What are the demand trends, currently, particularly for products for consumption outside the home, given that inflation in the international markets has clearly weighed on the performance in the second quarter? What does reality look like at ground zero?
Before I get into that, just a top level view of our numbers; we announced results on Thursday – 11% revenue growth, 4% EBITDA growth and 36% group net profit. All our businesses are on a very strong footing; India’s beverages are almost flat – negative 2%; food on a roll with 29% growth, international up 7%, India growth business is up 50%, ready to drink up 64%, Sampann 37%, Soulfull 112%.
Financially, we are on a strong wicket. We have improved margins in all our India operations. India’s EBITDA actually increased by 25%, an improvement in packaged beverage margins. Group operations are growing and improving gross margins by 30 bps. Strategically, we feel we are in a good place. Yes, it is soft in Indian beverages, but we have had market share. Salt will continue to increase market share. We had talked about 1.5 million stores in March and we are already at 1.4 million. So we will surpass that.
A&P we continue to push forward, we are now at 6.4% for the half year compared to 6.1% last year. We gain leverage on the cost. Personnel costs are, for example, 30 bps better, innovation 2x what we launched last year. So overall, we’re doing well, but there are two pieces specifically that are showing in our numbers for this quarter: a) In the India piece, there’s some softness in demand very specifically semi-urban, rural and more I would say Hindi belt. But the good news is that everyone was predicting that as we get into the festivals and as the monsoon normalizes, we will see demand come back. It is very, very early days but we are seeing a better second half of September and early October.
We will have to distill the festival numbers out of it. So I make no comment. I think we will see pressure; it will be less than last quarter but we will see pressure for at least a quarter on that piece. Outside, Covid is behind us and we are up and running. Our NourishCo businesses are mostly out of home and we’ve grown 64% and feel good about it.
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Our Starbucks business has a very strong wicket. We are up 57% compared to last year. Our same store sales compared to pre-Covid have increased by 24% and they are EBIT positive. Internationally, it’s a perfect storm hitting us out there whether it’s inflation, demand and currency. We have to deal with it and get plans in place. We are seeing a lot more than we expected on inflation in both the US and the UK and we are ready for it.
In the UK, the new pricing is already in effect. In the US we have already announced it. Accepting it takes some time with the dealers. Currency is an issue, we have both transactions and translation as all tea is bought internationally in dollars but we sell it in the UK in pounds. We know what the pound is doing and when you translate that into Indian rupees the pound has depreciated. So that’s the other piece.
Overall, there are several moving factors but what we feel good about is whether you look at all the major CPI market shares or whether it is financial. I think we are in a good place. Incidentally, while we will say press in international markets, in the UK we have gone beyond Twinnings and are the number three player. So structurally, we have been in a good place. We just have to put our heads down and deal with this demand and inflation.
How do you intend to do that given that rural areas have lagged behind urban markets? What is the breakdown in growth rates?
For us, overall rural areas are growing faster than urban areas, but that is an anomaly because we always had a lower percentage in rural areas than in urban areas. So we do two or three things to make sure we address the numbers.
First, we are dramatically increasing the number of wholesalers and therefore our reach to rural areas, focusing on the specific packages that go to rural areas. We aim to raise that figure significantly. Two, in specific parts of the country, where we’re seeing softness, we’ve taken pricing action and that’s why we’ve gained 10bps on volume but are down 50bps on value share because we’ve done bundle price adjustments just to get that assimilated.
We believe the economy will bounce back given the good monsoons and all the measures taken by the government.
A lot of your business is centered around what’s happening with tea, what’s happening with tea price trends? Tea as a commodity has seen a decline and the decline started two quarters ago. It should have been captured in how things would have moved for that vertical but I don’t see that happening.
It is right. If you look at the long term trends, the supply in India is greater than the demand for tea and hence the price has to come down. It had gone up during Covid and after that it was a secular downward trend. The curve has flattened out right now. First of all there is the whole history of Sri Lanka and therefore orthodox tea is disappearing from the market. Many Indian vendors had switched to orthodox and hence there is an impact on CTC and hence it is flat.
Secondly, the June-July floods affected the harvest in Assam in July and August. Right now we see them trending about Rs 10 higher than last year, but going forward I expect tea prices to come down. It comes into our economy as we move forward. So in the medium term, not even in the long term, that’s the trend that’s coming.
