Tata Consumer Products Limited (TATACONSUM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tata Consumer Products and Tata Coffee Limited Conference Call hosted by Kotak Institutional Equities Limited. [Operator Instructions] I now hand the conference over to Mr. Jaykumar Doshi from Kotak Institutional Equities. Thank you, and over to you, sir.

Good evening, everyone. On behalf of Kotak Institutional Equities, I welcome you all to Conference Call of Tata Consumer Products and Tata Coffee. We have with us the senior management team of Tata Consumer Products and Tata Coffee. I'll now hand over the call to Nidhi Verma, Head Investor Relations, who will introduce the team. Over to you, Nidhi. Thank you.

Thanks, Jay, and thanks Kotak for hosting us. Hi. Welcome, everyone. I understand it's late in India and Asia, but we thought it's important to talk about this event. So I'm joined by my colleague, Sunil D'Souza, Managing Director and CEO of Tata Consumer, Mr. L. Krishnakumar, Executive Director and Group CFO; Ajit Krishna Kumar, COO. I also have from Tata Coffee, Mr. Chacko Thomas, Managing Director and CEO, and Mr. Venkat, Executive Director and CFO. As you all know, the purpose of the call today is to discuss the outcome of the board meetings of the 2 companies. I hope you've had the opportunity to download the presentation, which is available on our website and also under stock exchange. If you haven't done that, we'll request you to please download a copy. For further proceedings, I'll now hand it over to Sunil. Sunil, over to you.

Thanks, Nidhi. Like you said, we had back-to-back board meetings of Tata Coffee and Tata Consumer Products to consider a series of items. And we've just filed with the stock exchanges, the results of those meetings. Overall, this is between the 2 companies. We've proposed a group simplification exercise, which we have filed for. To walk you through the group simplification exercise, I'm sure all of you are aware of the profile of Tata Consumer Products. We are an integrated food and beverage company with a rich heritage of Tata, aspiring for a larger share of the FMCG world. Number 2 branded key player globally. FY '21, INR 11,600 crores, 200 million households reached to 2.6 million retail outlets among the top 10 FMCG companies in India. We are a branded company with big brands like Tata Salt, Tea, Eight O'Clock, Tata Sampann, Tetley and Himalaya. Tata Coffee is a company which has, again, a portfolio play there with extractions and instant coffee, branded coffee, green bean coffee, pepper and tea. We are among the world's largest integrated coffee cultivation and processing companies, the second larger exporter of instant coffee, a large international footprint, where we import from 15 but export to 42 countries, and they're also the exclusive supplier and roasting partner for Tata Starbucks. They have a majority holding in Eight O'Clock. We have 3 plants for instant coffee, including 2 in India and 1 in Vietnam. Processing units for coffee and pepper, roast and ground units for Tata Coffee Grand, which is an online brand as well as Sonnets, 18 plantations for coffee and pepper of about 8,000 hectares and 6 tea estates of 2,400 hectares. Now this reorganization plan of group simplification is essentially to simplify, synergize and align various initiatives, starting with 2 big initiatives of consolidation of minority interest from Tata Coffee and TCP U.K. Group TCPL. Number 1 is a notification, which we had already sent out, which the board has considered today, which was purchase of a minority interest in the U.K. business from Tata Enterprise Overseas through preferential allotment by TCPL in the India entity. And the second one was TCL combined with TCPL and wholly-owned subsidiary of TCPL through a composite scheme of demerger and merger. Essentially, this global simplification seeks to unlock synergies and build efficiencies in operations, enables faster decision-making, creates focused business verticals and unlocks potential synergies. So we look at our efficiencies in terms of corporate structure as well as a significant reduction in number of entities. And this enables faster decision-making and execution by converting minority interest and creating a single listed entity. This is also a stepping stone for further consolidation and simplification in the international business. As a result of this, we will create 2 business -- extra business verticals for Tata Consumer Products. One is extractions, where we will combine the tea and coffee extractions that we will now have and creating a dedicated plantation vertical and unlocking potential synergies both from the front end as well as cost synergies with a single holding company for international branded business. The legal structure that we have in Tata Consumer, we had 45 legal entities which we now aim to consolidate over a period of time, which will help us align legal and management structures, converging all the minority interest of all subsidiaries into Tata Consumer Products. We will create a single listed entity capturing the full value of the TCPL Group and this paves way, as I mentioned, for further operational and structural benefits. The synergies would be in terms of revenue and distribution with increased product offerings to consumers -- to customers, where we've got product expansion as well as synergies on geographies that they operate in. More efficient use of management bandwidth, optimization of cost structures, better procurement and leverage on supply chain and other operational efficiencies. Now in terms of the reorganization, essentially, we will do a demerger of the plantation business of Tata Consumer into the new wholly-owned subsidiary of Tata Consumer Products as step 1. Step 2 is the remnant business of Tata Coffee, which is primarily the extractions will be merged into TCPL. Now while these are 2 steps, they will be done almost simultaneously. And therefore, the minority shareholders of Tata Coffee will receive a swap for the Tata Consumer Product share. The TCL shareholders on record would get in aggregate 3 equity shares of TCPL for every 10 equity shares of Tata Consumer Products. As a result of this, we have very clear shareholding of TCPL and TCPL would have 100% subsidiary -- a wholly-owned subsidiary, which holds the plantation entity. This is beneficial for both sets of shareholders, for the Tata Coffee shareholders, you get a broader play in terms of participating in a larger branded consumer product company with larger ambitions to become a full-fledged FMCG with multiple growth engines and strategic initiatives, which drive greater business outlook. And of course, a company which is part of the Nifty 50 and a larger market cap and, therefore, more widely held. For Tata Consumer shareholders, there are synergies both recurring and onetime operational efficiencies in terms of management and administrative and this structure enables further simplification efforts. And of course, it creates greater focus because we have clear verticals of extraction and plantation, and therefore, dedicated and specialized management focus for their respective businesses. The second announcement was for purchase of minority interest in TCP U.K. from TEO. TEO owns 10.15% in TCP U.K. With this swap, TCPL would own 100% ownership in TCP U.K. As a consideration, TCPL will issue 74,59,935 equity shares, which is 0.8% stake computed post valuation to TEO. This transaction is subject to the shareholders' approval as well as other regulatory approvals as required. Just as a point, the previous transaction also is subject to all regulatory approvals, shareholder's approval and the NCLT process. As a result of purchasing the TEO's stake in the TCP U.K. business, we will have 100% ownership in all core businesses of the company, which enables us for the next round of efficient reorganization of the international business. And incidentally, the share issuance is at the same valuation as of the other transactions contemplated under the scheme. In terms of time line, now that the board has approved, we will be filing it with stock exchanges, conducting a shareholders meeting to consider approval for preferential issue, issuing preferential shares, filing with the stock exchanges and receiving a no objection letter post which we will file with NCLT. We would then have the shareholders, creditors meetings for approval of the scheme and the NCLT order. And after that, we'll have the appointed and effective date of the scheme post which we will issue the shares -- TCPL shares to the Tata Coffee shareholders. That's the broad outline of the scheme per se. Nidhi, back to you.

