High conviction stock pick: Tata Consumer shares to gain from merger; check target price

Tata Consumer products, TGBL, Tata chemicals

With robust performance across business and merger of Tata Chemicals with Tata Global Beverages (TGBL), Tata Consumer Products is now a ‘high conviction buy’ pick of a major research and brokerage firm. Motilal Oswal has listed Tata Consumer Products shares as ‘high conviction buy’ with up to 14 per cent upside. Tata Consumer Products share price gained nearly 2 per cent in the trade today to hit the day’s high of Rs 384.75 apiece on BSE. The stocks opened at Rs 378.45 and quoted intraday low of Rs 377.25 in the session so far. With today’s gain, the market capitalisation of Tata Consumer Products sits at Rs 34,986.71 crore. “To realize its vision, the group has not only consolidated Tata Chemical’s consumer business with TCP but has also brought in a new CEO and MD, Sunil D’Souza, to steer the company in the right direction,” Motilal Oswal said in a latest note.

The brokerage firm sees the merger in line with Tata Group’s focus on creating a single FMCG-focused company and offers multiple synergies, including higher outlet coverage, focused new product development, stronger cash flow generation, and scale efficiencies. “It marks the company’s entry into an additional segment of staples, with addressable market size of Rs 770bn,” it said.

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On the back of strong balance sheet, robust free cash flow generation and decent management quality, the brokerage firm positive on the stock with a ‘buy’ rating with a price target of Rs 431 per share. Tata Consumer Products is part of a joint venture with Starbucks and has a JV arrangement with PepsiCo, which manufactures the packaged water and flavoured water products under the brands Himalayan, Tata Water Plus and Tata Gluco Plus. Tata Consumer Products owns brands like Tata Salt, Tata Tea, Tetley, Eight O’Clock Coffee and Himalayan water. The company also acquired the branded tea business of Dhunseri Tea & Industries, strengthening its presence in the premium tea market in Rajasthan, through brands such as Laal Ghoda and Kala Ghoda.

Another brokerage company IIFL Securities has also reiterated ‘add’ rating to the stock. “Overall working capital improved by 6 days, to 70 days of sales, driven by lower working capital requirements at the recently-merged India foods business,” IIFL said in a recent research note. “Going forward, management would focus on i) realising synergy benefits from the merger, ii) growth in the core categories, iii) innovations and iv) continued improvement of the margin profile of the international business,” it said.

The net sales of Tata Consumer Products rose 35.45 per cent to Rs 2,405.03 in January-March quarter of FY20, as against Rs 1,775.46 crore in the year-ago period. Total expenses stood at Rs 2,179.41 crore, compared to Rs 1,649.65 crore earlier, up 32.11 per cent.

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