Tata Stock: Potential Gain of 17% In Tata Consumer Due To Acquisitions, Rights Issue, And Tata Coffee

Tata Consumer would pay Rs 5,100 crore for Capital Foods and Rs 1,900 crore for Organic India out of the entire amount of Rs 7,000 crore.

The company’s strategy aims to expand into new adjacent high-growth/attractive margin food and beverage sectors is aligned with this purchase.

Coffee from Tata:

Furthermore, the board of Tata Consumer authorized the distribution of fully paid-up Equity Shares with a face value of Re. 1/-to Tata Coffee’s qualified shareholders.

According to the share entitlement ratio, for every 22 (twenty-two) fully paid-up equity shares of TCL owned by the Member (apart from TCPL) as of the Record Date, the firm y has issued and assigned 1 (one) fully paid-up equity share of Re.1/-each of TCPL. As a result, the Company has allocated 36,09,571 fully paid-up equity shares of Re.1/-each.

Additionally, for every 55 (fifty-five) fully paid-up equity shares of TCL that were owned by the Member (apart from TCPL) as of the Record Date, the firm issued and distributed 14 fully paid-up equity shares of Re.1/-each of TCPL. Consequently, the Company has allocated 2,02,13,595 fully paid-up equity shares of Re.1/-each.

January 15, 2024, was designated as the record date for identifying eligible shareholders in the Tata Consumer-Tata Coffee merger.

Commercial Papers: Rights Concern

The board also approved the company’s plan to raise money for the issuance and allocation of Commercial Papers, up to a maximum of Rs. 3,500 crores. These funds will be used as bridge financing to make it easier to pay the consideration for the proposed acquisition of Organic India and Capital Foods.

Additionally, it will raise money by issuing equity shares of the company with a face value of Re. 1 each through a rights issue to eligible equity shareholders of the company as of the record date (which will be decided by the Board’s “Capital Raising Committee” in due course), subject to obtaining regulatory and statutory approvals. The total amount to be raised will not exceed Rs. 3,000 crores.

In order to implement the rights issue, the Board or the “Capital Raising Committee” it has appointed will decide in due course the specific terms of the rights issue, including but not limited to the issue price, rights entitlement ratio, record date, timing, and terms of payment, in accordance with applicable laws and subject to obtaining any necessary approvals.

Tata Consumer Share Price: With a market valuation of Rs 1,06,882.79 crore, Tata Consumer’s shares were trading at Rs 1,150.50 each on Saturday, down 0.95% on the BSE.

Tata Consumer shares have increased by more than 55% in a year.

Brokerages: What are their thoughts on Tata Consumer?
JM Financial said in its research note that “TCPL’s purchases of Capital Foods and Organic India indicate an aggressive attempt to exploit white spaces with the explicit goal of constructing a more extensive premium F&B business with significant growth potential. TCPL’s valuation is c.7x at CMP, c.5-5.5x at prices from 3-6 months ago. The acquisitions contribute c.6% to TCPL’s sales and EBITDA. The acquisitions are valued at c.6.8x and c.5.2x FY24E sales of Capital Foods and Organic India, respectively. Since Organic India’s growth profile is spotty and its margin is declining, more effort needs to be made to address these issues. Capital Foods has expanded effectively in the past (5-year sales CAGR of 15%) and has excellent margin potential.

The brokerage went on to say, “The immediate goal would be to address cost-structures (including trade-related) to enhance profitability and to unlock value in predicted huge TAMs by leveraging TCPL’s distribution scale. We believe that this may need a few more years of effort in contrast to the management’s suggested Year-2 break-even point.”

Elara Capital, meanwhile, said, “To account for the consequences of the acquisitions, we decrease our PAT by 4.4% in FY25E and boost it by 6.2% in FY26E. As we roll forward to March 2026E, we assign 50.0x (from 48.0x) FY26E P/E to the standalone business and new acquisitions, 6.0x (from 5.0x) price/sales to NourishCo & Soulful businesses, 2.5x (unchanged) price/sales to the international beverages business and Eight O’Clock, and 1.0x price/sales to the Tata Coffee unbranded business. We reiterate Accumulate with a higher SOTP-based TP of INR 1,246 from INR 1,030.”

Lastly, Motilal Oswal stated, “TATACONS’s holistic strategy aims at transforming by: i) strengthening and accelerating its core business, ii) exploring new opportunities, iii) unlocking synergies, iv) digitizing the supply chain, v) expanding its product portfolio and innovation, vi) enhancing its focus on premiumization and health & wellness products, vii) embedding sustainability, and viii) expanding its sales and distribution infrastructure, supply chain, and capability building towards being a multi-category FMCG player.”

The research paper further said, “In line with its strategy of new opportunity exploration, TATACONS acquired the CF and OI businesses that will contribute ~8%/9% of the incremental PAT for FY25/26 and is expected to support margin expansion backed by the synergies..”

“We have taken into account the financials of both companies, assuming that a rights issue will raise INR35 billion, or 50% of the deal value (or 61% of the INR57.25 billion urgent funding requirement).” According to Motilal’s comment, “this is resulting in an EPS dilution of 3%/2% in FY25E/26E and it will be EPS accretive from the third year of operations.”

Regarding the value, Motilal stated: “Over FY23–26, we project a CAGR of 13%/18%/25% in revenue/EBITDA/PAT. We confirm our BUY recommendation for the stock and arrive at our SoTP-based TP of INR1,350.”

There is potential for an increase of more than 17% from the present price level.

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