ICICI Securities has maintained its Buy rating on Tata Consumer Products (TCPL) with a target price of INR 1,385, representing a 16% upside. The brokerage's positive outlook is primarily driven by the ambitious expansion plans of Tata Starbucks (TS), a 50:50 joint venture between TCPL and Starbucks Corporation, which aims to double its store count to 1,000 by FY28.
Key takeaways from the report:
- TS has achieved a 29% revenue CAGR and 26% store count CAGR over FY14-24.
- Gross margins remain strong at ~68%, comparable to Starbucks Corporation.
- TS plans to open a new store every three days to reach its FY28 target.
- The brokerage values Tata Starbucks at INR 211bn using a 24x EBITDA multiple.
- Potential risks include heightened competition, commodity price increases, and failure of new product launches.
Strong Performance and Ambitious Expansion:
Tata Starbucks has demonstrated impressive revenue growth over the past decade, driven by robust store expansion across India. The company's expansion strategy is fueled by a favorable market environment created by the partial exit of Café Coffee Day and the rise of new coffee chains. TS plans to capitalize on this opportunity by aggressively expanding its footprint, particularly in tier-two cities, and introducing new store formats like drive-throughs and airport outlets.
Healthy Margins and Operational Efficiency:
TS boasts strong gross margins, comparable to its global counterpart, Starbucks Corporation. The report highlights potential for further margin expansion due to lower labor costs and rentals in India, coupled with increasing operating leverage. Additionally, the company has consistently maintained negative working capital days, demonstrating its ability to manage its operations efficiently and leverage its brand equity with suppliers.
Revenue per Store Growth Potential:
While revenue per store has remained relatively flat over the past decade, ICICI Securities sees potential for improvement. The report cites factors like premiumization of the portfolio, expansion into less competitive regions, and inflationary pressures as potential drivers for revenue per store growth.
Competitive Landscape:
The Indian coffee chain industry is witnessing increasing competition from both domestic and international players. Many new entrants are backed by private equity funding and are focusing on rapid store expansion. This competitive intensity could pose a challenge to Tata Starbucks' growth ambitions.
Valuation and Outlook:
ICICI Securities values Tata Starbucks at INR 211bn, using a 24x EBITDA multiple and a 14% same-store sales growth (SSSG) assumption. This valuation translates to INR 91/share attributable to TCPL. The brokerage anticipates a 15.8% revenue CAGR and an 18.9% PAT CAGR for TCPL over FY24-26E, driven by improved profitability in its India Foods and international businesses.
Potential Risks:
The report acknowledges potential risks to the positive outlook, including higher-than-expected competitive pressures, a sharp increase in commodity prices, and the failure of new product launches.
Valuation Method:
ICICI Securities employed a discounted cash flow (DCF) analysis to arrive at its valuation of Tata Starbucks. The valuation is based on projected future cash flows, discounted back to their present value using a 12% discount rate.
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