Sure. Thanks, Sunil. so with that, I would request the moderator to start taking questions from the Q&A queue or perhaps if Jay wants to jump in. Over to you.

Ladies and gentleman we will begin the question and answer session. [Operator Instructions] Our first question is from the line of Bharat Sheth from Quest Investment Advisors Private Limited.

Sunil, is that -- just to understand the plantation business will resume separately under the 100% subsidiary of TCPL. Is that correct, correct? Or later also we may plan to hiving it off.

So Bharat, essentially, right now, we are doing a demerger and merger scheme of Tata Coffee. Tata Coffee has 2 pieces of businesses, plantations and extractions. We have just formed a wholly owned 100% subsidiary of TCPL, which will house the plantations business of Tata Coffee. We aim to create a dedicated plantations vertical to build efficiencies into the entire plantation space per se. But overall, between the international and this reorganization, it also gives us clean ownerships, which enables any further restructuring that we want to do at a later date.

The purpose of question -- asking this question is because what I understand, if you correct -- can correct me that any company having a plantation business of FII cannot have -- there is a limit on the FII holding. So will that affect us?

No, it's not going to matter at all. It only helps us to consolidate our plantation interest in an unlisted entity, which is a wholly-owned subsidiary, and we are looking to overall improve efficiency of all the verticals that we have, right? And your second part of your question on hiving off and all that, there is no such plan at this stage. We are only focusing on simplifying and building synergies for different parts of the business.

[Operator Instructions] Our next question is from the line of Jaykumar Doshi.

