New entity to push Tata's FMCG ambitions forward

Chennai: Tata Consumer Products will become a platform for the salt-to-software conglomerate’s aggressive aspirations in the FMCG business. Once the new entity consolidates its brands and integrates distribution, it will be seen entering high-growth, high-margin categories in the consumer business.

The combined entity has a total revenue of Rs 9,099 crore as of FY19, Ebitda of Rs 1,154 crore, Ebitda margin of 12.7 per cent and net profit of Rs 612 crore. “Without assuming any revenue or cost synergies, the transaction would be earnings per share-neutral for Tata Global Beverages in the first year and accretive to the extent of 6 per cent by FY2023,” finds Kotak Institutional Equities.

Motilal Oswal Securities believes that the consumer business is a re-rating candidate because of multiple expected synergies, including higher outlet coverage, focused new product development, stronger cash flow generation and scale efficiencies.

The deal itself has increased the distribution footprint of the new entity by 30 per cent compared to that of Tata Global Beverages. The products will be present in 2.5 million retail outlets and 5,000 stockists and distributors. It will have a rural presence in 80,000 villages with two lakh outlets and will be able to reach out to 200 million households.

Tata Global Beverages currently reaches out to 110 million households. Integration of distribution channels would be one of the initial tasks for the new entity. Combined distribution will deepen the reach of each product and add to their sales.

Consolidation of brands will be another major task. Salt, Tea and Coffee are currently the three major categories of Tata Consumer Products. Tea accounts for 57 per cent of the sales, salt 18 per cent and coffee 13 per cent. Emerging segments like pulses, spices, ready-to-eat mixed and other nutrition products account for the remaining 12 per cent sales and these were promoted aggressively in the past few years through modern trade and e-commerce channels.

Kotak Securities expects that Tata will retain leadership in tea and innovate in salt, continue to ramp up Tata Starbucks and improve distribution of Himalayan brand of packaged drinking water.

Post-consolidation of the existing brands, it will look into newer categories like dairy, personal care and home care. The group has been in talks with Prabhat Dairy earlier and reports suggest that it is still pursuing the Rs 1 lakh crore organised dairy market.

It had recently made a pilot launch of Tata DX detergent in West Bengal, re-entering into the homecare segment. Brands like Hamam, Moti, 501 and OK were once owned by erstwhile Tata Oil Mills. Analysts feel Tata will follow both organic and inorganic routes to expand its product portfolio with new categories.