#TataConsumer's CEO Sunil D'souza sees growth opportunity being significantly enhanced by acquisitions.
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00:00 Hello and welcome to NDTV Profit. I have with me Mr. Sunil D'Souza, the MD and CEO of Tata
00:05 Consumer Products to decode the contours of the two mega deals that the company has acquired.
00:11 One is the Capital Foods and the other is Organic India. Thank you Mr. Sunil for taking
00:16 the time. I would like to begin by asking how were the two brands identified for the
00:22 strategic acquisitions and how long were the negotiations? Could you take us through the
00:26 process?
00:27 So, we have always maintained that we will grow by organic and inorganic means. And we
00:34 have also consistently said that when we do inorganic spaces, it should be both a strategic
00:40 fit as well as a financial fit. Now, the beauty of both these brands is they fit perfectly
00:47 within our strategic platform that we have defined for growth. To give you a perspective,
00:51 we said we will focus on five platforms. Our core, which is tea, salt and coffee. We have
00:58 defined a pantry platform where there was only Sampan for now. Then next we have defined
01:03 very clearly ready to drink beverages. Then we had the mini meals, breakfast and snacking
01:10 and then the future forward horizon three sort of portfolio. Now, Capital Foods, the
01:19 two brands of Ching s Secret and Smith and Jones fit perfectly within our pantry and
01:23 mini meals platform. Whether it is pastas, noodles, chutney, sauces which go into pantry
01:29 or instant noodles and soup which goes into the mini meals and snacking platform. And
01:34 in organic India, it adds tremendously to the premiumization strategy on our core which
01:40 is tea with their tea and infusions and their supplements portfolio which is a horizon three
01:45 future portfolio for us. So, from a strategic fit, it was perfect. From a financial fit
01:51 again, these are high margin, high growth. The categories are high growth. They have
01:56 high market shares in the categories that they operate. We have always maintained saying
02:00 we would like an India acquisition but with international legs. Capital Foods has very
02:05 strong links with the ethnic retailers globally. Organic India, half their business comes out
02:10 of the US and they've got strong opportunity globally. So, they fitted perfectly. Both
02:16 of them, Organic India started talking to us about February, March of last year and
02:22 Capital Foods, Goldman Sachs was the firm running the process which was in about March.
02:29 So, it's taken us roughly I would say 11 to 12 months. But because we've been very, very
02:35 clear that A, it fits in strategically and B, it adds to our financial muscle, we've
02:41 been very clear we've gone after it.
02:43 Okay, got it. So, when you say that it adds to your financial muscle, I would like to
02:49 get some numbers from you. Like if I have to look at Capital Foods and Organic India,
02:56 you know your volumes for the food business that grew at about 6%. So, how much these
03:00 two businesses are expected to contribute to your overall volumes? I understand that
03:06 you know you will have a distribution to scale up which is massive.
03:11 Yeah, so I start with the distribution piece. Just as a perspective, Tata Consumer, our
03:17 total numeric reach is 3.8 million or 38 lakhs. Capital Foods, very strong brand but in 3.4
03:24 lakh outlets. So, it's a 10x multiplier if I can get it to all my outlets. Organic India,
03:29 the runway is still bigger. It's only 24,000 outlets. And like I said, Organic India, there's
03:33 a global footprint which I can leverage as well. So, from that perspective, I mean distribution
03:38 will play an initial role in the scaling up. But more importantly, when you look at the
03:42 financial profiles, right, both these products are about 40 to 50% higher gross margin than
03:47 my own current core, 50 to 55%. So, that's very, very strong gross margins, number one.
03:54 Number two, we see huge opportunity because they were subscale, we see opportunities to
03:59 optimize their trade margins. And apart from that, the entire cost base that we have, because
04:04 we've got scale, we can leverage that. So, whether it is logistics, whether it is the
04:08 back end of finance, HR, legal, etc. All these pieces when we leverage, it will be significantly
04:15 incremental in EBITDA terms, even if I do a standalone EBITDA.
