TATACONSUM — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. MANOJ MENON, ICICI SECURITIES LIMITED.

Tata Consumer Product Limited November 06, 2020

Ladies and gentlemen, good day and welcome to Tata Consumer Product Limited Q2 FY21

Thank you very much.

We will now begin the question and answer session.

First question is from the line of Arnab Mitra from Credit Suisse.

Please go ahead.

Arnab Mitra

Just on the first point on the tea price inflation and your comment on managing volume and margin both.

Given that tea prices are now coming off, would you look to focus on market share volumes in this phase even if it means that margins go down further in the short term because we do have visibility of the prices coming off or would you continue to try to dynamically manage it quarter-to-quarter even if it means a bit of impact on market share, just wanted to know your clarities on that especially given the commodity have started correcting all the way?

Sunil D’Souza: So let me take that question.

So #A our focus on market share will continue to be laser focused.

That’s number one, number two while you did mention that the prices are coming down, I would just like to highlight that while they were roughly 80% above last year, when we exited the quarter, they are now coming down but they are still significantly higher than where they were last year.

We are seeing a trend which is downwards and probably settling down.

But we’re still not very sure because we’ve seen that movement up and down.

So the critical point exactly like you mentioned is staying close to the ground, making sure that we are in sync with the cost going up and down.

And we make sure that we manage pricing and margins dynamically, I wouldn’t hazard a guess as to where the prices are going.

Because overall, we’re still seeing a projection of a shortfall in tea production for the full year given that even if I take a marginal decrease in Tata Consumer Product Limited November 06, 2020 consumption, there is still going to be a pressure on inventory.

So therefore, given all these factors, I would say playing it by ear while remaining laser focus on market share will be critical.

The one thing I would want to highlight is that we have made a statement last quarter saying that we are aiming to double our direct reach over the next 12 months and we remain committed to it.

Given the fact that our share of handlers is almost equal to and in some places better than competition, we do believe that as we expand our reach that will be critical in driving volumes as well as market share.

Thanks Sunil and my other question.

The second and the last question was on the launch of Poha and the Nutri mixes, which I assume you’re talking about the dosa mix, idli mix, and those kind of mixes which you have launched.

So any sense of what is the current market size of these three mixes and would it be a slow initial phase where your dosa market will be more e-commerce and modern trade or do we see that this category is ready for pretty fast expansion for player like Tata tries to expand the category?

Sunil D’Souza: Okay, so let me answer it in two ways.

Number one, I would split this into two different pieces.

One is the Poha and one is the Nutri mixes.

Poha is a mainstream category and I don’t think it will be restricted to e-commerce alone, it is going to be a mass category and it’s a category of today.

It’s not a category of tomorrow, Nutri mixes, we are trying to be early on the bandwagon and as consumer trends move more towards convenience, and the COVID situation is only accelerating trends out there, we are making sure we are front and center with the consumer.

Now given where we were in our distribution systems in the past, we were largely focused on e- commerce, but as we put our integrated distributors together with our ability to expand direct reach and execute better in every single outlet with significant increase in feet on street, we do believe that we can carry Nutri mixers into mainstream and make a traction out there.

That said Nutri mixes will be a relatively smaller category today.

But we are playing this for the future.

Thanks.

And just any quantification of the market size that’s the last question from my side.

Sunil D’Souza: I would have to get back to you.

Rakesh can get back to specifically on that.

Rakesh Sony

So, Arnab if you see Nutri mixes as a category, as we are saying that there is a huge disruption we’re seeing.

So, if I have to quantify it the branded side of the Nutri mixes will be a couple of thousand crores today, but growing at almost 25% to 30%.

Year-on-year.

So that’s the market that we see currently.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Percy Panthaki from IIFL Securities.

Please go ahead.

Percy Panthaki

So my first question is, on the international tea business as we did, by deducting the consol minus standalone and stuff like that.

And I’m sure it must be matching with your numbers as well.

So the EBITDA margins there are quite robust and on the higher side.

So any idea of what is driving that?

Tata Consumer Product Limited November 06, 2020 Sunil D’Souza: So, I’ll ask LK to jump in here.

There are two, three critical pieces which are contributing to the EBITDA margins.

Number one is an increase in gross margin with both slightly lower commodity costs, I did allude to the fact that Kenya had a record crop and you’re seeing prices, which are almost flat versus last year, so that is flowing in.

