Tata Consumer Products Ltd
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Tata Consumer Products Ltd
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Ladies and gentlemen, good day, and welcome to the Tata Consumer Products Limited Q1 FY '21 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities Limited. Thank you, and over to you, sir.
Hi, everyone. Good morning, good afternoon, good evening, depending on the part of the world you are dialing in from. As I said, it's our absolute pleasure to be host to the 1Q FY '21 conference call of Tata Consumer Products Limited today. The company is represented by Mr. Sunil D'souza, Managing Director and CEO; Mr. L. Krishna Kumar, Executive Director and Group CFO; Mr. Ajit Krishnakumar, COO; Mr. Rakesh Sony, Global Head, Strategy and M&A. As I said, we have an ad rating on the stock and an outperformance of process and we continue to stay believers.Rakesh, over to you, please.
Thanks, Manoj. And on behalf of the management of Tata Consumer Products, I welcome you all for this conference. I have with me -- today I'm with Sunil, Mr. Krishna Kumar and Ajit. So before I get into a detailed presentation, which Sunil will take us through, a quick recap of Tata Consumer as we gone through. We are now the -- we are the standardized branded team player in the world. After the merger, we are now from the top F&B companies in India. Last year, we did a consolidated revenue of close to INR 10,000 crores. And we recently grow the current market cap of that. We feel -- I will now hand over the presentation to Sunil, who will take it from here. Over to you, Sunil.
Thanks, Rakesh. In summary, I would say we've had a pretty decent quarter. Our consolidated revenue grew by 13% to INR 2,714 crores. The critical thing being the higher volume growth across all our businesses. And this was amidst extremely challenging environments with the lockdown and the supply chain issues. Our consolidated EBITDA grew by 37% to INR 486 crores. India Beverages business, which now includes NourishCo for which we've completed the acquisition, grew by 11%. On a stand-alone basis, our packaged tea, the branded tea business grew by 8% in value, and 4% in volumes. India Foods grew 8% in volume, 19% in value. Our international business, excluding Foodservice grew by 23% in value, with a volume growth of 27% in coffee and 4% in tea. Our consolidated profit before tax before any exceptional items is higher by 42% at INR 436 crores. I would credit the team with efficient management of commodity as well as discretionary costs. The one blip pricing that we see is tea prices in India continue to rise and that may impact margins in the short term. However, on the longer term, we are confident of our delivery because of the integration of the consumer products business of the Foods business, which we acquired from Tata Chemicals and India Beverages businesses progressing very well. We already have the complete organization structure in place. Apart from that, work has already started on realizing our synergies, which is -- we have committed between 1.5% and 2% before the merger, all the levers are in place to realize the synergies. Highlight of the quarter, in terms of M&A activity is the complete acquisition of the stake of PepsiCo in NourishCo in May 2020. If I move to the next slide. If you look at revenues at a glance, revenue growth of INR 1,000 crores in revenue with a 4% volume, 11% value growth. India Foods was INR 589 crores with an 8% volume, 19% revenue; U.S. Coffee INR 358 crores with a 27% volume, underlying growth of 26%, but currency included 37% revenue growth. International Tea, INR 475 crores, 4% growth, 14% revenue underlying 9%. Foodservice INR 34 crores. This was the business which was impacted by the closure of the out-of-home and on-premise. Still locked-in only a negative 56% versus last year in terms of revenue, volume negative 60%. Tata Coffee, decent quarter INR 229 crores top line, 14% volume, 12% revenue. All in all, INR 2,714 crores underlying 11%, 13% revenue growth, 0 value growth. Next slide. Overall, our results, INR 2,714 crores of revenue, INR 486 crores of EBITDA, INR 436 of PBT, group net profit, INR 346 crores and the net cash of almost to INR 2,000 crores. Our growth [Technical Difficulty] 82%. So in terms of our flow throughs, we saw a perfect flow through this quarter from the top line to the bottom line. Margins did expand close to an 18% EBITDA growth, 16.1% PBT, and 13% net profit, margin expansion... [Technical Difficulty]
Sir, this is the operator. Sorry to interrupt you. Sir, the audio is breaking from your line?
Okay. So we'll try and stabilize it. Can't help it.
It's audible now. Please go ahead.
Yes. Okay. So EPS of 3.55, total cash EPS of 4.1, growth 89% overall EPS and 24% in cash terms. If I move to the next slide, if I go to the sector outlook. And this, I'm sure everyone has seen already FMCG sector growth was slowing down pre-lockdown. And this quarter, overall FMCG sector is about a 20% [Technical Difficulty] but that said, we are seeing recovery in, I would say, middle of May and in June, hopefully, that trend continues and we should be touching normal levels very quickly. Commodity was extremely volatile driven by tea. If you look at the center line of India Tea, I think India Tea was impacted by 2 things. One is in the early days of the quarter because of the lockdown, unable to pluck and therefore, loss of crop. End of the quarter, extreme flooding, bad weather and again issues are in total crop. So lack of crop and overall price increases are looking less challenging as we go ahead. With that said, for the international business, I think we are seeing a favorable record. And then the thing in the price, India has had a record crop and therefore, we're seeing [Technical Difficulty] and tea prices there. Coffee continues to be on a slow downward trend, which bodes well for us as of now. More Robusta than Arabica. Arabica seems to have flattened and seems to be in slowing -- showing a slight uptick. Commodity, I would say, is the big watchout for us, we're managing it well in the next 1 or 2 quarters will be critical to delivering results. If I look at category growth across different markets that we are operating in, you would have not seen these numbers in a long, long time in the developed markets, which are normally flattish on tea and coffee businesses. 21% growth in regular black in the U.S., 14% in coffee. U.K., while tea was flattish overall, but Fruit & Herbals was a significant uptick. Canada, significant rise in all types of tea, 19% in black and 32% in specialties. India, the numbers do show a total decline of 5.4%. But that said, as I had mentioned earlier, we saw trends coming back at the end of June. For the month of June, growth was...