Analysts Haven’t Kept Pace With The Surge In This Tata Group Stock
The price to earnings of this company has doubled in the last one year
Shares of Tata Consumer Products Ltd. have surged the most among peers since March lows as it saw demand for its tea to staples jump during the Covid-19 lockdown.
The consumer goods maker’s stock has jumped 140.9% since its low in March when equities saw their worst selloff in more than a decade. That compares with a 36.1% rise in the FMCG index and has beaten Britannia Industries Ltd.’s 81.5% rise.
Aided by the merger of Tata Chemicals Ltd.’s food portfolio, Tata Consumer has seen double-digit growth in the category in the last two quarters. As India imposed the world’s strictest lockdown in March, in-home consumption of beverages and packaged food spiked. In the April-June quarter that saw near-complete shutdown for two months, Tata Consumer’s revenue jumped 13% year-on-year.
That’s just one reason why Tata Consumer’s shares rose.
Increase In FII Holding
Tata Consumer’s stock has been rising as foreign institutions investors increased stake in the company since the merger of Tata Chemicals consumer business with it. Foreign ownership of the stock rose from 17.08% in March to 19.4% as of June end.
New Food Portfolio
The merger of salt, pulses, spices and packaged foods of Tata Chemicals with the erstwhile Tata Global Beverages Ltd.’s portfolio came into effect from Feb. 1. Food now contributes 21% of Tata Consumer’s revenue.
The merger of the food business which includes its salt, pulses and spices packaged foods from Tata Chemicals Ltd. to the erstwhile Tata Global Beverages Ltd.’s portfolio now contributes to 21% of the new entity’s revenue. The merger came into effect from Feb. 1.
In the April-June quarter, the pulses and spices segment grew more than 50%, while its salt grew 11%. That aided the growth of entire food segment. Tata Consumer saw online demand spike even as it pulled back trade promotions, saving on costs.
Tata Consumer benefits from the merger of the food business as the portfolio has high presence in growing categories like pulses and spices, ICICI Direct said in a report, adding that the company’s growth is dependent on consumers moving from unbranded to branded products in these categories. “We also see margin expansion possibility in the long run with low raw material price volatility.” Prices of tea, which are usually volatile, are trending higher at present.
Tea & Coffee Surprise
Demand for Tata Consumer’s teas and coffees rose in India and outside during the Covid-19 lockdown. In the quarter ended June, the India beverage business grew 11%, while its branded tea business grew 8%, with volumes rising 4%.
That came when India’s branded team market contracted 5.4% in April-June, according to Nielsen India. But there was a rebound in June.
It’s international beverage business, excluding food service, grew 23%. Coffee volumes rose 27% while tea volumes grew 4% as consumers stocked and consumed more during the pandemic.
Valuations Double But Analysts Bullish
Shares of Tata Consumer, however, have run ahead of analyst expectations. The average of 12-month price targets compiled by Bloomberg stands at Rs 504.44—implying a 7.2% downside from the current price.
The stock trades at 55 times its earnings, according to Bloomberg data. It has turned twice as expensive in the last one year.
Analysts, however, are bullish. Of the 13 brokerages tracking Tata Consumer, 12 have a ‘Buy’ rating and one recommend ‘Hold’. No one suggests ‘Sell’.