Second thing is a better mix as we push towards premiumization of our portfolio, including cold infusions, et cetera, et cetera.

And the third piece is tight control on discretionary and other costs in the middle of the P&L, which has dropped into the bottom line.

So most of these are sustainable, assuming that the tea cost remains where it is, right?

Sunil D’Souza: We do believe that it is sustainable but that said, firstly I think the critical piece for us is, we have growth ambitions so we will continue to make sure that we put in the right investments to balance profitability and growth in India, definitely but also in our key international markets of UK, Canada and the US.

LK if you want to add anything more?

L. Krishnakumar

The only other comment I’d make is, we had strong performance in some markets like Canada on our specialty range, which are also higher gross margin.

So we are focusing, as we said always to more of non-Black from black.

So that is also helping in certain markets.

We’re not there yet, but it is the contributor in some of the key markets.

Percy Panthaki

Understood.

Secondly, I just wanted to ask you, regarding your margins, the synergy benefit.

You had mentioned earlier that you’re targeting about, 200 to 300 basis points of margins to synergies.

So just wanted to know where we are on the journey, how much of that 250 basis points are sort of implicit in the Q2 results and therefore, how much more we can expect going by?

Sunil D’Souza: So, Percy you are absolutely right, we have put out a guidance of about 2% to 3% of total synergies, but that was total including revenue as well as cost synergies.

Roughly half of it coming from cost, half of it coming from revenue.

The thing is, right now we’re focused on the cost synergies and making sure that our systems are structured properly, and we make sure that we leverage both the systems to pull out as much of cost as possible.

So, like I &Ajit alluded, we have taken out layers in our system, both in terms of our own internal organization as well as in the distribution structure, second piece is we have created consolidated distributors.

We are in the middle of our journey on a consolidated warehousing / logistics roadmap.

And next stage, we are moving to a consolidated rural distribution system.

So on the cost aspects, we are more or less in-line with what we slated to deliver - there is a small inflow which has happened during the last quarter, but as now we move on, you will see acceleration on those synergies flowing in.

We said 18 to 24 months timeline for the delivery of synergies, we remain confident of two aspects one is, we will be ahead of the estimates and second is we will probably deliver them ahead of time also.

So, sir if I understand correctly, what you’re saying is that, the cost synergies whatever was possible to achieve your already achieved that and going ahead, it will be mainly focused on top line synergies, is that understanding correct?

Tata Consumer Product Limited November 06, 2020 Sunil D’Souza: No, Percy what I said is, we will put the structure in place to derive the cost synergies, I don’t think the cost synergies have flowed in yet to the bottom line, because remember this quarter has been a whole bunch of juggling on putting the structures there.

Now, the structure that has been put in place will start delivering the cost synergies as we move forward.

Whether it is distribution, whether it is network, whether it is logistics, whether it is as simple as leveraging common cost for packaging, as simple as that.

Things have been put in place, and therefore we remain pretty confident that they will start to flow through on the P&L, as they started to flow through yes a small piece.

But that is because of timing because a lot of the stuff was completed towards the end of the quarter.

Now, it should start flowing in full blast at the P&L.

L. Krishnakumar

Percy the initiatives are being completed or contracted, so we assure that that they will happen.

The run rate will improve progressively.

Percy Panthaki

Right sir.

And last question if I may be permitted, basically if I look at your gross margins it’s a inter play between the price increases and the cost increases.

And the cost increase is we see on spot are not integrated because your consumption cost may be different.

So as we go into Q3, how do these play out and at the gross margin level for the India tea business Q3 should be worse than Q2 because there would be a delayed cost inflation for you.

Is that the right way to look at it?

L. Krishnakumar

Yes, we’ll have to manage Q3 I’m not going to comment on the specific numbers.

Like we said, Sunil made the statement we managed Q2 well, Q3 is a challenge.

And we are focused, like Sunil said on shares.

But having said that, we are employing all levers to see how we can manage the cost inflation.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Manoj Menon.

Please go ahead.

Manoj Menon

I have one question on salt business and the other one on Sampann, on salt first, If I heard correctly, the commentary the growth was 7%, just one comment which I heard Sunil addressing Percy’s question earlier was, you’re talking about the structures in place, et cetera.

So is there a one off in the salt performance, specifically as we speak currently?

Sunil D’Souza: I didn’t we didn’t fully understand your question.

L. Krishnakumar

The 7% is a volume growth, value growth is 10%.