[Technical Difficulty]If I move to the next slide to give you a quick update on what we have done to tackle the issues, the external environment, especially with COVID. On business continuity, all our factories and plantations are now operational. We've implemented very strict SOPs and guidelines, we make sure that all our factories and offices are in the safe zone, if I may. As far as possible and where possible, we are continuing to encourage people to work from home. Starbucks is the 1 business which was more severely impacted by shutdown of stores. With that said, about 60% of Starbucks stores are now operational in India. Revenues are significantly down for sure, but at least we've had the opening stores. On the supply chain piece, if we move it very quickly to make sure we [Technical Difficulty] In addition, as we start the demand right across different segments that we operate in, we have set up additional packaging facilities, especially for pulses, the sales team where there were sporadic lockdowns and couldn't operate in the market, adapted very quickly to conditions, telemarketing deployed aggressively. And we're continuously engaged with government and industry bodies to make sure that our supply chains and customer service continues to function uninterruptedly. Digital, these are our headlines. Digital took a big leap forward during this period, then that was not only with consumers, but also we adapted digital far, far faster. We've done the quarter end audits, for example, through remote third-party call-ins. We've had our summer trainees and management trainees joined us virtually on domestic and even other projects remotely. We've upped the ante on our digital marketing plays foods, beverages as well as Starbucks. Tata Coffee, Tea has adopted blockchain and ratability and also using digital for trained crop health. Innovative ways of working. Right now, obviously, we've restricted travel once if it is efficient. We have done significant tie-ups with e-commerce players and hyper local debts across the businesses. Starbucks has adapted a contactless pay procedure. On the employee well-being, we are in constant touch with our employees to make sure that we are staying in touch with them, running weekly health and wellness initiatives. Providing safety kits and training to our front end employees plus employees across the organization have had an option to step up coverage for COVID-19 mental wellness. In terms of our initiatives, we were at the forefront apart from the Tata Group itself as a company, apart from contributing to the overall Tata Group initiatives, we have made sure that each of our businesses have contributed to the local communities, whether it is contributing to health care and frontline workers. We ran a campaign to help tea shops in Tamil Nadu, and make sure that we coordinate in the group activities [Technical Difficulty] et cetera. In the U.K., we make sure the NHS was front end center of delivery. No interruptions for their supplies. Apart from that, we've opened our hospitals and both Munnar and Assam to get into quarantine centers and help the local government folks. With that, I'll hand over to Ajit to run you to a quick update of the integration.
Thanks, Sunil. I'm on Page 14. Just a recap of the consumer. You all brief them well. So I won't take very much time. But this is the first full quarter since the merger was complete. It is a very quick recap of why we did it. So I think by now it’s already, I did talk to the -- as well Tata Consumer market. So I think the intention that we came into this merger was essentially to create a single entity, which had scale and financial strength. The idea was to create an entity which has multiple legs, not just beverages leg, but eventually have beverages, food, obviously, 2 very strong legs in India as well as a strong international presence with leading positions in key markets. I think the single biggest point here, however, is that the brief given to the management by the Chairman and the Board, was to use the merger as a catalyst for upgrading system processes and the ways of working across the company. And that is a brief with which the team has been operating since the merger closed in February. If I would continue on the next Page 15. The activity pre-merger, I think you would be familiar with. We announced it in the transaction in May. We received approval from SEBI in August. From somewhere around August onwards, we have been in preparation mode. I think we spent a lot of time in day 1 preparation, so and so that in February when this merger actually affected. They were -- it was a very smooth transition. Since February of this year, we have essentially been execution more to achieve the objectives of a unified company, operating at the -- at a stage where it has been trading -- operating until now. I think we have made significant process -- progress. We have completed many of the building blocks that we needed to. We have created an integrated organization structure and operating model. We have harmonized how both operations in India have worked, so that they are all either operating or will be shortly operating in 1 single way. We have also planned out and I'll talk about the sales and distribution in a minute. A revamp of our sales and distribution system in India. And we have also worked on where and how we will realize cost and revenue synergies. What is in process, obviously, is the execution of some of these pieces. Some of it is already in progress, but much of it is still in process. This is primarily in -- there's a biggest chunk of this now comes in the next page in our sales and distribution organization. We're also in the process of implementing an end-to-end digitization across the entire -- both on the sales and distribution side as well as on the supply chain side, so that you will have end-to-end visibility. This includes, obviously, ERP, IDB and visit other TMS and the sales force automation tool. We are also working on optimizing our vendor base. All of the -- all vendor base and all of these things that you would expect to in the merger and we are progressing it fairly at furious pace. We've also not neglected our core businesses in this integration. We have relooked at our -- the tea and the salt in the Sampann portfolio and look to ways to enhance it. When we announced the merger in May, we had said that we would be -- we would expect to realize roughly 2% to 3% of the -- then combined India branded revenues over the next 18 to 24 months. We are broadly on track to do this. The -- some of these synergies will start flowing in, in the back half of this year. But over a period of 18 to 24 months, we expect all of these synergies to flow through. If I would take you briefly to Page 16, I mentioned that sales and distribution was the most visible and largest change by volume in what we're integrating and upgrading. This is being led by Navaneel Kar, who is the Head of our India Sales and Distribution Fees. And it's a fairly -- well it's a fairly substantive fees. What is actually being attempted is combining 2 very strong distribution organization into a single large tier system. But in doing so, simplifying and rationalizing the structure. We are focusing, for example, we created dedicated team to focus on areas which need a special focus, for example, the NPE, Commerce, Foodservice, et cetera. But we are essentially simplifying delayering and essentially executing a fairly straightforward simple plan, to actually achieve this while also adding a dedicated -- little backbone through the crystal ball to ensure that we get visibility from end-to-end and we're able to enhance our India operations. Well obviously, these are input metrics. The expected outlook metrics are on the right. We hope to double our direct which India in the next 12 months. This will follow through to 2x to then numeric reach in about 3 years. Cost synergies, as I mentioned, are coming through from rationalize structure and the critical piece to recognize in this page is that while we are doing all of this, we don't expect there to be an enhanced cost. In fact, we believe that on a net basis, we will take about 100 bps of our cost to serve while once the system is through. The last point to leave you with is that while there is the volume of this level of activity is quite considerable. We believe that by the end of this calendar year, we will have all the building blocks that we have talked about in place, which would include elements from both org structure from F&B, from org things like IDB, et cetera, and various other pieces, all of this should be broadly in place by the end of early in the calendar year. I'll hand it back to Sunil to take us through the business performance.
