Tata Consumer Products share price jumps 4% after firm announces reorganisation; Stock may rally 21%
Tata Consumer Products share price jumped 4 per cent on Wednesday, a day after the company announced reorganization of India and overseas business to simplify the corporate structure, align and synergize its business. It came out with two announcements focusing on creating a single consumer product entity by consolidating the branded coffee business of TCL (excluding the coffee plantation segment) with TCPL and also buying out the minority stake in the TCP UK business. Tata Consumer Products shares were quoting Rs 777.84, up 4.66 per cent on BSE intraday. Domestic brokerage firm Motilal Oswal expects the stock to rally over 20 per cent going forward.
Reorganistation to create synergy, improve efficiency
The merger is focused on simplifying and creating synergy in the consumer business. It is expected to result in “focused management attention, operational efficiencies, revenue and cost synergies including from commonality of customers, sales and supply chain opportunities through enhanced geographical reach, optimization of capital, operational (including promotion) expenditure, leveraging sales and distribution network and simplification of overlapping infrastructure,” said Motilal Oswal in its report.
This reoganisation is likely to bring out synergy of operations and benefit of scale and additionally. The legal and regulatory compliances of both the listed entities will be unified and streamlined. It will enable efficient consolidation of ownership interests in the international branded business owned by TCPL and TCL which will result in cost benefits, higher operating and other efficiencies, the brokerage said.
The acquisition of a minority stake in TCP UK will give 100% ownership in all core businesses of the company along with enabling efficient reorganization of international businesses. The combined entity will house the entire bouquet of consumer brands such as Tata Tea, Tetley, Eight O’clock, Tata Coffee, Tata Salt and Tata Sampann among others creating an operational synergy in terms of common customers and sales & supply chain opportunities through enhanced geographical reach, according to Motilal Oswal analysts.
Should you buy Tata Consumer Products shares?
Motilal Oswal: BUY
Target price: Rs 900
The management believes that with the consolidation of ownership interests in the international branded business, cost benefits, higher operating and other efficiencies is expected to kick in generating an incremental EPS of around 5-10% going forward. “We expect a sales, EBITDA, PAT CAGR of 9%, 17%, 23% over FY21-24E, respectively. Factoring the increase in outstanding share by 3.4% in FY24 due to restructuring and minority income adjustment; we increase our EPS estimate by ~3%,” the brokerage said. The brokerage maintained a Buy rating on the stock with SOTP based target price of Rs 900, implying 21% upside.
JM Financial: BUY
Target price: Rs 805
JM Financial in its note said that these transactions do not materially change their overall valuation construct for TCPL. It estimates TCPL’s EPS to go up by 4-5% at best but the quality of incremental earnings is weaker (from non-branded and international tea which represent two of the least favoured businesses in TCPL’s portfolio).
“The street may still choose to view this a bit more favourably, though, also because a simpler organisation structure would make it easier for some of the businesses to be ‘monetised’ in the future, if need arises. For now, Tata Coffee holders are the clear winners from this exercise,” it said. The brokerage has a Buy rating on the stock with a target price of Rs 805.
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