Over the last five quarters, as tea prices moderated, the company’s standalone gross margin improved. Nevertheless, tea prices have spiked since July of this year due to unfavourable weather conditions. “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,” the brokerage said.
In July, all India tea production fell 15 per cent 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. We expect tea prices to stabilize or moderate on the back of an increase in production in coming months. The 16 per cent YoY decline in production in Jun-Jul ’22 created a supply crunch and lifted average tea prices. Prices have risen by 3.8%/11.7% YoY in July ’22/Aug ’22,” the report said.
According to the report, as tea prices have been moderate or lower now, the company’s gross margin shall see an expansion.
“Standalone gross margin expanded by 320 bp YoY to 37.9 per cent in 1QFY23 due to a moderation in tea prices, which led to an 80bp expansion in EBITDA margin to 14.8 per cent. However, gross margin is 290 bp lower than 1QFY21 levels due to a surge in tea prices, led by lower production during that period,” the report added.
On the prospects of going ahead, the brokerage mentioned that given the unlocking of sales and distribution synergies from the merger of group companies, the company has started to draw benefits. Also, it has been strengthening its S&D channel, which shall act as a key growth trigger.
Tata Consumer has also been expanding its F&B product portfolio with new launches. The food business of the company is iterated to be the key driver, with Tata Sampann leading from the front.
“We expect a sales/EBITDA/PAT CAGR of 11%/19%/31% for FY22-24. Factoring in an in-line performance in 1QFY23, we maintain our FY23 and FY24 earnings estimate,” the brokerage said.