Thanks, Ajit. So if I run you through the different businesses very quickly, if I go to Slide #18, India Beverages, which includes packaged tea and coffee. Volume up 4%, revenue up 8%. April did start-up with the Head of Hiccups, both from a customer perspective as well as supply chain, but we've seen high double-digit growth coming into May and June. Tata Tea Gold delivered double-digit growth. Apart from that, all our recent innovations of Agni and Spice Mix continued robust performance. We saw a good increase in profit, driven by price realization, management of commodities and more importantly, lower discretionary expenditure. We have seen a market share gain in the quarter. That said, I think, the watchout for this business, as I mentioned right upfront is the tea prices in India continue to rise. And the timing between cost increase and price increases are the watchouts, at least for the next one, if not 2 quarters. If I move to the next slide, Slide #19, India Foods. 8% volume, 19% revenue, high double-digit growth achieved despite operational challenges, a significant growth in May and June sales, salt revenues overall grew 11%, pulses and spices under the Sampann brand, which is a focus for us, delivered robust growth of 50% plus. And again, better profits because of management of the specific levers. The good news is, despite a complicated supply chain, we continued and ensured continuity of operations despite all the challenges and the business continues to be on a very strong footing. Slide #20, NourishCo. We took over the business and landed straight into the lockdown. The business did see a 34% revenue decline, but still clogs the INR 46 crores revenue. We are actually quite happy with where we are right now with NourishCo. We have completed the entire stake. We have a concentrated supply agreement for 5 years and R&D support for 3 years from PepsiCo till we set up our own systems, integrating the business with the Tata Consumer Products, bigger organization is underway. We have new MD and CEO, Vikram Grover in place, and he is running the business as we speak. Overall, as I mentioned, on-premise, out-of-home did have a challenge, and we saw that challenge reflecting in the results. That said, May and June have bounced back. We saw roughly 85% index to last year. Himalayan continues to maintain a very, very high brand equity and connect with consumers. If I move to the next slide of our Theni Tata Coffee. We saw a 6% extraction growth, 18% in plantations and 12% overall revenue, primarily driven by Vietnam and plantations. The top line grew 12%. Extraction business grew 14% led by Vietnam. However, we had challenges in India extractions during the lockdowns with us initially being not able to ship out the product that we had and also lockdowns causing issues in production. Right now, the Vietnam plant is operating at close to 90% of its production capacity and has turned EBIT positive. We've had good results in our expansion of the portfolio in the plantations. And however, we do see, again, a challenge moving ahead, possibly with the developed markets, which are the primary customers facing issues on on-premise and out-of-home consumption because most of coffee is consumed out-of-home. And therefore, demand could be a question mark in the short term. Next slide, Starbucks. Extremely challenging quarter. We are now present in 11 cities, 187 stores. That said, just this week, we have opened Lucknow. So they're now 12 cities. But revenue decline of 87% during the quarter. Despite all the challenges, we have 60% of our stores open. We are seeing a month-on-month sequential improvement. June was about 27% versus last year, July is faring better. August have started off on a good note. Takeaway and delivery, obviously, is the key out here because dine-in is not allowed in most places. But the team has done significant work on rental renegotiations and kept their momentum alive by opening India's first Starbucks Drive Through at Zirakpur near Chandigarh, which has got off to a, I would say, a great start. Apart from that, they have activated and kept consumers engaged through social media as well as launching a Virtual Dance Challenge, contributed in the COVID-19 relief for partners around the world and kept consumers engaged with doing Virtual Coffee Tasting. If I go to the International thesis like 24 in the U.K., we've more or less maintained our market share, marginally improved it, 12% revenue growth , volume growth 7%. The discounter channel continues to be the big growth driver. And unlike other businesses here because we participated in the government food packs which is the DEFRA supply, we see a growth in out-of-home channels. Again, improved profits on account of both sales as well as improved margins. This was one business where we have upped the ante on A&P. We have continued to invest behind our TVC campaign, which is "Now We Are Talking". We did launch Good Earth which is a brand we had in the U.S. We punched that now in the U.K. And it has started off on a, quite a strong footing. It's right now on an exclusive basis in Sainsbury that we are seeing a very good response. That said, we are seeing a bit of normalization of the pantry loading happening in the U.K., and through this quarter, I think we will see demand levels coming back to normal. Slide #25, the U.S., we maintained our bags share coffee growth 26% in revenue. Growth we have seen, both in branded as well as we have a private label coffee business. Tea also saw strong growth with a 25% value, 26% volume. We've upped the game on e-commerce, and that is doing extremely well. However, we have All American's out-of-home business, which is supported significantly. Hopefully, as the lockdowns start easing out, we will see that business coming back to normalcy. Canada, we marginally again increased our market share, 32% revenue growth, largely driven by pantry loading and retailer restocking. Canada is 1 market, where the growth continues to outpace the category, both across regular and specialty teas. Foodservice sales continue to remain soft. We did launch Cold Infusions at the end of Q4, but we had held back media because of the lockdowns and because Cold fusions -- Cold infusions is mostly out-of-home consumption. That said, end of the quarter and coming into Q2, we have activated media, and hopefully, we should see good traction on the new launch out there. Slide #27, just a snapshot of the different campaigns that we ran during the quarter. Tata Tea in India ran the JaagoRe campaign was with "Iss Baar #BadonKeLiye" which has taken care of the elders. We also upped the ante on our immunity building with Tata Sampann turmeric. Starbucks innovated by pushing through a launch of take-home packs of 1 liter coffee, got off to a good start. Tetley U.K. ran a campaign behind Cold Infusions, "Add a little fruitiness to your water". And Tetley Canada, like I mentioned, launched Cold Infusions, but media kicked in very late in to the quarter. Apart from that, Eight O'Clock also continued to run campaigns behind their new product innovations. On the responsible business front, we continue to focus on sustainability across the value chain, the communities that we operate and for the climate. In line with our aim to impact committee members, we continue to partner the Trustea, UNICEF, provide an Affordable Care in Munnar and Assam. We have a proud supporter of the Canadian Cancer Society through the "pink pack" sale contributing roughly $700,000, since launch. We've distributed about 5,000 food kits in the JaagoRe campaign in India. And we celebrated biodiversity on Environment Day in line with the Tata Sustainability Month. On Climate, we continue to be 1 of the 6 companies on the CDP A list, focused on renewable energy, focused on pure pipes -- sorry, responsible citizens out there and decreasing our carbon footprint despite raise in volumes from 2010 to 2019. With that, I hand over to LK, who will walk you through the financials for the quarter.
