Tata Consumer Rights Issue: Will Two Big Acquisitions by the Tata Group Company Pay-Off?

In 2023, the Indian business landscape underwent a radical metamorphosis fuelled by record-breaking mergers & acquisitions (M&A).

The year witnessed a staggering 72% increase in deal volume compared to 2022.

The total value exceeded a colossal US$ 150 billion (bn). This can be attributed to rising investor confidence, robust corporate cash reserves, and the government's pro-consolidation policies.

From aviation's landmark Tata-Air India reunion to the birth of the cinema behemoth PVR-INOX, these mega deals redefined industries.

And 2024 promises to be just as thrilling, with Tata Consumer Products, a Tata Group company, kicking things off with two major acquisitions.

About Tata Consumer Products

Tata Consumer Products is a focused consumer products company uniting the principal food and beverage interests of the Tata Group under one umbrella.

The company's portfolio of products includes tea, coffee, water, salt, pulses, spices, ready-to-cook offerings, breakfast cereals, snacks and mini meals.

In India, Tata Consumer Products has a reach of over 200 million households, giving it an unparalleled ability to leverage the Tata brand in consumer products.

In the past one year, Tata Consumer share price has gained over 50%.

Tata Consumer Products Rights Issue

According to media reports, Tata Consumer Products is looking to raise funds for the acquisition via CPS / rights issue.

It is likely to announce a Rs 35 bn rights issue to fund its Rs 70 bn acquisitions of Capital Foods and Organic India.

Tata Consumer's board is scheduled to meet on 19 January 2024 to consider the proposal for fundraising by debt issue in the form of commercial papers/debentures and equity issues.

The proceeds from the issue will be used to partially finance the Rs 70 bn acquisitions of Capital Foods and Organic India.

The remaining half will be funded through internal accruals.

While the intent and approximate size of the rights issue are confirmed, crucial details like the issue price, record date, and allotment procedure are yet to be revealed.

The company is finalizing these aspects and is expected to make an official announcement soon.

Participating in the rights issue allows shareholders to maintain their ownership stake in the company and capitalize on its future growth potential. The discounted issue price offers an additional potential gain if the stock price appreciates after the issue closes.

The Recent Acquisition of Capital Foods

Tata Consumer Products recently announced that it will be buying a 100% stake in Capital Foods, which markets its products under Ching's Secret and Smith & Jones brands, for Rs 51 billion (bn) in an all-cash deal.

The FMCG company added that 75% of the equity shareholding will be acquired upfront, and the balance 25% will be acquired within the next three years.

The estimated turnover of Capital Foods for FY24 is approximately Rs 7.5 to Rs 7.7 bn. The same was Rs 7.1 bn in FY23, Rs 5.7 bn in FY22 and Rs 6.7 bn in FY21.

As per FY24 estimated sales, the company is valued at about 7x. As per FY23 sales, the deal values the firm at 7.2 times. As of the last closing price, Tata Consumer is valued at 12 times its FY23 sales and 11.5 times its FY24 (annualised) sales.

This acquisition will enable it to expand its product portfolio and further strengthen its pantry platform. The overall size of the categories in which Capital Foods operates is estimated at Rs 214 bn.

Another Acquisition of Organic India

Tata Consumer Products, on 12 January 2024, stated it will acquire up to 100% stake in Organic India, a Fabindia-owned business that sells tea, infusions, herbal supplements and packaged foods, for Rs 19 billion (bn) in an all-cash deal.

Organic India is a brand with a geographical footprint covering over 48 countries, substantially from India and the USA. Its product portfolio spans premium and high-growth categories focused on sustainable living.

The estimated turnover of Organic India for FY24 is approximately Rs 3.6 bn to Rs 3.7 bn. In the last three fiscals, the company has seen a gradual decline in sales from Rs 3.9 bn in FY21 to Rs 3.2 bn in FY23.

The deal values the company at a little over five times its FY24 sales. Against FY23 sales, the company is valued at nearly six times its sales. Tata Consumer is valued at 12 times its FY23 sales and 11.5 times its FY24 sales.

The Total Addressable Market (TAM) for the categories that Organic India is present in is Rs 70 bn in India and Rs 750 bn in international markets where Tata Consumer has a strong presence.

This transaction aligns well with Tata Consumer's overall strategic objectives and presents exciting market opportunities in the rapidly growing Health & Wellness segment.

Will These Acquisitions Turn Fruitful for Tata Consumer?

Organic India, recognised as a niche brand with robust appeal among premium customers, and Capital Foods' Ching's, which has a well-established presence in the Indo-Chinese market, operate in categories experiencing a 15 to 20% growth rate.

These categories, being higher margins, offer substantial potential for growth, especially with the extensive distribution reach that the company possesses.

In terms of distribution, the company holds ten times the reach of Capital Foods, providing a substantial advantage.

The international expansion of these acquired brands is a key focus, particularly given that half of Organic India's turnover comes from international business, 80% of which is in the US. The company aims to broaden its market base globally.

Capital Foods' relationships with ethnic Indian retailers worldwide and the profitability perspective of both acquisitions, with potential cost synergies in logistics, distribution, selling costs, finance, and legal, make the acquisitions strategically significant.

The company anticipates double-digit growth over the medium-to-long term, leveraging the 50% gross margins of Capital Foods and the over 55% gross margins of Organic India.

The acquisitions align well with the company's growth platforms. Capital Foods' products integrate seamlessly into the pantry and snacking platforms, while Organic India's tea offerings contribute to the premiumisation platform, and its supplements complement the future-focused portfolio.

What Next?

Going forward, it aims to target international markets, particularly emerging economies, where its brands can resonate with consumers seeking value and quality.

It also envisions additional acquisitions in wellness, snack food, and premium food categories, capitalising on the success of Organic India and Capital Foods.

Over the next few years, it is projected that India's FMCG business will grow rapidly due to expanding consumer demand, rising incomes, and favourable government policies.

Looking ahead, the FMCG sector in India is poised for rapid expansion, driven by increasing consumer demand, rising incomes, and favourable government policies.

Recent data from NIQ India reveals double-digit value growth of 10.2% in Q1 FY 2023-24, underscoring the industry's robust performance.

Given India's vast market and a plethora of well-established brands, the FMCG industry remains highly attractive to investors, offering strong growth prospects. This bodes well for the company's future performance, providing a solid foundation for continued success.

Conclusion

The rights issue of Tata Consumer Products presents a lucrative opportunity for shareholders in the Tata firm.

First and foremost, the company's recent strategic acquisitions of Capital Foods and Organic India signal a robust growth trajectory.

Further, Tata Consumer boasts an extensive distribution network encompassing 3.9 million (m) outlets, with 1.5 m directly served.

The recent acquisitions of Capital Foods and Organic India, with their respective reaches of 0.4 million and 24,000 outlets, offer immediate growth potential through expanded distribution channels.

Notably, nearly 40% of Organic India's product portfolio, primarily herbal supplements, is geared towards international markets, aligning with the acquisitions' India-focused strategy.

These acquisitions not only broaden the product portfolio but also align with the growing trends in wellness, snack food, and premium categories, offering significant potential for revenue expansion.

However, participating in a rights issue dilutes existing shareholding to some extent, as new shares are issued. Therefore, one should carefully weigh the potential benefits against the dilution impact and make an informed decision based on your individual circumstances.

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