So, just to correct the number right, what was the next question Manoj.

There is no one off.

Manoj Menon

Okay.

Understood secondly, we observed in the market that there is a 5% price increase which we have taken in salt from first of October, just trying to understand if it is feasible to comment on that, the underlying thought behind this price increase?

Sunil D’Souza: So, we would take increases in salt depending on our input cost increases given the factors that we’ve seen in Gujarat especially with the monsoon, COVID lockdowns, labor issues, Tata Consumer Product Limited November 06, 2020 transportation issues, we’ve seen cost increases, and we’ve taken price increases in-line with the cost.

Okay, go it.

Second question on salt was when I think about the salt business over the next maybe 5, 10 years from a 30 odd percent market share, is it correct to think that this, Tata Salt can be a 60% 70% market share, because one template I have in mind is let say Parachute, you are the category creator, is it realistic to think if yes, just want your comments on this?

Sunil D’Souza: So, let me leave you with this thought - we’ve got strong ambitions, and it is not only like I said, just a simple share and a volume driven increase.

We are also looking at how do we premiumize, how do we expand the portfolio in salt and how do we give a greater variety to consumers, which is a win-win game both from a consumer perspective as well as from a margin perspective for us.

Understood.

Second question on the Sampann part of the business, while I completely understand that these are time which Nielsen and lot of those scientific methods are not necessarily available, but still any qualitative color on the household penetration increase?

Sunil D’Souza: We have actually not gone into the detail because Sampann is right now, still I would say at a nascent stage, though it is growing very fast, I would say we’ve still not gone deep detail into the household penetration, the objective being to continue to increase penetration.

At some point of time, we will get onto the details and start working on household consumption data.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Sumant Kumar from Motilal Oswal.

Please go ahead.

Sumant Kumar

So, my question is related to market share again.

So, this market share, market share in volume term or value terms and is it, we have gained market from the unorganized players?

Sunil D’Souza: So, I presume the question is on tea market share, so if that is the case we have gained both volume and value market share.

And we have gained share both from organized as well as unorganized.

Talking about in the previous call you have discussed, you’re going to launch new products in November.

So, can you discuss more about the new product launches and you’re exploring the new opportunities.

So, can you discuss in detail?

Sunil D’Souza: Yes, so we have product launches lined up across tea, we are doing multiple launches as we speak, we have launches in coffee, which includes the reformulation and a relaunch of our entire Tata coffee range in the South, we have an entire range of new Nutri mixes, which we are just launching as we speak and as we go into December and January, you will see the tempo of innovation and new launches going up.

Like I said, the reason why we had delayed our launches was to make sure that our sales and distribution execution is up to par, to make sure that we get the full benefit of new innovation launches.

Now that we are confident that we have it in place, Tata Consumer Product Limited November 06, 2020 we have started to launch but that time we are facing it to make sure that there is enough focus on each and every launch as we go forward.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Tejas Shah from Spark Capital.

Please go ahead.

Tejas Shah

Sunil, you spoke about direct reach and as you mentioned that we are on track to achieve our number of doubling the count there.

So, two questions on that, as an outsider how should we track the benefits of direct reach and in the initial stage of that expansion, let’s say and let say one year or two years down the line.

And second question is 10 lakh number an interim target and you may up the target after a power simulator or you would like to consolidate at this number for a while?

Sunil D’Souza: So let me answer it in two different ways.

Number one, first of all, I said our share of handlers is equal to and in some geographies higher than our nearest competitor.

So as we expand our numeric reach and therefore rated reach, if you multiply that by share of handlers automatically, the total market share should go up.

So through the expansion of direct reach, you should see an impact straight on the market share.

That’s number one, number two are we expanding direct reach or not, that is crystal clear in Nielsen when they start looking at numeric reach, like I mentioned, as of September end we’ve already seen an increase of 12% in our total reach per se, I would attribute a small portion of that to direct reach.

Now, why do we think we can get to the direct reach number is because we have mapped out city-by-city state-by-state, the total number of outlets and the number of salesmen required and therefore worked backward in the number of distributors required and profitable distributors.

And that is the structure that we put in place and therefore, we remain confident that they are on track to double the direct reach over the next 12 months.

Again, like I said the number of a million outlets we put out for the next 12 months, as and when they research this thing, obviously there are much more outlets beyond that, once we get to the 1 million number that is when we will re-index our ambition and start looking at profitable expansion of direct reach beyond the 1 million.