04:19 Got it. But, you know, when you say that the distribution will help, you know, scale your
04:28 financials in all aspects, could you also give us a few, you know, color on the volume,
04:34 like what how much your volumes are expected to grow in the food business? India food business,
04:40 I mean.
04:41 So, I mean, capital foods is about 750, 770 crores today. Organic India is about 350 to
04:47 360 crores today. Both of them are playing in categories which are growing in the 15
04:53 to 20 percent. Just as a perspective, my base tea and salt portfolio, we expect, I would
04:59 say volume of about mid single digits, value about high single digits. So, these are significantly
05:03 incremental. And like I said, when I do the distribution multiplier, the numbers can transform
05:08 dramatically and more importantly, profitability as well.
05:13 All right. So, you know, you did mention that TCPL will leverage the Organic India's overseas
05:20 presence for its product portfolio. Could you also explain a little bit on how and where,
05:26 which are the markets, you know, where Organic India is present and also, you know, TCPL
05:32 would like to take organic into other markets, any new markets that you have already identified?
05:39 Thanks. First of all, let me tell you why we think Organic India's portfolio can be
05:45 scaled internationally. Half their business comes out of the US today and 80 percent of
05:51 that half comes out of basically three big retailers, right? Sorry, half the business
05:56 comes internationally, 80 percent comes out of the US and in three big retailers, Whole
06:01 Foods, Sprouts and the Natural Grocer. And they are among the top two, three brands in
06:06 the category that they play. Now, for them to be top two, three in these kind of retailers,
06:11 which speaks volumes about the product and the trust that the consumers hold. Now, they
06:17 have about, they export to about 48 countries globally, but that's just about exports. Now,
06:22 remember, we have very strong presence in the UK, US, Canada. We've got operations in
06:27 Australia, Europe, South Africa, Middle East. So, we've got feet on the street, if I may,
06:34 in these markets to make sure that we expand the distribution even in the geography. That's
06:39 number one. Number two, if you look at the whole piece of Organic India, the beauty is
06:45 they are playing in two emerging trends. A, they are in the wellness category, so it gives
06:51 us a huge wellness platform. And they play at the intersection of ancient Indian medicine,
06:56 which is trending globally, and organic, which is trending globally. There is no other brand
07:00 which plays in this sweet spot. So, we do feel that we've got enormous leverage in the
07:06 international markets.
07:07 Got it. So, you know, you have already, you have a targeted product, including Tata, GoFit,
07:15 Protein T and Tees. So, you know, does the product portfolio overlap?
07:21 I would say there will be very, very minimal overlap. I mean, that's not something that
07:26 I would really worry about. But what it actually does, especially the Organic India acquisition,
07:32 because they've got a huge supplements portfolio, about 40% of their business is supplements,
07:37 but they're not, I mean, significantly available in offline business in India. So, what we
07:42 intend to do is use this along with brands that we have, exactly the brands that you
07:46 mentioned like Tata, GoFit, Soulful, Tetley, etc., which can sell in the pharma channel,
07:52 and we aim to create a pharma go-to-market.
07:54 Okay. So, just to follow up, when do you plan to start selling TCPL products in pharmacies?
08:02 So we've just signed up, we've finished the signing for both these deals. Now, we have
08:07 to go through closing. After we close, in about three months or so, we should be able
08:11 to have a very clear picture of how we are going to go to market, and then we'll execute
08:15 quickly.
08:16 So, we can expect some kind of announcements, maybe after closing the deal in another three
08:21 to four months?
08:22 Closing should happen before three to four months. I mean, the capital foods closing
08:26 should happen quickly. Organic India also will close by Q4 at the latest. But definitely
08:34 before that, we will come back and tell you how we are going to go to market in the pharma
08:40 channel.
