions, but already priced in

18 Jan 2024 , 11:40 AM

Recommendation: Add; Target price: Rs 1150

Tata Consumer has announced two acquisitions – Capital Foods (CF) and Organic India (OI). The funding for these acquisitions is likely to be a mix of debt + equity; transactions are expected to be completed in Q4FY24. These acquisitions would help expand TCPL’s portfolio in the pantry platforms and also help gain entry into the Health and Wellness segment. There is significant scope for TCPL to scale up both sales and margins in these products, by leveraging its extensive distribution, rationalising trade spends and extracting operational efficiencies. Transactions are expected to be EPS neutral in FY26. Analysts of IIFL Capital Services forecast the overall EPS Cagr of 18% over FY23-26 and maintain ADD rating with a TP of Rs1,150. 

Transactions: 

Tata Consumer has announced two acquisitions – 75% stake in Capital Foods for an EV of Rs51bn (implies a 7x EV/sales and ~50x EV/Ebitda on FY24) and 100% stake in Organic Foods (implies 5x EV/Sales and 50x EV/Ebitda). Funding for the acquisition is likely to be a mix of debt + equity. Transactions are expected to be closed in Q4FY24; management expects three to four months post that for operational integration. 

Potential to scale up both sales and margins: 

The acquired portfolio doesn’t have any overlap with TCPL’s existing portfolio and helps extend offerings within the pantry platform and mini meals / snacking categories, while aiding entry into the Health and Wellness platform. Gross margin in CF and OI is healthy at 55%/50%. Further, there is significant scope to expand distribution for both CF and OI, where the reach is limited to 300,000 and 24,000 outlets respectively (vs 1.5mn direct reach for TCPL). While Ebitda margin profile is reasonable for CF and OI at ~20% and ~10% (analysts of IIFL Capital Services estimate), there is scope to improve further via rationalising trade spends (~200-400bps) and operational efficiencies. 

EPS upgrade for FY24/25/26 by 3%/2%/6%: 

Analysts of IIFL Capital Services estimate the transaction to be EPS-neutral in FY26 (3% dilution in FY25), taking reasonable assumptions on growth as well as margin scale-up. Overall, analysts of IIFL Capital Services EPS estimates are upgraded by 3%/2%/6%, factoring in the Tata Coffee merger (effective 1st Jan, 2024). TCPL has performed reasonably well in scaling up Sampann, NourishCo and Soulfull portfolios in recent years. While valuation is rich at 68x FY25 EPS, TCPL is one of the few FMCG companies that is well poised to deliver a high teens EPS growth over FY23- 26. Maintain ADD rating with a TP of Rs1,150.