Thanks, Sunil. Good afternoon, everyone. I'm on Slide #31, which is the highlights for the quarter. If you look at the stand alone performance, revenue from operations higher by 10% from INR 1,464 crores to INR 1,605 crores. EBITDA up by 39% from INR 234 crores to INR 326 crores. On a consolidated basis, we saw a 13% growth in top line from INR 2,392 crores to INR to 2,714 crores. Of the 13%, 2% was due to currency movements. Of the balance of 11%, between 6% and 7% was due to volume growth. We had strong performance in all parts of the business. India Beverages grew by 11% percent, of which the tea business had an 8% growth. India Foods higher by 19% and the Tata Sampann record more than 50% growth. International business had strong performance due significantly because of the coffee business in the U.S., but also higher tea consumption in home. The fact that people were stocking up during the COVID period driven by higher in-home consumption helped us to excellent in the quarter. Tata Coffee performance was led by Vietnam, which operated at over 90% capacity, a bit of softness in the order booking for extraction because of dependence of markets like Russia and Europe, which have to get back to normal. So overall, firing and on cylinders, a little bit of a slowdown in the B2B market, but that's only 10% of our overall business. Coming to EBITDA, we have seen a 37% growth, an improvement across all margins. Big levers are the volume and the value growth and value growth coming from reduced promotions, better product mix and some price increases, including price increases spilling over from the previous year. Commodity costs have been soft in the U.K. and also coffee prices are soft. In India, we have volatile pre-costs, but we had the benefit of good inventory and a fantastic performance by the supply chain team to deliver the results that you are seeing. Going forward, we are cautious in our outlook for tea prices, as Sunil mentioned. Moving on to the next slide. This is a summary financials in full form. I just want to draw retention. We talked about the revenue growth. EBITDA and EBIT margins have gone up significantly. On a consolidated basis, we're up to 17.9% compared to 14.8%, and EBIT percentage is also higher. The effective tax rate is lower than the same period in the previous year. Because of the reduced tax rate in India, a higher proportion of profits from International business, which has a lower tax rate among other regions. We have exceptional items of INR 63 crores, which has 2 elements, which is, 1 is the profit on conversion of NourishCo from a joint venture to our subsidy. There's a requirement for fair valuation as per the accounting standard. That's offset by provision for integration and restructuring expenses that we have taken. So overall, PAT before associates -- share of profit of associates up by about 97%. In the group net profit from JV and associates, they have higher losses in Starbucks, for the reason we stopped off. We also have a slightly higher losses by the plantation companies. While prices have been higher and trending higher there has been crop shortfalls, and I'm sure you're reading a lot about that in the press these days. So the crop shortfall contributing also to a slightly adverse performance by plantation company. Moving on to Slide #33. This gives you an overview of performance by segment. You'll see all branded business segments grown double digit, India 11%, Foods 19%, Beverages, International 15%, which is a very strong performance led by the coffee business in the U.S., where we've also seen the category growth being fairly significantly different from what we have seen in the past. Non-branded grown by 9%. So overall, we've seen a 13% revenue growth. In terms of segment results, all branded businesses are by over 50%, a combination of volume, value and cost commodity as well as discretionary and overall cost control. Look at the composition of business on the right-hand side. India Beverages and Foods about 55%, and International is 35%. In terms of segment results, India business is about 72% compared to revenue of 65%. International profitability is 28% against the revenue of 35%. So those are the highlights of performance. I'm going to hand it over to Sunil to talk about outlook and priority for the year ahead. Thank you.
Thanks, LK. So I'm on Slide #35. Outlook. I'll break it into 2 parts. One is the macros and the external environment that we're seeing. And what impact do we think that it will have on our business. Macros, the COVID-19 pandemic continues to spread and continues to spread in India. Because of that, GDP forecast, it is almost like every fortnight new forecast. Anywhere from 5% to 6% down both in India as well as globally. Consumer sentiments continue to be low. Consumers not spending money, not stepping out, not shopping. That will be a challenge from some time. However, that said, it is improving slowly. We do see consumer parameters coming back to normal. Some markets faster than the others, even in India, some geographies faster than the others. Rural will lead the revival and goes back before the urban market does. Demand for in-home and essentials continues to be robust, both in India as well as globally. And we like the fact that we are in both essential space quite strongly. On the business, the thing that is, I would say, a bit unpredictable is the set of unknowns out there. The sporadic and sudden lockdowns across either counties or states and cities in India is causing demand and supply shocks. The good part is, I think, having gone to 1 round of lockdowns, the team is now very quick to adapt. But that said, it still causes a disruption. The second piece is, I think we saw a pantry loading impact on volume and therefore, on our bottom line in the last quarter. That is now starting to normalize globally. But in India, after a decline in April and May, and we talked about how the overall tea industry showed a negative 5%, but coming back to a plus 8% in June, we are seeing growth coming back with the easing of the lockdowns. And as the lockdowns progressively ease, we do hope that we will continue to see this trend more upwards. Despite the fact that across the globe and across different states and cities in India, on-premise and out-of-home consumption is getting eased out. We still see a challenge which consumers are still very, very hesitant to step out. So that business will continue to face significant headwinds globally. I think LK talked about it, I talked about it earlier. Both overall supply as well as therefore the impact on cost of tea, due to COVID and then recent flood disruptions may impact demand and also margins in the short term. But that said, [Technical Difficulty] steps that we are doing in the integration process... [Technical Difficulty]
Sir, this is the operator. Sorry to interrupt you. Sir, the audio is breaking from your line. Please check.