Sunil, would it be possible for you to give us some color in terms of what are the synergies that you expect from this consolidation exercise and simplification, both in India and internationally. And if there is any tax benefit that you were not able to utilize earlier for the TCPL U.K. operations that you may now be able to do once it becomes a wholly owned subsidiary?

So Jay, thank you. So effectively, this entire exercise achieves the following objectives. Number one, it aligns the corporate structure with management and administrative structures, converges all the minority interest of subsidiaries into TCPL level and a single listed entity. It creates focused business verticals and unlocks potential synergies. The answer to your question is, across the organization, like we have 45 legal entities, which we are collapsing now, hopefully, to about 23 to 25 number, that's #1. And because of this cross holdings across, we have issues on tax efficiencies, dividend repatriation and cash traps, right? So we will be releasing a lot of these pieces as we go forward. Significant benefits will be in places where we've got certain businesses, which are tax paying versus some which could have tax offsets. There will be some efficiencies, but overall, the exercise is aimed to streamline and structure in terms of driving multiple pieces. In terms of actual numbers, at the end of this, our estimate is that we would be accretive on the EPS by 5% to 10% -- so 5% to 10% incremental in PAT.

Just to clarify, there is an overall scheme of restructuring, of which we have announced 2 steps today, which is the Tata Coffee demerger and merger and second is the buyout of minority interest, right? And when the overall program of simplification also has further steps but these are to do with international and other parts of the organization for which both board and other approvals are still to be completed. But the benefit that Sunil talked off of 5% to 10% is what we expect to start realizing once all this process is complete. And that could be anywhere starting between 12 to 24 months. The approval of NCLT takes time. While some activities, we will start in parallel, but this is where we expect to end. And just to recap in terms of benefits, the areas we could get benefits are, say, revenue synergies. For example, in extraction, we currently have tea and coffee extraction managed separately. And some of the customers are permanent, so we could look to see how we build a larger, more synergetic extraction business. We are also looking at efficiency in plantation. As we combine international businesses, we will get some operating efficiencies as well. In addition to -- because of the business reorg overall, and removal of minority interest of the subsidiaries are 100% owned then it makes it easier and lower cost to make subsequent reduction in legal entities and simplify the international structure. So we will get operating savings and also some continued tax benefits. So it's a combination of all this. And this is the first step, and we expect to complete the other steps over time.

That was detailed. Follow-up question is, could you explain us the valuation for acquisition of 10.11% stake -- minority stake of the international business and how you valued it and the rationale.

The valuation has been done by professional valuers who have also done the swap ratio and whatever numbers are insulated in the sum of cost valuation for the respective parts of International has been applied. And the same valuation for TCPL shares have been considered in arriving at the swaption. And my understanding is the valuer used the combination of DCF, comparable multiple and other methods that they think appropriate. And they have considered relevant transaction multiple, comparable trading multiples as well as DCF.

Understood. So if I calculate at today's price and 74.5 lakh shares that you'll be issuing, it comes to about INR 5,500 crores is there any cash in those entities or it is entirely...

Let me defer it to the valuers. They have considered the latest financials and everything that is in the entity, right? So there is cash in the entity, it is the usual valuation. So there is cash that will be added to the DCF valuation.

Our next question is from the line of Sumant Kumar from Motilal Oswal.

A few clarification, when we acquired Tetley the acquisition cost was $450, okay. And that -- when we calculate that, this is coming around, say, INR 2,300 crores, INR 2,700 crores. But today's price, we are valuing this company INR 5,600 crores. So what has changed over the year for the higher valuation of Tetley.

I don't understand the question. So you should -- the business has changed, right?

Yes. When we acquired Tetley, we acquired Tetley at say, $450 million...

What are you trying to say? Please be clear. the business is operationally undergoing a lot of change. Yes.

Yes. Yes. So since 2000 when we acquired Tetley the valuation was -- we have given $450 million. And today, at the INR 5,600 crores around -- we are paying $750 million. So what is the -- why the valuation is high, what we have acquired this asset. I don't think that the overall operating performance of the company has increased over the year.

So let me comment. So 2 things. Number 1 is this is the valuation done by valuers like LK explained, logical calculation and they have come out as a result of that, that's number one. Number two, TCP U.K. is not only Tetley, right? There is a multitude of other businesses, which are there as part of that unit.

