How does it feel that now that Tata Consumer is part of Nifty 50?
Before I answer that question, I would like to give the reasons why Tata Consumer is now part of Nifty 50. It is probably the results that we have delivered so far in the nine months as Tata Consumer Products. Last quarter we delivered 23% top line, 29% net profit, and even for the nine months, it is a perfect flow through — 18% top line, 26% EBITDA and 47% net profit.
The value of the share price of Tata Consumer is a recognition of both the investment thesis of the Tata Group when they formed Tata Consumer as well as the execution that the team has put behind it to deliver that investment thesis. I am humbled as well as proud to be part of the 50 most traded listed stocks and probably part of what is the world’s largest traded contract per se — the Nifty 50. But the flip side is it puts a greater spotlight on performance and builds greater expectations. Also, we are subject to the India view. A lot of people buy the Nifty 50 instead of individual stocks and so we are part of a larger basket and therefore we will be more susceptible to the ups and downs there. All in all, I feel humbled and proud to have reached this milestone.
What is next? Also, let us understand the new businesses which have become part of Tata Consumer and the new businesses which you have incubated to take advantage of your reach and distribution. What is the growth there?
We see growth both in the existing or the core portfolio — which is tea and salt — and the nascent categories of coffee, Sampann that we have launched as well as the new inorganic opportunities that we are looking at. Some of these have already fructified. Let me go step by step and start with Sampann. Sampann has delivered significant double digit growth over the course of the year and we are right now fuelling the pipeline and expect acceleration from here on all pulses, spices and mixes.
We started focusing on coffee from Q1, Q2, more sequentially plus 2, plus 26, plus 31 and that trend continues to accelerate. It is primarily the reach and distribution that we are driving. Apart from that, we have done two acquisitions already. We have acquired Pepsico stake in the JV which we had — NourishCo — and we have just finished the acquisition and closed the Soulfull deal in record time. NourishCo was completely down in the dumps when the full lockdown happened and has now gone from strength to strength. Last quarter we delivered a top line of 9%. Now we continue a run rate 30-40% growth and we have not even started. We were playing in 25% of the country. Geographic expansion is just about beginning but just the sheer focus and the distribution behind Tata Gluco Plus, Water plus and Himalayan is delivering great results. We have just started on Soulfull and we see a huge opportunity for it going forward. It gets us into new consumption occasions of breakfast snacking which we did not have in our portfolio.
Apart from that, it also gets us into new categories of snacking, mini meals, breakfast, cereals etc. There is a Rs 20,000-crore market growing at about 15%. It is margin accretive, great team, great new product and there are 15,000 outlets. My total reach is about 2.4 million and I can really explode the whole portfolio as we expand distribution. But more than that, there are also synergies to be had at the backend in procurement, manufacturing and logistics. All the pieces are falling into place, in line with the six strategic pillars of growth and core, digital and innovation, building future ready organisation, organic, inorganic opportunities, synergies and growing sustainably.
A mainstay for Tata Consumer has been the tea business. Everything from tea prices to coffee prices to sugar prices to other basic ingredients’ prices have gone up. While you are on the cusp of growth and innovation and reinvention, you have to deal with commodity inflation.
You are absolutely right. If I segregate my business, there are three big parts — India beverages, India foods and the international business. The India foods segment is chugging along. There is a huge growth opportunity in salt and the Sampann portfolio is doing very well — both top line and bottom line.
In international business, we are seeing good expansion of portfolios and Kenya has had record crops. There, commodities are going soft and profitability is very healthy.
Now I come to the India beverages business. That is primarily tea; coffee is a very nascent category and does not have much impact on our P&L. Tea has been through an once in a lifetime sort of yo-yo on pricing with the lockdown, shortages with about 15% gap between demand and supply and therefore tea prices went up 70-80% in September. Right now, they are 25-30% up. So, there is a bit of squeeze on the margin but we are not in this game only for today or a quarter or two. We are here in for the long haul and we believe that as the next round of crops come in, tea prices will come back to normal.
In the tea business, we are focussing on doing a fine balance between margin, market share, volume growth and profitability, on things we can control. My numeric reach from April to now is up by 20%. We reach about 2.4 million outlets. On a three monthly basis, 80% of them are buying on a monthly basis. We are the volume share leader now in January. Our value share is at a 24-month high. Our share in the same outlet vis-à-vis the largest competitor is just 1% short. So, we are closing in and we feel good about the building blocks that we are putting in place. The prices do create a pressure on the margin for sometime but it is a fine balance to walk.
