Tata Consumer Products: Tea, salt and now coffee

Tata Consumer Products Limited (TCPL) will merge its subsidiary Tata Coffee Limited (TCL) with itself via share issuance by January 15^th—the record date. With this, TCPL moves one step closer to realising its aim of being a large integrated FMCG company.

Prior to the current move to consolidate operations, TCPL had been consolidating Tata Coffee’s financials. This will remove redundancy in management structure, benefit both entities from market reach of each other and eliminate minority interest in TCL. The process also involves creating different verticals for extraction and plantation business of TCL, resulting in improved returns from dedicated management for both the arms.

Deal structure

TCPL holds 57.48 per cent stake in TCL which implies that the current merger involves paying off remaining TCL shareholders (42.52 per cent) with TCPL shares. The shareholders as on the record date will get 15 TCPL shares for every 55 shares of TCL they are holding. The shares will be transferred in two simultaneous tranches of 1:14 for demerging the plantation arm of TCL and 14:55 for amalgamation of rest of TCL into TCPL. Effectively, for every 10 shares of TCL one will get 3 shares of TCPL.

As on close prices of January 02, 2024, this implies an eight per cent discount to shareholders of TCL against ₹17,938 investment in 55 TCL shares and one will receive ₹16,462 in the form of 15 TCPL shares. But the final discount/premium should be calculated as on the record date only.

TCPL Beverages and Foods Limited (TBFL), a newly created entity, will be fully held by TCPL. TCPL will hold the plantation side of TCLs business. Coffee prices have been declining and this will impact the integrated business of TCL. While the extraction business (branded and unbranded coffee sales) will benefit, the plantation arm suffers. This will change when coffee prices reverse. When the Tata Tea business faced similar challenge in 2005, the company then hived off the plantation business to Kannan Devan Plantations, a worker-owned company, retaining 18 per cent of the stake. By demerging the plantation business, TCL (now TCPL) can focus on branding and marketing.

TCPL holds a wide food and beverages FMCG portfolio and TCL’s integration can further widen the basket. Under TCPL, beverages (Tata Tea and Himalayan water) accounted for 37 per cent of ₹7,500 consolidated revenues in H1 FY24. Foods led by salt and upcoming division Tata Sampann accounted for 28 per cent.

US Coffee business under Eight O’clock brand and international tea under Tetley brand accounted for 10 and 15 per cent of revenues. By eliminating a separate sales and distribution vertical for TCL, the combined entity can leverage the wider portfolio efficiently.

TCPL is focussing on improving its distribution reach within the country and has a touchpoint in every town with more than 50,000 in population in India. This kind of rural/urban reach for salt, tea, coffee (now), oils and other foods and beverages will add significant heft to TCPLs FMCG status.

Valuations

TCPL is trading at 84 times trailing earnings compared to TCL trading at 23 times. By issuing fewer shares—owing to premium at which TCPL is trading—the merger can be earnings accretive in the short term for the combined entity. But assuming the lower valuation of TCL is on account of lower growth forecast, the combined entity may imply a lower growth trajectory.

If the synergies of the deal results in reducing cost duplications, inter-leveraging the export markets of Vietnam of TCL with US/UK markets of TCPL and improved domestic reach of TCL, the merger may favour the combined entity shareholder in the long run.

But with TCPL trading at 84 times trailing earnings, the upside can be limited to earnings growth with valuation contraction as the downside.

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