Tata Consumer Products Rating- add; A good fit in Tata Consumer portfolio

Tata Consumer Products Rating: add; A good fit in Tata Consumer portfolio

FMCG Giant Tata Consumer is in talks to acquire Bisleri at Rs 6,000-7,000 crore according to media reports. Bisleri is a strong market leader with 13-15% marketshare with robust growth/profitability in a large category that is growing at 15%+ CAGR. TCPL can drive share gains, margin expansion and leverage Bisleri’s distribution to augment and scale its liquid beverages portfolio. Bisleri would be a good addition to TCPL if acquired at a reasonable valuation, even as the large capital outlay for the packaged water business would limit its ability to pursue other inorganic opportunities.

While both Tata Consumer and Bisleri have confirmed talks, a final decision has not been made yet. Bisleri promoter has indicated that he is not looking at a complete stake sale and it is expected to register revenue/profit of Rs 2,500 crore/ Rs 220 crore in FY2023 estimates (versus Rs 1,460 crore/Rs 92 crore in FY2020), and this deal is expected at a valuation of Rs 6,000-7,000 crore (unsure if real estate is included), implying 27-32X FY2023 estimates price to earnings ratio (PE). Bisleri registered 19%/ 24% compound annual growth rate (CAGR) in revenues/Ebitda over FY2016-20. As per Euromonitor, the packaged drinking water market in India is pegged at Rs 30,000 crore (retail sales), with a value/volume CAGR of 14%/19% over CY2011-21. The aggregate market share of Top5 players is <40% (Bisleri ~13-15%, MSD-to-HSD for PepsiCo and Coca Cola, as per our checks/Euromonitor).

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TCPL is present in packaged water through NourishCo (75% growth to Rs 600 crore in FY2023 estimates; key brands Himalayan Rs 70/liter, Tata Copper Plus

Rs 17/liter), and it is expanding distribution rapidly. Given this, one can argue in favour or against strategic rationale—Bisleri is a strong market leader with robust economics in a large category that is growing at 15%+CAGR. TCPL can gain a meaningful share (combined brand/distribution strength of Tata-Bisleri) and expand margins (synergies). TCPL can also leverage Bisleri’s pan-India distribution to augment and scale up its liquid beverages/RTD portfolio. Secondly counter argument would be Bisleri would not add any capabilities, and the large ticket size of this acquisition could restrict TCPL from considering other inorganic opportunities for a foreseeable future. Overall, Bisleri could be a good addition to TCPL’s portfolio, provided it is acquired at a reasonable valuation (say, 20-25X FY2024 estimates PE, including synergies). Given TCPL’s presence in packaged water and its CEO’s experience (20 years across PepsiCo and Coca Cola), we do not expect any integration challenges/execution slippages. Rights issue seems to be a good option to fund the transaction if it fructifies TCPL’s net cash balance stood at ~Rs 2000 crore as at end-Q2FY23. Bisleri acquisition outlay of Rs 6,000- 7,000 crore could be funded through (i) debt financing, (ii) QIP (unlikely as it would lead to dilution of Tata Sons’ 34.7% stake in TCPL), (iii) preferential equity allotment to Tata Sons, or (iv) rights issue (likely to be EPS accretive).