If the economy comes back, tea prices remain stable, the food-minus-beverage business is doing very well for you, how will the second half differ from the first half? The first half was about managing costs, battling inflation, trying to get the house in order. If things turn around, are we looking at a gradual jump in the second half?
I would split the other half into two parts. I would say this quarter, for India, is still a wait-and-see policy and although we are seeing early signs, but I would still reserve judgment. In terms of international, as I mentioned, we have to take pricing measures and currency measures. We have to take structural cost measures which will take about a quarter.
So for us, this quarter is still in the same ballpark but going forward, once we get this on track and assuming the macros turn around, we’re very well positioned. I keep telling my teams that there are two fundamental factors that are the indicators of a strong business – market share that gives us strength in the market where we are good at tea. We continue to strengthen in salt and all our growth businesses on a very strong trajectory.
The second is margins. Our margins are back more or less where they should be. So if the volumes come back, we are broadly in a very good place.
You talked about tea prices and how the tea industry is shaping up, but given that coffee prices have been quite low, how do you see the coffee industry shaping up?
We have three different businesses. It’s eight o’clock in the US. We have coffee in India consumer companies and we have
which is the subsidiary. Now Tata Coffee will obviously benefit from increased coffee prices as we move forward and therefore we feel very good about that. Eight O’Clock Coffee in the US.
Coffee prices are going up in quick succession. We were hedged for a while and now we are putting up new hedges so there is a bit of pressure but we are taking pricing steps. It should be back on steam. The US business actually has very strong growth, very good margins and so it will come back in the next 45-60 days. In India, the coffee industry’s coffee grew by 39%, albeit on a small base, but we continue to move forward and share. Overall, coffee is a big growth factor for us and we feel good about it.
You talked about cooling inflation trends and how you deal with that globally. But the margin picture has been unchanged on an annual basis. Is the worst over when it comes to your margins then?
Again, I’ll split it into two parts. I think on the India part the margin pressure is pretty much over. Maybe they will be a little range bound going forward. Internationally, I don’t think we’re out of the woods yet just because we have to take pricing measures and cost measures that are in play. It will probably take us a quarter of an hour to get it.
Could we see a sequential decline in international business? Let’s keep the currency part aside because it becomes an assumption if it’s a dollar or if it’s pounds or if it’s some other currency.
No I do not think so. I feel very good about the demand. The total revenues of the international business will continue to grow. Last quarter we had grown by 9%. This quarter there was a bit of pressure. We grew by 7%. I don’t think growth is a problem. It’s just a matter of getting the margin structures right.
What is happening to the non-beverage industry? There is pricing power is salt because there is hardly any commodity involved in it, but pulses are where the inflationary effect would be felt?
If I take out tea and salt for a minute because we’re growing into a total food company, we’re doing well for any company. As I said, ready-to-drink is up 64%, despite pressure on cost. Sampann, which are pulses, spices etc grow by 37%; Soulful is growing 100% plus; Starbucks is growing very well.
Now specifically to your question about Sampann and pulses, the good news is a) we need to expand our purchasing engine; b) we have to get the logistics right; and c) we need to expand our brand. All three are in play. We have started putting money behind Sampann’s brand and we have got our procurement engine in place.
Pulses had a very good growth. Also, VAT on packaged goods including pulses helps us as it spurs the drive from the unorganized to the organized. So overall we feel good about where we are and also Sampann is one of the big pushers for us. South is 40% of the market, we just launched and when the comments of the sellers say boss, we need more and we need to go to more geographies because this is a product that works, then you feel good about it.
You are thinking of taking shares in Bisleri and I will not allow you to say any comments?
Here’s the thing. The media speculates on 10 different things and therefore I would not comment on speculations that are going around.
I ask you this question. Let’s end the speculation. You can say yes, no and then the speculation ends right now?
Let me leave it with if anything happens you will be the first person to know.
Would you be looking at or interested in the distilled water category?
We will be a total food and beverage company. We are in the beverage business, the food business, we are in packaged tea. So we look at the whole playing field: organic and inorganic growth is on the table. I would just leave it at that.
You have had experience with water before because of the Himalayan acquisition. But you are in the niche water category. Now when you look at your growth and ambition, where is the opportunity?
I would just like to correct one of the points. Himalaya grows very well. We are growing close to 50%. We are in Tata Copper Water which is in the same drinking water and it is growing 2x compared to last year. I would say that overall our R&D business is projected to be north of Rs 500 crores by the end of this year. So we are in a good place overall in the beverage space.