Okay. So -- look from the fact that integration goes out well, we do remain confident that in the longer term, it will bear fruits, both in terms of a stronger operating company with lot of synergies to be realized. But the critical phase, as Ajit mentioned, as we are targeting for [Technical Difficulty] make sure that there are no hiccups and we execute it to the team. So that's the outcome [Technical Difficulty] in terms of priorities, we clearly focused on the priorities we have outlined in the beginning of the year. Building our Foods businesses of tea and salt [Technical Difficulty] pulses, spices, coffee, et cetera, are strong growth part [Technical Difficulty] changing the digital portion of the organization, change in digital and new product innovation, unlocking synergies with the integration process, making sure that we create a future-ready organization. We will continue to explore new opportunities, both organic and inorganic, while making sure that we are good corporate citizens caring for the societies that we operate in. That's brings me to the end of the presentation. Over to you, Rakesh.
Thank you, Sunil. I will now hand it over to Manoj and we can start taking some questions. First, from the call, and then we will take some questions on the web. So over to you, Manoj.
Yes. Yes. So we can open up it for questions, please.
[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.
Yes. Congrats on a very good set of performance. My first question is on India Foods. So there's a gap of around 11% in terms of volume and value. So is it more because of the mix? Or is it because of the reduced promotion?
Just give me a minute.
No, I'm not sure, I think in the slide, when you say between value and volume, are you looking at 11% and 19%. I'm trying to ask the question because...
Yes. 8% and 19%.
In the India Food, yes.
Yes. Right. So that is -- it's a combination, as we said, for the difference between volume and value overall, I think there are different -- 3 main reasons, right? One is price increase. And some of the price increases are not necessarily in the first quarter, but spillover of the previous year, where we may have taken a price increase in the later half. So that's one element. The second is the mix. The mix itself has been improving. And if you take our focus has also been on improving the premium variant, and the other thing that is happening in terms of mix overall, and this is not specific to food is that with higher online sale. I think the mix is also a little more favorable because there is a mix element in that. And thirdly, I see rightly said, there is a regular -- reduced level of promotion. So all 3 are contributing, and this is not specific to Foods, but across all categories.
Right. My second question is on the India Tea business. We mentioned that market share has improved. So if you could tell us, is it versus the other main players. Second, again and again, you brought the raw materials scenario. So normally, we do have a good pricing pass-through to the customer. So is it -- you're highlighting the margin because you want to focus on market share and take a bit of more lag pricing? Is that the reason?
So let me take that one. I think the critical thing is we did gain market share and we did gain market share from most of our competitors, if I may put it that way. On the pricing itself, I think Abneesh, the critical thing is, there is the commodity cost increase, which normally is passed on to consumers. But we've got to be very mindful and careful of doing it at the right time for 2 reasons. One is make sure that margins are protected in terms of at least the rupees per kilo margin percentage is good to have. Also the second part is to make sure we are neither significantly ahead, nor significantly behind competition when doing that. So we've got to be nimble footed on the piece and that is why the watchout. Ultimately, the cost creditors will have to pass on to the consumers. The critical thing is when do we press that trigger. I think that is the critical point of watchout. LK, you want to add?
No, you're right, Sunil. So I think it is ultimately, we are -- I think we are responsible competitors. So we are not going to be doing something which is just for the sake of share. So we want profitable growth, and we want long-term profitable growth. So that is the orientation.
And historically, you have taken the price increase or the other competitor has taken in the last 3 years, who has taken it early?
It happens both ways. Sometimes, it's competition. It depends on inventory levels, what is our inventory position, what is the incoming inventory, et cetera. So there is no trend of who'd exit first. It varies depending on the situation.
And sir, last question, you've seen synergy benefit, distribution, the rest which is expanding. So beyond the current Foods portfolio, are you looking to add more products in the next 2 years or you want to scale this up? And could you look beyond Foods because your name is now Tata Consumer. So is there a thought process that long-term you can look at beyond Foods also?
So Abneesh, let me take that. I think we have very clearly said in the near term, the focus is to make sure that we've got 2 strong businesses both Beverages and Foods, which we need to put together into a common engine, and we remain extremely focused on that. And I think Ajit alluded to that, that they're having ambitious targets of finishing this entire integration by December. Once we have a strong engine, which includes a strong front end in terms of sales and distribution, a strong back end in terms of warehousing, logistics, transport, et cetera, I think after that, plugging and playing with any category is a very easy thing to do. That said, we are immensely focused on, I think you saw it in the priorities to raise the quotient of new products development and drive innovation in the portfolio, the portfolio that we operate in. So you should see a ramping up of new products within the segments that we operate. We will also -- I have also said we will expand our playing field. In the short term, you could probably see us branching out into adjacencies in the categories that we operate in. And in the longer term, obviously, the intention is to become a full-fledged FMCG company, playing across multiple categories. But first, we've got to get our whole own integration proper build the categories that we operate in, move out into adjacencies where we can leverage the capabilities that we have and then branch out into a full FMCG piece, one step at a time, if I may.
The next question is from the line of Prateek Panthaki from IIFL Capital.
Team, this is Percy here. And my first question is on your margins. This quarter, you've seen in the India business, a gross margin tailwind despite the input cost going up, probably because you were consuming old inventory. So going ahead, as you start consuming the new price inventory for the remaining of this fiscal year, do you see any risk that either the gross margins or the EBITDA margin will sort of on a Y-o-Y basis be lower than last year -- for the remainder of the year.
So Percy, let me put it this way. Tea prices remain extremely volatile. Right now, they are on a significant uptick. That said, there will be a significant crop expectedly in August and September. We could see movements of pricing out there. I think the critical piece is to walk with -- make sure that we are balancing volumes as well as pricing. We could make sure that we are protecting margins, but remaining competitive at the same time to continue to drive the volume momentum. However, like I said, the prices are a worrying factor. I wouldn't put our outlook out there on the margins as of now because that is something we've got to play closer to the ground.
Right, sir. Also, just wanted to understand in terms of your outlook on tea prices, I mean it's probably peaked, and you're saying that it might soften a little bit going ahead. But even after the softening, it will be quite high on a Y-o-Y basis. So to basically offset this kind of an impact, what is the amount of pricing that you need to take? You have already taken some. How much more pricing in percentage price increases will you need to take to offset the cost inflation in your opinion?
