Tata stock: Tata Consumer shares up 40% in 1 year; should you buy, hold or sell?

ICICI Securities is positive on shares of Tata Consumer Products Ltd (TCPL). The brokerage called Starbucks India's plans to more than double its store counts to 1,000 by FY28 ambitious, but achievable. The domestic brokerage believes that Tata Starbucks can potentially reach 20 per cent Ebitda margin against Starbucks Corporation's 18 per cent.

It said the ambitious Tata Starbucks target is probably triggered by vacuum caused by partial exit of Café Coffee Day, even as Tata Starbucks is far more premium-positioned. Besides, it may be due to the rise of new chains such as Blue Tokai and Third Wave, ICICI Securities said.

The brokearge is modelling in an enterprise value of Tata Starbucks at Rs 21,100 crore and Ebitda multiple of 24 times. It attributes Rs 91 per share for Tata Starbucks in its Tata Consumer Products Ltd (TCPL) valuations.

"We model TCPL to report revenue and PAT CAGRs of 15.8 per cent and 18.9 per cent, respectively over FY24-26E led by improvement in profitability of India Foods and revival in profitability of international business. We maintain BUY and value the stock at unchanged target price of Rs 1,385," it said.

On Wednesday, the Tata Consumer stock was trading at Rs 1,213.20, up 0.89 per cent. The stock is up 40 per cent in the past one year.

ICICI Securities said Tata Starbucks has consistently reported 65 per cent plus gross margin over FY17–24. Also, the gross margin trajectory is steadily improving, led by higher scale resulting in better bargaining power with suppliers; and stable commodity prices. It said the cost of goods sold as percentage of sales for Tata Starbucks is in a similar range to Starbucks Corporation.

"It stood at 31%–32% over FY21–23 for SBUX as well as TS. The employee cost to total sales for TS is lower than SBUX. Other operating expenses to total sales has declined for TS while it remained flat SBUX between FY19–23," it noted.

ICICI Securities said while Tata Consumer Products' revenue per store stagnated over FY14-24, there is potential to expand revenue per store due to steady premiumisation of the portfolio, expansion in regions where the competitive pressures are lower and inflation.

"We note the working capital requirements seem low for this business as the working capital days have largely remained negative over the years. Higher creditor days (average of 101 days over FY21–23) reflect TS’s ability to leverage its strong brand equity against suppliers," it said.