Tata Consumer Products Limited (TATACONSUM) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Tata Consumer Products Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Nidhi Verma, Head of Investor Relations and Corporate Communications. Thank you, and over to you.

Thank you so much, everyone, for joining us today. We announced our Q2 FY '27 results earlier in the evening. I hope you've had a chance to go through the materials -- as usual, I am joined by Mr. Sunil D' Souza, Managing Director and CEO; Mr. Ashish Goenka, Group CFO; and Mr. Ajit Krishnakumar, Executive Director and COO. In terms of the format, we'll walk you through key business updates for the first 20 minutes or so, and then we will open the floor for Q&A. So with that, I just want to quickly draw your attention to the disclaimer statement, which is on your screen. With that, I'll hand it over to Sunil.

Thanks, Nidhi. So in summary, we grew top line 14% with UVG of 11 in the India business. Salt was another strong quarter of 9% volume and 15% revenue. India tea volumes were flat. Revenue was marginally lower year-on-year. Growth businesses had another strong quarter. Sampann was up 57% ready-to-drink is now strongly back on the growth trajectory with 47. Capital Foods and organic India were up 15% but the domestic business was very strong because international was impacted by shipping disruptions as well as the Mundra port issue in early September. International business grew 7% in constant currency was negative 2%, but I had a very, very strong margin delivery. Non-branded grew 12%, 9% in constant currency. Consolidated EBITDA was up 18%, with margins expanding 40 bps to bring EBITDA margin to Starbucks had probably one of their strongest quarters ever, revenue growing 15% and with strong same-store sales growth. I think now they have 5 or 6 successive quarters of positive same-store sales growth and very strong results. So India sold was close to INR 1,100 crores. It's coming to touching distance of India tea and coffee now, up 15%. India tea and coffee, largely impacted by weather, a little bit of price increases in and a little bit of a hangover of the disruptions in Q1 of the LPG issues was down 1%. Growth businesses up 40% to close to 1,400 continue to be now powering ahead of our salt and tea coffee businesses. International close to INR 1,300 crores, up 7%, non-branded up 12%, and consolidated up 14% constant currency was 11%. In terms of first half, India salt, up 11%. India tea and coffee. If you remember, the first quarter was minus 4% on revenue. This quarter was minus 1%. Overall, minus 3% as you've taken up prices. growth businesses of 43%, international, up 11%; non-branded up 3% and consolidated at close to INR 11,000 crores. The beauty of the portfolio to look at it, salt, tea coffee growth international. Now we've got 4 strong legs on the TCPL tool. In terms of financial performance, revenue of 14%. EBITDA, up in Profit before taxes of 21% and net profit at INR 470 crores, growing 16%. EPS of 4.5%. And as we said, if we amortize -- because we amortize certain brands, if I take that off, our adjusted EPS is 5.18% for the first half, revenue up 13%; EBITDA, 18% profit before tax 24%, net profit of 22%, adjusted EPS of 9.8%. In terms of the businesses, overall, our A&P to sales for the quarter was 5.5%. And for the first half was 5.8%. Just a perspective here is we've reclassified visibility separately and A&P separately. That's why this number you will see separately. Visibility is knocked off from revenue up top. In the ballpark, we are in the same number of about 6.3% to 6.5% in total A&P to sales. Growth businesses up 40%, now contribute to 38% of India business. We've started our significant transformational journey with AI, with about 1,600, 1,700 salesmen, which you on date as of now with an objective by December to reach 100% of our salespeople operating. There is a personalized AI sales companion, guiding the salesman outside by outlet, SKU-by-SKU and what exactly to do. And where the salesman misses the outlet, there is a voice agent, which does call up the retailer and does the ordering process. The sales executive gets a concise summary of what exactly the DSR did at every single outlet with a follow-up on what coaching is needed out there. That's on the sales front. On the operations front, we have started deploying -- we have deployed AI to recognize close to 120 different types of leads that come into the factory so that we qualify quality and pricing