As I think LK alluded to it. We will not chase volume for the sake of volume. We will chase profitable growth. As our cost of inventory keeps going up, we will make sure that we translate it into the pricing. That said, we've got to make sure that the pricing that we take doesn't stall momentum completely. As I mentioned, it's a tightrope walk. You've got to constantly rebalance the cost and price numbers to make sure that while margins are healthy, you are not stalling volume. So I wouldn't hazard a guess on how much. Like I said, in the last 3 months, we've seen an uptick of about 50% on tea prices. Where it will end, I'm not sure. Because we keep doing this reforecast. And then again, we see the prices picking up. So it's a sort of weekly forecast on which we are operating today. We will continue to operate that way till we see stability coming back. Again, I said there is significant crop expected in August and September. But that said, we had expected significant crop in July. We did not expect the floods, which spoiled the crop out there. So keeping my fingers crossed that the crop should be normal. And if so, we should see some despite from the nonstop upward trend of the tea prices.
Yes, Percy. Percy there are a lot of...[Technical Difficulty] come back, let us take few more questions and then we'll come back to you.
Yes, Manoj.
Sir, should we take the next question.
Yes, please.
The next question is from the line of Arnab Mitra from Crédit Suisse.
Congratulations on a very strong quarter. My first question was on the distribution expansion as you do this merger of the 2 businesses. So doubling distribution in a year's time span is obviously very aggressive target. So do you have the outlet snapped out? Is it more rural expansion that -- where the gaps are larger, and you mentioned that your front end workforce essentially currently probably does both the businesses separately. And therefore, as they expand, they'll do it together. So does this mean net-net, there is no significant increase in cost, either for you or your distributors as you double your direct reach in this period?
So let me answer the last question first. I think, Ajit, during his presentation, said very clearly that we expect 100 basis points reduction in cost to serve at the end of this entire process. That said, right now, we are in the process of putting together the food and beverage system. We had a set of layers both in the sales organization structure as well as the distribution structure per se. We are focused on removing those layers and making sure we are flattening the structure, so that we become more nimble and agile. Work is in progress on putting together the distribution systems, both in urban and rural. That said, the focus is first to put the urban system together, and then we will move to the rural pieces. But ultimately, we'll finish the entire process by December. So there are 2 strong distribution systems coming together. And we do think that we've got the entire data mapped out and the plans laid out to make sure that we are doubling our reach, direct reach initially and then that translating with the wholesale multiplier into the total numeric distribution as we go forward in a period of 3 years. We remain fairly confident. You will see step-by-step implementation of those plans happening over the next 2 to 3 months.
That's very helpful. And just one last question on the near term. So Tata Sampann has had very good growth. And this is also a time where consumers are willing to try branded package products in much more easier ways. So in this shorter term, are you being able to ensure, firstly, supply chain in terms of product availability and distribution because this business had relatively low grocery distribution outside modern trade. So in the short term, what are the measures you've taken? And can you leap out this business in this period of next 5 to 6 months?
So let me put it this way, while you did term that Tata Sampann had a good quarter, I think there is far more potential for this brand, and we remain extremely focused on growing this brand across different channels and across the country. We did have some supply chain pickup in the early days, especially as plants were not allowed for the operational, et cetera, in lockdown areas. That said, over the months of May and June, I think we've seen progressive easing, and the supply chains are now robust. We are focused on expanding distribution. Like you rightly mentioned, there was a limited reach. In the very, very near term, we have expanded our reach and probably our market share in these categories. But one of the critical reasons why we believe that putting an integrated system, doubling our reach, active reach if I may, is critical because that is when we will see the real ticker for the Tata Sampann pulses, spices, the coffee business, et cetera., which are normally secondary to the tea and salt. So the objective of putting a direct distribution is to reach more outlets actively with the salesman who is selling our entire range. We remain confident that once we get this, we will significantly jump shift the availability of Sampann.
Yes. We will take one question from the webcast now before we go back to the call. The first question here is from Varun Arora. Varun says, could you spend a couple of minutes, changes that we are making in the distribution strategy as we look to increase direct fees and dealing directly with stockists and dealers. What were the issues earlier in distribution and how we are addressing it as we look towards the rest of the stockists and dealers?
Sunil, you take it.
Yes. So let me put it this way, both in Beverages and Foods, as I said, we had layers in the distribution system, a lot of which in the new age are not necessary. So we had the consignee agent system. So the company used to bill to the consignee agent who used to then bill to the stockists and the stockists used to bill to the retailer. In the Foods business, we had a distributor whom the company used to bill to and the distributor used to bill to the stockist and the stockist to the retailer. We have given notice to the consignee agents and the distributors, and we will deal directly with the stockist because we do believe a flatter system is much more effective and much more efficient. And we aim to be much more nimble and quicker out there in the market. Going forward, we will implement the salesforce applications with the front end, connected with DMS and the distributors, link it to our systems. So we have real-time analysis of what is happening out in the market. So as a company, both from a marketing/pricing/supply chain or the procurement pieces, we are able to react much more effectively and efficiently to the trends in the market.
Thanks, Sunil. One more question from the webcast from Prashant Kutty from Sundaram Mutual Fund. The question that he has is what was the extent of inventory gains that have come in tea business? What is the sustainable margin in the tea business? Question number two, there has been a sharp jump in the profitability of Foods business. Is it to do with any changes in arrangement or sourcing the Tata Chemicals. And what is the level of profitability now in pulses and spices?
LK.
LK, will you take this?