“Growth is the single biggest driver for us and we want optimisation of working capital to make sure all the return ratios move in the right direction.”
How much of your portfolio you would say is enjoying benefits of pricing power?
If I take a very broad guess, about two-thirds or 60- 65% of my portfolio is more of a branded play and 30-40% is commoditised. We are trying to do two things: one, in our core category, we are trying to create power brands for tea and coffee. Innovation and A&P are being ramped up to make sure that we build stronger products and brands with pricing power in that portfolio. Apart from both the organic and inorganic growth drivers, the things we are looking at is to get us to a more margin accretive, more non-commoditised, more branded, more distribution led portfolio if we may.
Your PE multiples right now are getting compared with that of Nestle, Britannia and HUL. But your return ratios are nowhere close to what those companies have generated both in terms of ROCE and return on equity. Do you have ambition to reach the top quartile in terms of return ratios? How soon will we be able to compare return ratios with other FMCG majors?
When you look at Tata Consumer, the legacy is a lot of goodwill on our balance sheets. We are lagging the rest of the industry vis-a-vis ROE or ROCE metrics, but it is what it is. I would say when shareholders are investing in a company, they are investing for the future and not for the past. The critical piece is to move those ROE, ROCE matrices northwards. Growth is the single biggest driver for us and we want optimisation of working capital to make sure all the return ratios move in the right direction. The team is extremely focussed on doing this and you would see us focussed on moving all the return ratios north.
In terms of progress, how gradual, how smooth, how quickly could it happen?
I will tell you what has actually happened. Without goodwill, if you look at just year to date, we have moved up our ROCE by about 6 percentage points. So, we are already on the move. You will see an acceleration on both as we trim down our costs and infrastructure and make sure we are a lean, mean machine. That is number one.
Number two, as we build the funnel for S&D and manufacturing logistics, we throughput more and more products both organically and inorganically through that 23% top line growth. We aim to continue at significantly good double digit growth levels as we go forward that should have a significant impact on the return metric.
It is just a coincidence that Tata Sons has acquired BigBasket which is your online grocery portal. How do these things complement each other and fit in your strategy?
I would talk about Tata Consumer and not comment on things which Tata Sons is doing. There is a very specific space for e-commerce. There is a specific space for modern trade, institutional business and a general trade business. We are focussed on building all the four verticals. We have created very clear demarcations. And we have gone and made sure not only the organisation structure, even the talent is fully tuned. We have actually gone out and recruited people to run modern trade, e-commerce, etc, because those are specialised functions.
Now on e-commerce per se, we have moved our needle from about 2.5% of sales to about 5.5-6% right now and I think double digit is within arm’s reach. As and when the group plays across and builds more heft and muscle in those spaces, we will definitely be playing in that space and taking full advantage of the group play.
Which are the categories where you are looking at scaling up dramatically and which are the categories you would say it does not make sense for me and it is better to exit?
So I would answer that in two or three different pieces. Number one is we are market leaders… we are among the top two in tea. We are market leaders by far in salt. In tea, I see growth in both market share and absolute industry growth. Therefore, it is a good business to be in. In salt, we have got a 30% plus share. We see opportunities both on the premium end as well as the mass end and you will see actions in both these places. In salt, we have seen double digit growth. Value added salt last quarter grew about 170%.
Apart from that, we are probably one of the prominent national brands in pulses and that is a huge market. You will see us ramping up our space there. In mixes, we have just about stepped in. We have the Tata Sampann brand name. The product quality and the brands that we can create and we also have the ability to ramp up there significantly.
The growth rate of the NourishCo business is very significant. We aim to be among the top two, three players in the categories in which we play. Tata Gluco Plus for example does not have competition. It is an affordable refreshing drink and it is fantastic to have when you have just got Rs 10 in your pocket. We have got a huge innovation pipeline out there. In Soulfull, with ancient grains tailored to Indian consumers, we see us being being able to create magic. I would not look at a product per se. I would look at a portfolio piece.
So whether it is Soulfull, NourishCo or the Sampann range, we are playing there to win. We will take a close look at what we need to do going forward. But as of now, I think everything is on the right footing.
Have you internally debated if you want to exit your US operations because the growth, the market dynamics, the power of Tata brand, your distribution, everything is far better in India?
We look at our portfolio both from a product as well as geography angle on a constant basis. In the past, we have exited Russia, China, Czech Republic. Last quarter, we exited the out-of-form coffee business in Australia. So if we do not see space for our business, we would not be gun shy and we would exit and we have demonstrated that.