08:41 Right. Mr. Sunil, could you also throw some light on the timeline of the integration,
08:46 like how do you plan to go about it? There are also manufacturing plants of capital goods,
08:53 like will you be also producing TCPL products in the manufacturing plants of capital foods?
09:00 So now that we've finished the signing, the good part is we've got an integration team
09:05 which is always active in Tata Consumer, because we've done Soulful, we've done Smartfoods,
09:10 right now we're integrating Tata Coffee. This team will now get to work. They will go through
09:16 every single detail, including distribution, including logistics, manufacturing, etc. And
09:21 within the next 15-30 days or so, they will come back with a very clear view of how do
09:26 we integrate these businesses. The idea is we want to integrate very quickly so that
09:31 we then start leveraging the synergies and driving up the top lines. For the plants itself,
09:36 the same thing. I mean, they've got three own manufacturing plants, they've got four
09:40 contract packers, but so do we have plants across. So again, the team will look at which
09:46 is the best place to produce, where do we drive up utilization, how do we play the logistics,
09:51 that is work yet to be done.
09:53 Got it. So, you know, coming back to the transaction value, I would like to understand that what
10:00 is the actual cash outgo for the two acquisitions and how much equity is required to be raised?
10:07 You also have a scheduled board meeting on Friday, that is 19th. So what are you considering
10:14 a rights issue? How much are you planning to raise?
10:18 So Capital Foods, the transaction was at 5100 crores of which 75% we acquired today. That's
10:26 the funding that we will need. 25% is over the next few years. In Organic India, the
10:33 transaction was at 1900 crores and that is the funding that we need, roughly 6700-6800
10:37 crores. Remember, we have close to 3000 crores sitting on our balance sheet and the balance
10:42 is what we have to bridge. We are right now going to propose to the board on Friday, a
10:47 short term bridge financing and then equity, preferably a rights issue.
10:54 Okay. So have you identified, so that is half of the total, you know, cash out, the amount
11:03 that is required to acquire the branches is what you are likely to raise. So we can say
11:08 about 3000 odd crores. Thereabouts.
11:12 Okay. And when you say EPS break even will take two years, that is according to your
11:18 investor presentation. Does that mean that you have paid a premium for the acquisition?
11:24 Also, there are some concerns in the street on the valuations, you know, it is being seen
11:30 as pricey. So how do you justify the valuation? Could you explain a little bit?
11:35 So I would use a term, beauty lies in the eyes of the beholder, right? It depends on
11:41 what we are looking at in terms of value creation. On the pricing itself, while they are in the
11:46 higher range of the FMCG multiples, given the fact that I talked about high margin,
11:52 high growth, ability to derive synergies, ability to drive distribution, ability to
11:57 expand portfolio international legs, we do think we can create substantial value for
12:02 shareholders. Now, remember, we have got a very, very astute board, and we have been
12:07 able to convince the board and about the value creation and the board has reposed great faith
12:12 in the management team on our ability to execute these two acquisitions.
12:17 Okay, so I understand that this particular deal, I mean, both capital foods and organic,
12:24 there are a lot of white spaces that were there and it gets filled up with this. But
12:29 there are also, you know, several like, this is unlike the other consumer good companies.
12:36 So you have not kind of build up brands, which are in the general categories, it's always
12:42 been a niche game for you. So would you like to continue this or there are other opportunities
12:48 that you're looking forward to?
12:51 So I would use a very simple term, the business of business is making money, right? It's not
12:56 about creating scale in categories where there is no margin. So three years back, we scanned
13:03 the entire food and beverage portfolio, because like we've said, we want to become a larger
13:07 FMCG company, but food and beverage first, we scanned the entire food and beverage portfolio
13:12 in India and very, very clearly identified the categories in which we want to play and
13:17 the categories were defined, among other things with margin, scale, ability to differentiate,
13:22 ability to bring in trust as a factor, ability to drive distribution, etc. So we've narrowed
13:30 down the categories. And like I said, these, these two acquisitions do complement a lot
13:36 of the categories that we were playing in, and we had identified for growth. There are
13:41 still more categories to play in. Some of them can be filled in with these brands, some
13:46 of them will not. But I think the most critical thing to remember is these, both these acquisitions
13:52 will drive significant top line and more importantly, bottom line growth for Tata consumers.