Yes. Okay. So there are multiple questions there. I'll just talk about the full business and then come to the Foods business, right? As far as the tea business is concerned, right, we -- you need to remember that, first of all, you need to remember tea business, the volatility is good in the Indian tea business than in the international tea business. International tea business has not had that kind of volatility as of now. In the -- in India, you should remember first, what happened was initially during March, April when there was work to be done in terms of plucking, tuning, the right people were not in place because of COVID and other factors. So the standards that were employed, there's a lot of discussion on what could have been done. So it's affected crop further impacted by rain, which are unseasonal in some parts of Assam. And 60%, 70% of the tea production in India comes from Assam. So there is a problem, which is in this year, which is not a problem forever. It is something which is specific to the current year, and that has had volatility in tea prices, right? So it is still, as Sunil mentioned earlier, and some of you are familiar that a lot of the crop comes in, in July and August and going into September, we've had this continuing in July. There's a hope that crop will also improve in August, but notwithstanding a better crop in August, you are looking at a shortfall this year in crop, which could be significant. So you are seeing tea price increases across the board, which are fairly significant. Now the way we will react will depend also on -- obviously, we don't want to pass on all the cost increases. There are other efficiencies, and beyond a point, volumes will also be impacted. But the other side of looking at it, just for larger branded player perspective is we are better equipped because even the smaller players will have to pay more for tea. We'll have to -- will find it difficult to stock large quantums of tea. So there will be also some amount of competitive advantage that we will get. So I'm just trying to explain some of the dynamics, which are there, and it's going to be an unusual year. So we have taken up prices, will they look to take up prices further, but also look at rationalization and volume sensitivity. There will be pockets of opportunities vis-à-vis the small players, which could emerge, right? So this is the overall dynamic. I think the margin will not be what you have seen in the first quarter. And the strategy is, obviously, we have built up a little more inventory, but then everybody is waiting for the big supply in August. So that's the overall dynamics of the industry. So difficult to give you a specific direction, but it's going to be a combination of volume, pricing and efficiency. And to some extent, we will have some benefits of competitive advantage and volumes, which will play out on the results. So it's difficult to give a forecast. As far as the Foods business are concerned, there's no change in any pricing arrangement with Tata Chemicals. But one thing is clear is that we've had good volumes, and I think our presentation talks of record volumes in May and June. Full credit to also the team in Mithapur for managing these volumes we've had record volume months. I think that's part of the region for profitability improvement. Apart from overall better performance of pulses and spices at overall better margin because of selling through some of the channels where we don't necessarily have some of the costs that we would otherwise incur. So these are a combination of reasons. We obviously did turning back a little bit on promotions in this environment.
Thanks, LK. So we'll go back to the calls. Faizan.
We'll take the next question from the line of Gautam Trivedi from Nepean Capital.
Yes. Congratulations on the record of results and...[Technical Difficulty]
Mr. Trivedi, the audio is breaking from your line.
Hello. Is this better?
Yes, now it's better.
Okay. Yes, as I was saying, Sunil and team, great set of numbers. And frankly, we were very, very happy with the results. I had 2 questions. First question was, I was at a pharmacy yesterday near my home in South Mumbai. When I saw for sale product called Tata Q, ready-to-eat biryanis, noodles and pastas. What exactly is this? Is this part of our company? Is this a separate? And I always thought that Chandra's idea was to put all of the consumer business under 1 roof. So which arm of data is this and if it's not part of us?
Okay. So let me take that question. Tata Q has been launched by Tata Industries. I would leave it at that and not venture into further speculation comment on anything beyond that. They are into packaged foods as of now. I believe it's a great product. I have tasted it. And Tata Industry is normally incubate businesses and take them to a particular scale. As I said, I would leave it at that for now.
No worries. That's fine. Second question I had was to do with the AGM of Reliance Industries, where Mr. Ambani laid out plans for what JioMart wants to do. And it appeared, again, my interpretation is it appeared that they wanted to also help the kirana stores, perfect their inventory and so forth. Again, that's my interpretation. And I wanted to understand how would that impact us in any way or our distribution network?
So let me put it this way. The distribution system out there is evolving on a consistent basis. 5 years back, online did not exist. 5 years back online B2B did not exist. There were certain modern trade formats that did not exist. I would say, yes, Reliance has flagged off very strong ambitions in expanding their distribution to kiranas and making sure that they play the supplier role, if I may, to the kirana stores. As they expand their business, I think we've got to make sure that we partner with them and we drive our brand into their system and reach the kirana store. So wait and watch because they've started the pilot in Mumbai and now expanding nationally. They are already listed with them. And they do carriers. I think the critical piece is to stay focused and make sure that, a, we -- our supply chains are robust to cater to them as they expand their network. But more importantly, keep a laser focus on the consumer, make sure that you have product, price, entire proposition appeals to the consumer. So the pull-through happens with the kirana stores/modern trade.
The next question is from the line of Sathish from JM Financial Mutual Fund.
A fantastic set of numbers. I just have a work review question on how you want to take the company forward. Because you have so many agro commodities that you are dealing with, which have their own cycles, while demand is continuous and constant, growing, of course, but continues. So this inventory management across geographies, logistics, warehousing, inventory, all that requires for a huge razor sharp management. Are we -- I mean, when you do your internal benchmark, are we all there already in terms of our inventory management, procurement, cost control, et cetera. And what would be your ambition to take this forward? I mean, in terms of margins, like you said.
So let me answer that in 2 or 3 pieces. A, obviously, both the businesses, whether it is the Food business or Beverage business has been successful in managing this commodity costs. And that is why we build this business to scale. And that is why, for example, we've delivered the last quarter, if I may. But that said, I think there is plenty of opportunity to improve from where we are. And I would say digitization end-to-end is a key to managing it. I did allude to that, that we are trying to build a direct reach to outlets because if we do that, enable the salesmen on the ground to link to the distributor at the back end who links into our system and our system links in back to the procurement team, I think real-time visibility of what's happening on the front line will make sure that we keep our entire supply chain and inventory positions lean and cost efficient. So the focus is on building that. Apart from that, we are looking at different technologies to make sure that we improve our ability to forecast commodities and deal with commodity movements faster. In tea, for example, we've already implemented a system called DigiTea which we are now expanding and taking across different businesses across the globe, which, for example, maps out every single auction piece does a complete detailed data analysis and feedback to the buyers, so they know what to buy, how to buy, what is the gaps. So a lot of work in process. Just to reiterate, I think we are good in the space that we operate, but we have opportunity to become better. And leveraging new technologies and digital into the future is going to be key to enable that.
Also in terms of your final debt number because the cash flows have been very strong this quarter. Have you paid down debt significantly during the quarter and the next half? Would we see debt numbers that are significantly lower level?
LK, would you want to take that?
Yes. Sure. Sure. I think the overall, our net cash position is about INR 2,000 crores, and the gross cash is about almost INR 3,000 crores, right? The debt that we have primarily relates to long-term credit for the Vietnam project and some credit in Eight O'Clock, which has very low interest rates. So there's no urgency to pay them down. So we are -- we had a very strong quarter in terms of cash flow because profits were high and we manage working capital well. And there is one other point that as we are implementing a uniform sales and distribution system and we bring the advantages and the leverage of scale as we build a larger platform. We're also looking to review some of our credits and the like, which also will have a bearing on working capital. We started implementing some of these with more to follow. So long story short, it's been a good quarter in terms of cash flow. No hurry to pay down debt. Going forward, we expect to have good cash flow with one caveat, which is in the short term, the tea prices are very volatile. Even though we may be holding less stock in terms of per kg, the unit price may be so high that just from a free cash flow perspective, we can have an impact. But that's going to be short-term and not from a longer-term perspective.