In international business, right now we are doubling down on three core geographies – the UK, the US and Canada and we feel good about it. In fact, last quarter the international business, despite being a slower growth business, was profitable and it is hugely cash positive with 4% top line growth and 48% bottom line. That would bring cheer to anyone when they look at the bottom lines. But that said, it is a constant cycle that we do. If we find something that does not fit in our portfolio or is a drag on our entire algorithm, we would not be scared to cut it. But we are not there as of now.
In fact, in the UK for example, we are strong in black tea but growth is happening in fruit and herbal speciality and in the premium end. We have just formed a three-brand strategy. We have launched Good Earth from the US into an exclusive arrangement in Sainsbury’s and got out to a great start. We will now be expanding it. We are now integrating Teapigs, a standalone business, to drive distribution as a whole. We see us starting to make tangible difference in the tea category. Similarly, we look at different markets and make sure that we have the right strategy. It is delivering what it is supposed to deliver within our portfolio play. If it does not, we will not be shy to take tough decisions.
In you tenure as the new CEO & MD of Tata Consumer, on one hand, you have exited and on the other hand, you have also made acquisitions. Which are the gaps you would like to fill?
India is a significant growth story; international business is a growth but more of a profit story right now. Larger action is seen in the India business. We are supposed to become a total FMCG company but I would say one step at a time. We have got enough space in the F&B space and right now we are looking at adjacencies. F&B in India is a $400-billion business. There are at least 30 categories which are Rs 5,000 crore plus. We have done this segmentation, we have looked at the entire play in terms of segment, size, growth rates, margins, competitive intensity, what does the Tata name bring to bear, what are the capabilities that we can play out there and we have formed a very specific set of platforms which we will build out in India.
And to build out those platforms we will use both organic as well as inorganic spaces. For example, the reason why we went and bought Soulfull was because we saw this as a whole space of breakfast snacking, mini meals as a wide space for us as a company. It is extremely profitable, margin accretive. We have the ability to leverage our distribution, innovation capabilities and drive value there. Organically, it would have taken time and so Soulfull was a great brand to plug on. We will quickly integrate it and scale it up. We will probably see this playbook being repeated again and again to make sure we are covering the wide spaces that we can. But again, adjacencies first and then a larger FMCG play.
One area which Tata Consumer or rather Tata Tea has exited a couple of years ago was the plantation business. Would you be looking at doing such exits in even now?
Tata Coffee is a subsidiary for us. It is a profitable business. Tata Coffee has two pieces; plantations and extractions. Extractions is the big driver right now. As of now, we feel good about where Tata Coffee is headed, especially in the extraction space. We will constantly evaluate all options, make sure that we have got the right portfolio in terms of businesses to make sure we are delivering value to shareholders in terms of investments.
When Chandra took over as chairman of Tata Sons he came with a clear defined policy of simplifying the structure and getting rid of non-core businesses. It is evident in the way Tata Consumer has redefined itself in terms of ownership and product profiling. Are more changes coming or is it almost done now?
Let me break it into two parts — the single biggest thing was integrating the good and beverage business. There, the heavy lifting is almost done. Some small pieces of expanding rural distribution are out there. Now it is focussing on innovation, driving distribution, powering up the brands with A&P etc.
The second piece is to simplify, synergise and scale. We are on a journey. We have not reached the end by a long stretch of imagination. You will see all the pieces playing out in the mid to longer term.
If we repeat this interview a year from now, what kind of headlines do you think we should be staring at from Tata Consumer — high growth, high return? What will be the narrative?
The narrative of the conversation is that Tata Consumer Products is focussed very clearly on six pillars; growing the core, becoming a digital first and innovative company, growing both organically and inorganically, a very strong focus on costs, working capital, inventories, cash, making sure we have got the right talent for the future and of course being a good corporate citizen as a part of the Tata Group, doing good to societies that we operate in.
Tata Consumer Products is very clearly focussed on market share in categories that they operate in, being among the top two, top three players in every category, driving share, driving top line, good flow through and bottom line creating shareholder value.
One concern which a lot of shareholders have is price war. In a price war, the consumers make money but the market share blindness becomes so high that companies do not make money. Do you fear that happening?
I could not discount that happening but I cannot spend sleepless nights on what could happen. The critical piece for us at Tata Consumer is focussing on what we control and what we can do today to build a really strong competitive moat, strong distribution, strong innovation pipelines, strong brands, ability to price, connect with the consumer and making sure we are building strong businesses. Competition is a reality, it dials up and down. I could forecast it but I need to make sure that my business is on a strong footing so as and when we are faced with competition we are able to tackle it and move on with business.