And just one follow up on distribution integration.

So if we see both the businesses tea and salt they had different line of distributors, and they both have handled different volume to value ratio in past.

So now when we are integrating, how are they going about it because a salt distributor might find it easier to integrate into a tea business but a tea guy might find it not that lucrative to handle salt.

So any insight on that?

Sunil D’Souza: So, let me throw some light on the way we have gone about it.

Number one is we’ve gone about it in a very analytical manner in every city and every place where we have integrated distributors.

We’ve looked at the Beverage distributor, we looked at the food distributor, we looked at ability to invest, ability to bring in infrastructure, commercial acumen and ambition for the future.

There are places where we’ve gone with the beverage distributor, there are places where we’ve gone with a salt distributor, there are places where we’ve gone with neither, we’ve looked at a completely new distributor, because the critical pieces, we are looking at feet on street, we’re looking at logistics ability, and we’re looking at the ability to invest for the future.

So once that Tata Consumer Product Limited November 06, 2020 is in place, then we have looked at ability to execute and then selected the best in class distributor.

So, it has not gone to a beverage distributor or a food distributor we’ve gone in for the best distributor that we think we could have.

Thank you very much.

Rakesh Sony

Can we take a couple of questions from the webcast please.

So there is a question from Tanmay.

And the question is, with the new lockdowns in Europe, do you think that in-house consumption may revive growth back in the tea business in Q3 due to fresh pantry loading that is one question.

Sunil D’Souza: We hope that it will give us a fresh bump.

But, consumers are broadly sort of getting used to this on, off lockdown principles.

So while there are geographical lock downs, especially in Western Europe, in specific places, we are seeing an uptick, but I would not say a bump in pantry stocking.

Rakesh Sony There was one question Himanshu from Yes Securities and his question is, could you give us an idea of the extent of price hike in salt and tea during the H1 and the pricing also going forward.

Sunil D’Souza So, as I mentioned we have taken our prices in-line with input costs.

So as the prices have gone up, we’ve taken up pricing going forward.

Similar thing with salt, as we’ve seen cost escalation, we’ve taken pricing up, we will continue to walk the fine tightrope between price and volume traction to make sure that we are balancing volume and margin on a constant basis.

Rakesh Sony So we’ll go back to the call and we will basically take last two questions.

For all the questions that has been asked on webcast.

We have more or less answered all the questions because a lot of repetition was there.

However, any more questions you can reach out to us and we will reply that.

Moderator · Conference Operator

Thank you.

Next question is from the line of Devika Jain from Ratnabali Investments.

Please go ahead.

Devika Jain

So, I basically wanted to know how the shift from loose to packet is happening across all the segments in your Indian business, both in modern as well as in traditional retail?

Sunil D’Souza: So, I don’t think the short term I can make a comment, but in the longer term you will see a trend of people moving from loose to package.

Roughly half the industry in India tea is still in the loose format.

Right now, as prices are going up, we do see some players coming under pressure and therefore probably a slightly accelerated shift happening.

But your guess is as good as mine as to how long the shift continues to be in the accelerated format, that it, as I mentioned, we remain focused on market share, and market share both from loose and unorganized as well as organized players.

And similar traction for salt and pulses?

Tata Consumer Product Limited November 06, 2020 Sunil D’Souza: It’s the same thing, pulses it’s largely unorganized.

We are the only organized player in the country, you’ve seen growth of 33% happening in Sampann, I’m sure the pulses category is not growing 33%.

So we are gaining share right now, I don’t think we have got Nielsen data to give you that share number.

Salt we are seeing a share gain, we’re seeing a significant uptick.

And we hope to continue that.

Okay, and one last question, how do you see the change in your SKU mix because of premiumization that is happening in salt, like I have seen that the prices are ranging from 17 to approximately 35 per kg.

So, what is the mix like now, because there is a huge increase in value added salt, the volume so, what would be the mix now, if you could throw some numbers on that?

Sunil D’Souza: Correct, so I give you this thing while salt grew in high single digits for us, last quarter, value added salt has grown almost at 100% rate.

Obviously value added salt means there is a benefit for the consumer, whether it is lower sodium or it is fortified, or it has got some herbal ingredients, et cetera.

So we are focused on driving that because both from a value perspective as well as from a margin perspective, as well as from the consumer perspective, it is much more beneficial.