Faizan, we'll then take the last 2 questions.
Sure. The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.
My first question is, in the global markets, also, we have witnessed a very good growth during the quarter. So is there any significant improvement in market share? That's question number one. And my second question is with reference to capital allocation. So in your entire strategy, how do you see the return on net worth and return on capital employed because that is very, very muted compared to many other companies in the FMCG sector. And if I can squeeze 1 more because in your speech, you mentioned that your aspiration is also then to become full-fledged FMCG company. This is over what time period? And what you mean by full fledge because FMCG is a huge sector? So if you can give some clarity on that as well.
Okay. So let me take the initial part, and then I'll ask LK to probably chip in. So very, very simply put in terms of FMCG. Our ambition is to become a total FMCG company. Like I said, we are right now a food and beverage company, playing in the big categories of tea and salt, if I may. We've got the nascent categories of pulses, spices, and we've got a coffee brand, et cetera. We will look to scale that up, slowly expand into the adjacencies which we operate, not far away from the core. And once we have built in our total system of the front end and the back end to get in other categories, we will branch out to larger categories. We are right now in the middle of doing a full analysis of different categories out there, where we should have the right to win. We will not enter a category for the sake of entering it or adding to the top line. We will enter a category where we can create value for all our stakeholders. Make sure that we are delivering healthy bottom lines, which add to the business. LK, would you want to add to that?
Thanks, Sunil. So I think the points that you started out with on -- return on capital employed, right? So you have to look at it that we are creating a platform for growth with a very strong sales and distribution system at the lead, supported by a variety of things, right? So on that platform, we want to build growth. And growth will come from existing categories, and we will take Sampann as an example, it is a existing product with very, very low distribution, very high potential to grow, right? So there is a transformation of the existing product range. We can grow on some of the new products in Sampann like snacks and all that which have even lower distribution than pulses and spices. On top of that, we will seek to enter into other products and categories. So overall, as you achieve growth on the platform, giving us at other levers, the return on capital employed and hence return on ratios will improve. To that, you have to look at margin expansion, tighter control of cost, leveraging scale. So all this will help us in the medium-term to significantly improve return ratios from where they are today. So that's the aspiration. That's the journey on which we've embarked.
And if I can just add to what LK said, I think the critical thing is to get the platform right, that's why we are immensely focused on getting the integration right and making sure we are building out a system from which we can scale in the future. As we get that system right, then you would start seeing the addition of categories and segments and slowly us branching out into a full FMCG company.
Great. My -- there is one more question on the international side. By the...
I'm sorry, we are running short of time, and there are still people who would like to ask questions. So you can reach out to me separately, and I'll address sort of questions you have. Faizan, can we take 1 last question from Sanjay from Canara.
Sure. The next question is from the line of Sanjay Bembalkar from Canara Robeco Asset Management.
Yes. Yes, is it audible?
Yes, it's audible.
Sir, very good financial performance. And my question is on the raw materials position in India. Sir, most of our raw material is farm produced and now purchasing from farm produce is allowed outside the purview of 18(c) Act. So does this have any positive or negative impact on our business going ahead?
So let me take it and then I'll ask LK to input. Yes, there have been changes in the whole procurement of farm produce, if I may, from an India perspective. Right now, we are still in the process of understanding the entire pieces, and more importantly, understanding how we could take advantage of it. Once we go through the entire understanding, I think we will put in systems to make sure we are leveraging this for the full benefit of the company. LK?
Yes. I think, yes, it's clearly a big opportunity because we have direct access to produce a society, and you can have a preferred supply relationship. That helps us to ensure reliable quality supply for one, build traceability for -- as another example. And overall, you can develop a variety of products based on consumer demand based on long-term relationship with farmer. And the disintermediation will also be a win-win in terms of cost for us and return to the farmers. So all these opportunities are there. We are just about to start a few pilot projects in certain crops, which we are interested in. So that's where we are, but I think more in the medium term.
The next question is from the line of Sumant Kumar from Motilal Oswal.
Yes. So you mentioned in the PPT, do you have the market share in tea. So is a branded player gaining market share due to supply chain issue for around net sales or any other factors for that?
So I think the critical thing is, 2 things. Number one is procurement, and number two is distribution. I think during the lockdown, whoever had a better procurement system and whoever had a better distribution system did make inroads. I think we made it better than most other players, if I may. And yes, there was supply of tea. There was prices going up. A lot of the smaller players, like LK mentioned, were not very sure whether the prices will continue to go up or down. So they did not refill inventories weighted on the sidelines. We continue to supply the market, and I think we came out better off in the bargain.
Okay. And the second question is regarding A&P expense. So this quarter, it is lower. Can you talk about the next couple of quarters, it will be like that only?
See we're in the space of selling branded products, and to sell branded products, there are 2 or 3 critical elements: number one is sales and distribution; number two is A&P; and number three is innovation. We remain focused on all of the 3. You would see some ups and downs in short burst. But overall, we do believe that we have to spend to build our brand. So it is not that we are cutting out A&P for the medium-term or even the shorter term. We would see an increase in A&P spend as we go forward to make sure we are strengthening our brands with the consumers.
Just 1 addition on A&P spend. Actually, I think we spent more in the U.K. and less in India. So overall, it's not that we under spent anything significantly in A&P. Just want to make that point. If you look at consolidated, it will be different from stand alone.
Ladies and gentlemen, due to time constraint, we'll take that as a last question. I would now like to hand the conference over to Mr. Rakesh Sony for closing comments.
Yes. Thanks. Thank you, first of all, everybody, to come over and join this conference. We had almost 550 people logging for this call. And thanks to the entire team of Tata Consumer, who led us to deliver this fantastic growth in Q1. As we all look forward to Q2, we will put our best to forward to ensure that the performance of the company continues. With these words, we look forward to see you again in Q2. Thank you so much.
Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.