of the lease per se of stuff entering into the factory. In the [Amalan ] factory, we've got AI starting to do online bottle inspections. Around the corner, we've got a history of tea in terms of temperature rainfall, crop price, et cetera. We are going to use that to start guiding our procurement team on when to buy at what price to buy. We've already started automation with invoice validation and payment. We've got an engine running at the back end on online, on consumer insights be feeding both to our R&D team as well as our marketing innovation. We've started trade spend optimizer as a pilot, which we rolled out for tea, the entire country starting this month, and we have started to see substantial savings. And apart from that, we are looking at experimenting with AI calling for retailers where we can drop frequency to visit to outlets which order less than 2 times a month. So we move from a weekly to a fortnightly frequency with the alternate week AI agent calling in to make sure no order is missed. So these are a few examples of what is already in play. We will be continuing to make sure that we have robust business cases as we expand AI across the enterprise. We had 22 new product launches in Q2 totaled 36% for the first half. As I said, focused on differentiated propositions in health and wellness, convenience and premiumization. In terms of businesses, as I mentioned, volume overall was flat for tea and coffee. Revenue was minus 1%. But just as a perspective, Q1 was volume plus 2% value minus 4% as we took graduated calibrated price increases in tea, we have come to a flat volume and revenue minus 1%. So from a minus -- from a 6 percentage difference volume value where 1 here. And as we've continued taking graduated price increases, we expect the equation to start turning value greater than volume starting this quarter. Next, Salt, we took a price increase of about 6%. We moved from 30 to 32 for the earnings back in May. October 1 week, we moved another 2, so the 32 has become 34 but this is reported before that happens. So volume was up 9%. Revenue was plus 15%. Value-added and premium sorts continue to deliver the growth of the base salt business continued to expand their contribution to the portfolio. Some strong quarter, revenue up 57%, driven by strong volume growth as well. Dry fruits and cold pressed oils now combined ARR of INR 1,000 crore plus and we will continue to expand the portfolio with margin expansion as we go forward. RTD, having reset the entire business has now started delivering strong results, volume up 34%, revenue up 47%. Growth remained broad-based across the portfolio, both with the base business as well as innovation driving top line. Capital Foods and organic India, overall, 18% in capital for 9% in organic India. Domestic business was strong. If I put both together 24% top line growth. As I said, this quarter, the disruption in shipping and I think about 10 to 12 days of disruption at the Mundra port was the prime reason for international not coming to the party completely. But we firmly believe that having reset the go-to-market in India, Capital Foods and organic India are on a strong growth reactor. International overall, negative 2% in constant currency lapping a high base, but overall revenue of 7%. The U.K. was impacted by the continued heat wave for the quarter. The good news is the weather has turned. And I do think U.K. is going to come back strongly because share continued to hold out. Revenue declined 8% in the U.K., but U.S. business grew 4%, expanded margins with 6% constant currency growth in coffee. Canada continued their strong growth with 8% constant currency and South Africa also had a very strong quarter. Non-branded business grew 9% on an elevated base of last year. Robusta and Arabica prices continue to soften, impacting realizations. But margins continue to be healthy for the plantations business as well. The soluble volume grew 21% as we executed strongly, both operationally and made sure that deliveries kept pace. Starbucks, as I mentioned, had a very strong quarter. It's a fifth successive quarter of same-store sales growth, 15% top line. We had calibrated store openings to get our new business model in place. More or less, I think we've got it, and we've seen strong growth in traffic as well, roughly close to a 10% growth in traffic to the stores. Revenue was up 15%, opened 7 stores, and we've now at 505. You can expect acceleration of stores going forward. Over to Ashish for the financials.