But obviously from a company profit and bottom line perspective also it is a win-win proposition.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Viraj from Securities Investment Management.

Please go ahead.

Viraj

I just have one question on the international business, in the past we kind of talked about restructuring some of the smaller markets, if at all we were also open to looking at exiting some of those markets.

So are we through with that transition or portfolio rationalization.

Or do you think we still have some more room for that?

Sunil D’Souza: So, we maintain the stand that the portfolio in international is something we will keep looking at from time-to-time and make proper decisions.

We have exited China, Russia, and January of this year, we have exited Czech and we continue to look at whether the business is performing as per plan as per expectation or not.

That said, we also look at opportunities for example, in Poland we have just moved from a company direct operation into a distributor operation, which in our mind will be a much more financially beneficial performance.

It has at least in the short term, we’ve seen good results, and we continue to, we hope that we will continue this momentum going forward.

So each and every business we will evaluate for it’s merits, keep looking at it, if we find that something is not delivering as per expectation or does not fit into the portfolio for some reason, I maintain that we will take some decisions and continue to clean it up.

Okay, just one last question.

The cash position keeps on building up, we have seen a strong healthy generation and overall the cash position every quarter, every half year it keeps on moving up.

You also talk about us starting a very strong organic product pipeline and our focus on launching new product.

So in a very near to medium term, say next two, three years at least focus Tata Consumer Product Limited November 06, 2020 would be largely be on the pipeline of innovation which we have or would you be open to looking at other inorganic opportunities?

Sunil D’Souza: So we’ve always maintained that when we say explore new growth opportunities, they are looking at both organic as well as inorganic.

We do believe that we’ve got quite a lot of opportunities in the portfolio that we are playing in, whether it is in tea, salt, coffee, or most importantly in Sampann where it’s in the kitchen brand, and therefore there is significant room for us to expand the portfolio.

So you will see organic growth coming through and investments happening, I did mention that we were investing in brand, we were investing on innovation and we were investing on distribution.

But apart from that, as and when we find the right opportunities for inorganic, we will make investments.

Again, I will repeat what I’ve said in the past, when we make inorganic investments very clearly, the investments have to pass through two very clear lenses.

It has to be a strategic fit in our whole portfolio and for the future.

But most importantly, it has to pass the financial metrics and make sure that it is incremental value to stakeholders.

And it would largely be in the domestic market right?

Sunil D’Souza: I would not rule out or I would not restrict myself to saying domestic or international, if we see opportunities we will expand wherever we see opportunities again, like I said it has to be a strategic as well as financial fit, you’ll probably find more opportunities in the domestic versus international, but I wouldn’t rule out one or the other.

Moderator · Conference Operator

Thank you very much.

Next question is from the line of Arun from Chasegamma.

Please go ahead.

Arun

I have one question which is, I feel that the competition in salt segment for you is increasing even ITC with their Aashirvaad brand has entered into salt business and whereas the food segment ready to eat business, already had established brands like MTR.

So do you feel the heat with the competition or any loss of market share that you expect in the coming future for salt business?

Sunil D’Souza: So, I cannot forecast about the future in as much detail as I can tell you about the past.

Like, I said in the salt segment we have had competitors for a long time.

Competitors that you mentioned, there are other competitors which have been playing large multinationals have tried to play.

But despite that last quarter, I specifically said that we have gained share in salt.

And we will continue to focus on growing distribution and value addition and make sure that we are continuing to gain momentum.

On the ready to eat segment, Rakesh did allude to it.

The ready to each segment is relatively small in India today, but poised for healthy growth.

It would be wrong for us to calculate shares today and project far into the future because the category is going to evolve in many ways.

At the poised we have positioned very rightly and poised in a category which is slated for growth.

With the focus that we have put behind the brand, we remain confident that we will emerge as one of the strong if not leading players in that category.

Tata Consumer Product Limited November 06, 2020

Moderator · Conference Operator

Thank you very much.

Ladies and gentlemen, that will be the last question for today.

I will now hand the conference over to the management for closing remarks.

Sunil D’Souza: Thanks everybody.

Thanks, I-Sec for hosting us for this quarter results and everybody who logged into the call, and we look forward to interacting with you again with our Q3 results.

Thank you very much, have a great weekend.

See you soon, bye.

Thank you very much.

On behalf of ICICI Securities Limited that conclude this conference.

Thank you for joining us, you may now disconnect.