EUR 120.00 For Business Accounts Only

MOSL: TATA CONSUMER PRODUCTS (Buy)-Gross margin pressure to ease in coming quarters

TATA CONSUMER PRODUCTS: Gross margin pressure to ease in coming quarters

(TATACONS IN, Mkt Cap USD11b, CMP INR882, TP INR1000, 13% Upside, Buy)

 

Tea price inflation has impacted TCP’s performance since the last four quarters. However, we expect gross margin to improve from 2QFY22 onwards as tea prices have declined (down 32% from their peak in Aug’20 to INR175/kg in Aug’21). In this note, we have analyzed the impact of the fall in tea prices on TCP in the near term. Here are the key insights: 

Tea production in Jun-Jul’21 has grown v/s CY19…

• All India tea production (from Mar-Aug’20) declined by 19% YoY due to: a) first flush of the crop being lost as plucking activity came to a standstill due to the COVID-induced lockdown, and b) unfavorable weather conditions in Assam and West Bengal.
• Indian Assam tea is usually harvested in three flushes:
• The first flush is from mid-March to late-June (forms 32% of the whole tea cycle volumes and is of the best quality),
• The second flush is from July to September (forms 38% of volumes and is the second best in terms of quality), and
• The third flush is from October to December (forms 28% of volumes and are of inferior quality v/s the first and second flush) (as per 2019 production data).
• In CY20, tea production in India declined by 10% (to 1,258m kg), which created a supply crunch, leading to an increase in prices.
• Production volumes have started to normalize, but has increased when compared to CY20 and CY19 levels. Volumes have increased by 22%/11% YoY in Jun’21/Jul’21. They have increased by 12%/2% when compared to Jun’19/July’19 levels. All of which led to a decline in tea prices from its peak in Aug’20.