Thanks, Sunil. So as Sunil mentioned, our top line grew 14% this quarter. We added INR 700 crores to that turnover. Our EBITDA growth was ahead of top line at 18%, and that led to a 40 basis point margin expansion and adjusted EPS grew at 17%. In terms of first half, the growth has been at 13%. Again, I think overall EBITDA growth was ahead of top line at 18%, and then that led to a 60 basis point margin expansion for the first half. Our adjusted EPS, again, grew ahead of EBITDA growth at 21% coming at 9.85%. Looking at segments. India for the quarter, there was a bit of a contraction on the margin largely on account of the inflationary pressure that we are seeing on steel salt. Having said that, of course, we have taken calibrated pricing, which should start going in Q3, both international and non-branded at a very substantial improvement in profitability and leading to an overall improvement in the segment margins by 50 basis points. The same is reflected at a first half level where all 3 segments have actually improved on profitability across India, international and non-branded, leading to an overall 100 basis points in segment margins overall. That's pretty much the summary of our financials. I think I'll hand back to Nidhi for anchoring the Q&A.

Moderator, maybe we can go through the Q&A queue to take the questions.

[Operator Instructions] Our first question comes from the line of Mihir Shah with Nomura.

Congrats on a great set of numbers. My first question is actually on tea. So if you can just talk about is the procurement for the year largely done in tea? What is the level of inflation that you are seeing on a Y-o-Y basis? And can you share the quantum of price increase that you're putting through we are seeing some kind of price increases in the market? So that's question number one.

So overall, see, broadly, while tea volumes have been flattish volumes, value has been flattish. Market share is stable. So there's -- it's not that things are more it's overall industry has been stopped. I think if I look at overall third-party numbers, it's about negative 6% is what the number shows. So in that perspective, I think we are in a not too bad space. We have taken pricing roughly, I would say, between Q1 to now, you would have seen roughly around 8% to 10% pricing, which is in line with the inflation that we've seen in tea. While the initial bump in the Q1, Q2 was about that 7% to 8%. Right now, if you look on a week-to-week basis, it's broadly in the 2% to 3%. So we have covered more or less for the inflation in tea that we had seen, but it has not yet translated completely into the numbers, which you should see going forward. In terms of buying, the peak buying is going on right now as we speak because after Puja is a big swing, which happens in the north, and that is what is in progress.

Understood. Could you just reiterate your margin guidance for the full year? And what is the level that we will be exiting at on an overall company basis, just a question to this.

See, we had guided for 50 to 70 bps expansion when we started off the year. We've seen margin pressure coming through the year, but you've also taken price increases, right? On salt 30 to 32, 32 to 34. So as we've seen any bit of pressure on costs, we've translated into price to make sure we maintain volume. We remain aggressively focused on expanding margins for the year.

Understood. Secondly, on Sampann, another very strong quarter, can you share with the quick commerce expanding its dock stores reach in Tier 2, are the products getting well accepted there? Are you seeing repeat purchases? Or is it too soon there? And what subcategories we saw that oil and dry foods have already crossed INR 1,000 crores. So what subcategories are doing well and have reached a sizable contribution. And on the flip side, which are the ones that are not doing as per your expectations?

So the good news is I don't think there are any of the new launches, which are not doing the expectations. Like I've said earlier, in our innovation funnel, if the product doesn't deliver in the first 6 months, then we take a call on it, maximum like support for 3 more months, or else out, right? That's the only way you can sustain growth on the innovation platform. That's number one. Number two, in terms of quick commerce, I think one leading player declared their results last quarter. And our growth in quick commerce is almost in the same ballpark. So we are growing with the quick commerce players as they're expanding dark stores, number two. Number 3 is which categories are doing well with quick commerce. Actually speaking, if you look at it, Sampann on across the portfolio, all our categories are either mostly #1, or a few of them are to positions across platforms. So from that perspective, I think the team has done a good job in playing with them as we expand. While dry fruits and cold pressed oils ARR is now north of 1,000, the base categories of pulses, Poha, Matan, all these things are also in the 30-plus range as we go forward. So Sampann, I think, is on a very strong footing. The other good part is that, as I said, when we started off 5 years back, we were negative 5% margin. We are seeing margin expansion on a continuous basis, both as we build scale as well as layer on variants to make sure we drive margins along with top line. So this quarter also compared to the same quarter last year, I think we had a 270, 280 bps of expansion on margin on Campana as well.

Understood. Very clear. So I'm just asking on margins again, just to be very clear, because last year, in the second half, we had seen across businesses, margins seeing an improvement. And versus now it is on a higher base. So wanted to get your clear understanding on how should one think about margins on the overall consolidated basis for the second half?

See, overall, whether it is for tea, where we now start hitting peak season in India or international, which was impacted by the heat wave, and now winter has already started to set in strongly in the north. So we see no reasons why tea should not increase, number one. Number two, salt, we've already taken the price increases to put margins back in strong footing. For capital Foods, Q4 are peak festival and offtake season. So from every angle, we remain quite confident of continuing to deliver margin expansion quarter-on-quarter versus, when I say quarter-on-quarter, it is -- it would have take seasonality into account, so it is versus the same quarter last year. So despite the fact that we delivered higher margins in H2 versus H1 last year, we remain confident of continuing to deliver that this year as well.

Our next question comes from the line of Abneesh Roy with Nuvama.

Congrats on a good set of numbers. My first question is on your...

Sorry to interrupt Abneesh, your line is not very clear. Request you to please check.

