Reduction in tea prices will bring relief to Tata Consumer’s margin

As analysts at Motilal Oswal Financial Services Ltd pointed out in a report on September 13: “Standalone gross margin has been shrinking on a year-on-year basis for the last four quarters beginning 2QFY21 and is likely to reverse from 2QFY22. “

The fall in tea prices will aid margin performance. The adjacent chart shows that tea prices have softened from last year’s peak.

“With normalization and increase in tea production, prices fall by 33% from their peak in August 2020” ₹173 per kilogram (kg) in August 2021,” said analysts at Motilal Oswal. However, tea prices are still higher than the August 2019 level.

The broker further added: “As per our channel check, Tata Consumer Products has not yet slashed the prices of tea as it usually happens after a gap of 2-3 months while passing any increase or decrease This will have a positive impact on profitability in the coming quarters.” Of course, last year’s favorable base will also help.

Still, investors will have to do well to watch revenue growth closely, given that fiscal 2021 was a good year, with consolidated revenue growth at 20%. The performance of Tata Sampan, which includes pulses, spices, gram flour (gram flour), poha (flattened rice) and ready-to-cook offerings, needs to be monitored.

During the June quarter, the thriving portfolio grew 12 per cent annually, better than the 2% growth seen in the March quarter. Note that there was a growth of 26% in the concluded FY21.

To be sure, Tata Consumer stocks have outperformed the broader Nifty 200 index in 2021 by a good margin. So far this calendar year, Tata Consumer stock has appreciated around 49% against a 28% gain in Nifty. 200 index.

The stock is valued at 59 times estimated earnings for fiscal year 2023, based on data from Bloomberg. This could lead to significant acceleration in the near future.