So I think you can't do a detailed reconciliation. But like Sunil said, there have been new brands added. Teapigs is a good example of a brand which was not existing at that time. We also had the acquisition, and we know we made money there. So that extended the profile of the business. So there are quite a few things which have changed. And we've got very strong market share in some geographies. Though U.K. has been a bit of a challenge, as we've been saying, but there are new opportunities and new markets that we are getting in and overall share of the new brand is great. So I mean, leaving it to the valuers to comment. But in a broad sense, there have been quite a few changes.

Okay. Okay. And this Tata Coffee is listed entity. Now we are demerger and -- there is a merger with Tata Global. So this tea business -- tea plantation business will be listed all or it will be delisted?

It will be delisted. It will hold -- it will be held in a 100% wholly owned subsidiary of Tata Consumer Products.

Okay. And the Tata Coffee will be delisted.

Yes. Tata Coffee will continue to exist over time because the plantation business will go to an unlisted subsidiary and the residual business will become part of TCPL, right?

And it will be listed entity only.

Sorry?

The Tata Coffee residual part will be a listed entity? Or is it will be...

Tata Coffee residual entity will be merged with Tata Consumer Products -- for the 2 transactions, TCPL will pay -- will swap 10 shares of Tata Coffee for 3 shares of Tata Consumer products effectively thereby cleaning up the listed part of Tata Coffee completely.

Okay. Okay. And overall, the whatever the financials is not likely to change significantly only, we have a synergy benefit of 5% to 10%, and there will be no minority interest.

Yes. On the longer term, we feel that this will create value because growth prospects for some categories will be better.

And our shareholding of the Tata [ Salt ] is going to decline from 34.68% to 33.8%, correct? If all the transaction is...

There will be a small dilution in group shareholding, yes.

Our next question is from the line of Richard Liu from JM Financial.

So can you help me understand what percentage of the international tea business of TCPL is actually housed in this entity for which we are buying the minority stake?

I'm just trying to understand where and what this is going to lead because I don't want to put an arbitrary percentage, but substantially, all of the international tea business is what I would say.

Okay. So essentially, the whole international business that TCPL has, that's almost the entire thing is how the entity for which we are buying additional 10%.

And there is some element of ownership of the coffee business, U.S. coffee business as well, right? Some portion, I think, but a substantial part of the tea business is there in this.

Got it. And with regards to all the coffee plantation, the estate, et cetera, that you are now sponsoring to this wholly-owned subsidiary. Is there a stamp duty implication for the transfer. Since I guess there will be massive land holding involved, right?

So Richard, there will be onetime cost, but the onetime benefits will more or less negate the onetime cost. That's the way we look at it.

And Sunil, I remember -- so for example, the QSR part of the business, we have got -- we have taken it out of TCPL as I think that it's not really consumer products, et cetera. So is there really a compelling logic for you to bring the plantation business into TCPL. Could not that part has gone somewhere else? I mean I'm not sure if there's anything else to house it. But why would you want this plantation piece into TCPL, even though it is 100% subsidiary.

So Richard, if I go to a Tata Coffee shareholder and say, "I want to take out your extraction business and leave the plantations business there, that doesn't work, right? That's number one. Number two, leaving the plantations there in terms of a listed entity doesn't work because, a, market cap too small, b, all the listing -- all the related listed entity, governance, et cetera, that's the number two. Number three, remember, ultimately, we were consolidating in one form or the other, the entire business of Tata Coffee into the TCPL financials. So from that perspective, it's no different. All that we are doing is now we are creating a dedicated set of verticals where businesses like extractions, which were done by 2 separate companies come together. So we drive top line synergies with consumers as well as drive back-end synergies and efficiencies. And for the plantations vertical, we will drive efficiencies, et cetera. Again, like the structure that we've created enable us for any other decisions that we might want to take in the future. But as of now, the plantations stay in the 100% wholly owned subsidiary, firmly in TCPL.

And you see become 100% owned by TCPL now.

That's correct.

Okay. The last bit, just to help me verify my calculation. The expanded share count for TCPL after all -- both these transactions get done, it will be what? I mean, is it going to be somewhere around 953 million versus 922 million right now? Would that be a rough proper calculation.

Richard, we'll have to get back. I will ask Nidhi to get back to you. It's a mathematical calculation, but fortunately, unfortunately, we've not done those numbers, right? And we've not got to that level of detail.