Yes, sorry for that. So my first question is on the AI side and the advertising details which you gave out in the initial remarks. So first is based on the AI, I think most companies currently are doing. Are you seeing a cost advantage also? Or is it just a companion to the sales team? I understand the language rate. I understand that 1 week the sales team need not go -- is there any real cost advantage till now or just more of a companion to the salesperson. That is first part to that slide. Second bit is more on the advertising and the visibility bit which you put for the India business. If I see salt is a smaller part of the business. Tea and coffee is around 10% bigger than salt business. And the growth business is again 10% broadly bigger than tea and coffee business. My question is, from an overall publicity budget in terms of, say, visibility plus March media advertising, what will be the broad split between these 3 businesses, so we can understand that it is a bit related to the sales rate also, sales percentage also.

So Abneesh, #1 is visibility is not included in this A&P. And as quick commerce has continued to power ahead, we have continued to invest more behind visibility to make sure we drive penetration and market share in those channels, right? That's number one. Number two, to your question on AI, we firmly believe, yes, there will be a cost take out using AI, but that will be par for the course for everyone. The real differentiator comes in, how do you bump up your revenue lines with -- so the AI pilots, which we run give us a distinct lines for call improvement in the DSR calls, and that is when we decided to scale it. So there is a top line improvement outlet by outlet. Because it is very, very targeted. There is a memory function, and we're building our sales brain behind it. So that's number two. Number three, in terms of overall visibility, spend, et cetera, they are more on Sampann than for tea and salt, that is because Sampann as a category is also skewed towards more online modern trade businesses. And therefore, it is more of visibility shopper marketing spend that happens out there.

My second question is on the salt business. Last 7, 8 quarters, sold business in India has seen very good volume growth. The 9% volume growth, is it because there was some upfront buying because price hikes are now happening or the local players because they don't have the same capability to arrange the energy sources in the current turmoil and energy usage is very high in salt evaporation. Did that led to some market share gain? Because this business versus steel is doing much better now in almost every quarter, but is there something predictability in the coming quarters on the volume growth in solid business?

So Abneesh, I don't think it is volume upload because it's not that we have seen any slowdown even after we've taken the second out of price increase, but that is a point in time for now I can't -- there might be an impact going forward, but I don't see that realistically happening. I think the entire work that the team has done on building equity, diversifying portfolio, getting in the value-added salt like I said in one of the earlier calls, it's almost like a menu right in terms of the types of salt we can get. This quarter, also we launched Tata Salt Plus, which is double purified solar salt variant in the market. So from that perspective, nothing changes. We have consistently maintained our market share is now close to 40, 8.-- sorry, 39.8, 39%. So we are growing market share as well. I don't think it is because there is a short supply in the market or there is an energy issue -- it's just that the entire work the team has done on building the brand equity, distribution, portfolio expansion. I think all that is coming into play. We continue to guide salt for mid-single-digit volume, a couple of basis points of price, and that is what we remain committed to delivering.

Last question. So capital Foods plus organic India, 24% domestic growth. if you can give a split between the 2? And could you elaborate on the Mundra tonics impact? Do you expect that in Q3, there could be some bump-up pent-up demand benefit because of this impact?

So Abneesh, I think Mundra, there was a port strike for roughly around 10 days. So shipping was disrupted a bit apart from the fact that now a lot of shipping is getting diverted instead of going through the Middle East, it's going all the way around. So that is what has impacted our international business overall. Now I don't -- there might be a minor shift that will happen. There will be some uplift because as we catch up that gap there will be some uplift coming into this quarter. But overall, I would continue to expect 25% to 30% growth that we had guided for capital foods and organic India going forward. domestic, I think, like I said, having relaid the entire go-to-market by February this year. having proved that system works where we have salt, non-salt, we have core, noncore and then we have regular distributors. I think that has brought back immense amount of focus. And by the way, that has also, I would say, one of the factors in salt growth because many of the distributors who have solved focus who didn't want to do the other businesses now have got free to focus their energies capital execution completely on to salt as well.

And what is the split?

It's broadly the same for both the businesses.

Our next question comes from the line of Vivek M with Jefferies.

A few questions. First, on the international business, you mentioned about the high base -- as we head into the second half, whether I look at Y-o-Y or, let's say, a 2 year or 3 year, the base is still going to be very high. So how should we think about the growth in the third and the fourth quarter?

