Expansion of vertical and cut in debt should lead to better valuation multiples in FY17-20e than estimated.
We see TTCH’s consumer business contributing 19% to its consolidated revenues in FY2020e, up from 11% in FY2016, on account of (i) steady growth in consumer business portfolio and (ii) TTCH’s exit from urea business.(i) Growing share of high-margin and asset-light consumer piece and (ii) sharp expected net-debt reduction should enable TTCH to command better FCF yield and valuation multiples in FY2017-20e, versus our estimates. Maintain positive stance. Target price `630 (from `600).
Consumer business likely to grow at 18% in FY2017-19e
TTCH management aims to more than double the consumer business revenues to `50 bn in the next 4-5 years, through (i) increasing distribution reach of the salt business by 50% to 2.5 million outlets, (ii) growing presence of the recently launched product categories in the current network of salt business and (iii) adding more adjacent categories. TTCH has grown its salt business revenues at a CAGR of 13% in the past seven years, capitalising on (i) shift in market demand to national branded segment and (ii) absence of strong brand in the category. We note that the national branded players account for only 25% of the total salt market in India. Further, TTCH’s salt business reach is much below its larger peers, i.e. ITC (4.3 million outlets) and Unilever (6.3 million), signifying large headroom for growth in the salt business. The recently added categories of pulses, spices and besin are currently in the scale-up mode; pulses have reached only 7% of the current distribution network of salt business. We see management’s strong focus on growing its consumer business driving an 18% CAGR in the consumer business revenues in FY2016-20e.
Growing share of consumer business should improve FCF and return ratios
Contribution of consumer business in TTCH’s consolidated revenues is likely to increase to 19% in FY2020e, from 11% in FY2016. The salt business commands much higher margins and return ratios versus TTCH’s overall business, as per our understanding, on account of its strong brand positioning, which enables high margins and negligible working capital requirements. The sourcing and processing of the pulses, spices and other products are also completely outsourced, enabling TTCH to grow without heavy investments. Growing share of consumer business in TTCH’s overall revenues, hence, should enable gradual improvement in TTCH’s overall margins and return ratios over the medium term, in our view.
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Valuation: Improving FCF yield may attract better valuation multiples; maintain Add
We see TTCH’s FCF yield improving to 7% in FY2020e, from 2% in FY2016, on account of (i) sharp expected reduction in its net debt and (ii) growing share of consumer business. Improving FCF yield may enable TTCH to command better valuation multiples over the medium term, than our estimates, as the size of consumer business increases gradually. Maintain Add with revised SoTP-based target price of `630 (`600 earlier).