Shares of Tata Consumer Products Ltd. gained after Morgan Stanley upgraded the maker of Tata Tea by two notches, citing a shift in its focus toward a domestic-oriented business.
“We estimate the share of domestic business to rise to over two-thirds by FY24, given the focus on growing the India branded business,” the investment banking company said in a note. “By FY24, we forecast food and beverage net margins to outpace international margins.”
The research house has also raised its FY23 and FY24 EPS estimates by 5% and 11%, respectively, to factor in its more optimistic outlook on the domestic branded business and better margin. “We build in higher medium-term growth for the foods business. We expect Tata Consumer to deliver fastest CAGR in our staples coverage, with a 200-basis-point cumulative Ebitda margin expansion over FY22-FY24.”
Tata Consumer stock, the note said, has been one of the laggards. The changing pivot toward domestic business is driving a rerating for the stock. “While there are concerns on inflation, rural demand weakness, Tata Consumer is relatively better placed on both fronts—stable tea prices and higher urban salience.”
Over the medium term, with the changing pivot and higher growth potential, the stock can trade higher, Morgan Stanley said.
Shares of Tata Consumer had gained as much as 3.9% intraday but pared most of it to end 0.8% higher. Of the 19 analysts tracking the company, 14 recommend a ‘buy', three suggest a ‘hold' and two have a ‘sell' call, according to Bloomberg data. The average of 12-month price targets implies an upside of 17.4%.
Here are the other highlights from Morgan Stanley's note on Tata Consumer...
Upgrades to 'overweight' from 'underweight', hikes target price to Rs 886 from Rs 600 apiece—an implied return of 17.4%.
There is a step-up change in capacity building with a major focus on distribution, innovation and premiumisation strategy, and a strong key personnel team.
Starbucks and Nourishco are opportunities for the company to build it's discretionary portfolio.
The company' strong cash balance strength allows it to use the inorganic growth lever to scale up the domestic business further.
Any further weakness in the stock could provide a strong case for long-term investors to engage in the stock
Key Risks: Under delivery on growth, especially in the foods business.
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