So Vivek, the good part is, I mean, we're heading into season, right? And especially U.K., Canada, you have -- we have seasonality. So from that perspective, we remain confident. Canada we've gained share, U.S. coffee, I think 8 successive quarters of share gains commodities are starting to ease off, especially U.S. coffee, where now coffee is trending at what, versus the 330, 350 of last year. So around that piece, we remain confident of growing, a, the distribution expansion, we've gotten into significant accounts now in the U.S. as well. U.K. primarily impacted by weather. Now that seems to be behind us. So -- and like I said, share hasn't got impacted. So as the category comes back, we remain confident of delivering expansion. And the best part is it is top line growth with margin expansion that we will deliver internationally.

Got it. Perfect. Second, on non-branded, first quarter to second quarter, there has been a fair amount of shift in margins from 10% to just about 15%. Again, how to think about the second half, Sunil?

So broadly, I would say, in the ballpark, margin should remain the same because remember, solubles, which is the larger part of the business is largely a pass-through. So margins don't change substantially albeit there are times when there is substantial movement in coffee prices, then it could swing, but we don't see that happening right now. Ashish, do you want to chip in?

I think you look at the nonbranded margins from the context of solubles and plantations. So if you see our solubles margin have remained steady between quarter 2 and quarter. The swing is largely on account of plantations because -- and that is seasonal, and you will see that happen every year pretty much because the accounting the way it kicks in, is that the biological crop starts getting accounted for from quarter 2 onwards. And therefore, there's always a seasonality impact between quarter 2 and quarter 1. So if you normalize for that, the margin is pretty steady.

So basically, Asish, you are saying first half is what should sustain in the second half. Is that what -- how...

I'm saying what we saw in quarter 2 would most likely sustain in the second half.

Okay. Nice. Okay. Got it. Third, Sunil, a couple of small questions on the growth businesses. First, the gap between revenue and volume in LTD is quite meaningful. Can you just elaborate on the differential?

So a couple of points. I think as inflation has been, we've taken up pricing -- so we will also use that opportunity where we had strong market positions to make sure that we expand margins as we do that. That's number one. Number two, the mix. Remember the biggest hit to the RTD business at the INR 10 disruption was Tata Gluco Plus. Tata Gluco Plus is a higher value, higher margin part of the portfolio. So as that has come back very strongly, that has resulted in the value volume differential also coming into play. Apart from that, we've launched a bunch of other innovations, which are all at the -- aimed at the higher revenue, higher margin segments. Whether it is expanding coffee, whether it is expanding our fruit teas, whether it is Tata Life, which is just launched in alkaline and is getting expanded or Tata Spring the live, which is our, I would say, higher than Tata copper, lower than Himalayan water offering, it's mineral water again. which we are expanding. So there's a conscious effort to make sure there is a portfolio expansion with a focus of driving faster revenue growth and margin expansion.

Got it. This is useful. And last one on the growth business itself. You have been launching fairly aggressively in the last few quarters. So first off also, you have launched a lot of new products. Two parts and please be brief if you want to. One is anything that has not met your expectations in the last few. What you have launched in the last year? And the second is, how do you measure the performance and the risk of something not working out, but you're not calling it out from your portfolio?

So Vivek, we've got a very standard set of guardrails for every innovation. Innovation either has to be accretive to the top line at the same margin or accretive on margin at a decent top line. So unless it passes either it's accretive on margin or accretive on top line at the same margin, we would not launch, number one. Number two, the reason why we are also able to launch at such rapid pace apart from having the innovations and R&D engine is the ability to launch on e-com, quickCom in a limited geography, test it out, bugs, scale it up quickly, then go to modern trade, et cetera. So this e-com, quickCom and ability to pinpoint pin codes, geographies, specific areas, I think that is what has helped us. We've got a very robust stage gate process. And every month, there is an innovation council where the entire team, which makes a decision end-to-end is everyone is on the call. Business cases are presented. Everyone has a veto right. If someone says, so there is a question mark, and only then it proceeds to the next stage gate. But back-to-back with this, we have a financial review. Anything that has got launched in the last 3 months, last 6 months comes up for review. And if it has either hit or not hitting the top line or the margin, it comes up for a question. If there is logical answer about why it should continue. There is life support given for another 3 months. If not at the end of 3 months, we pull it off. So I would say roughly about 2/3 of the innovation that we launched makes it to the longer term, 1/3 is skill.