13:59 But that's over the long term, right? Like you mentioned, EPS break even will happen
14:05 in two years. So I'm guessing the, you know, whatever addition or whatever it comes to
14:12 your financials, it will happen over a longer period and not immediately.
14:17 So all that I would say is two years, I think is in my definition is short to medium term.
14:23 But that said, like I said, Organic India 24,000 outlets distribution and I've got 3.8
14:29 million. So it doesn't take very long to scale up.
14:31 Got it. And when you say that, you know, you have identified a few categories, could you
14:37 name what are what would be the priority in terms of categories that you would like to
14:42 focus on other than your core business, of course, that is tea and salt.
14:47 As I said, we've identified platforms per se, we've identified pantry, mini meals and
14:51 snacking ready to drink beverages and future platforms, if I may.
14:58 And within those categories revolve around this around the these particular platforms
15:03 itself. Absolutely, yes.
15:06 Okay. Okay. Now, you know, I understand that you are you won't be able to share much numbers
15:13 because of the silent period. But I would like to know how is like the general demand
15:18 scenario looking like at the moment in terms of you don't have that much of a rural presence,
15:24 but you are scaling up your rural presence at the same time.
15:28 So how is the rural demand looking like and also in the urban demand?
15:31 If you could tell us what is the trend that we are getting to see on ground?
15:38 So you're absolutely right. Number one is we are scaling up our distribution.
15:42 We will have appointed distributors in all 50000 plus pop strata very soon to increase
15:50 the width of our distribution. And for depth in all one million plus towns,
15:55 we are split routes which give dedicated focus to the products that we have.
16:01 Now, in terms of demand itself, I would say exactly what I said probably around two months
16:07 back, we can see demand coming back. Is it where it was pre-COVID? No.
16:12 But is it better than where it was a year earlier? Absolutely, yes.
16:16 And is it improving? Absolutely, yes. Okay. And in terms of the raw materials, are
16:22 we seeing, you know, prices? We did see some kind of moderation, but are we seeing any
16:29 kind of fresh pressures on the pricing? So I would say the pricing scenario is broadly
16:36 benign. But in today's world, you can never take anything for granted, right?
16:42 You didn't expect the disruptions in the Red Sea and the little bit of spikes in the oil
16:47 prices, etc. to happen. As of now, I would say largely benign, a little bit of fluctuations
16:54 in a few commodities here and there. But we are prepared for any sort of movements, quick
17:00 movements, I would say. Okay. And lastly, you know, I would again,
17:07 referring to the acquisitions, I would like to understand, will the employees of Capital
17:12 Foods and Organic India be offered employment with Tata Consumer Products? Or how are you
17:17 looking to place them? So the most important thing I would say is,
17:22 we have not bought these businesses for the brands alone or the categories and the production
17:26 alone. We bought these businesses for the strong value that they've created. And the
17:32 value creation also involves a specific knowledge and expertise from within the teams. So we're
17:38 making sure that the key management people will continue with us for some time. For example,
17:43 Ajay Gupta from Capital Foods will continue with us as a consultant to our Total Foods
17:48 business, because he has enormous expertise on the consumer space. For the balance integration,
17:54 there is work to be done. Like I said, the integration team, we're waiting for signing.
17:58 Now that we're finished signing, the integration team gets to work to see how best we would
18:02 structure the organizations. Okay. And, you know, we did speak to the Capital
18:08 Foods management as well. So I, what I've been told that Ajay Gupta is currently, he
18:14 will hold 5% in his personnel capacity, and of the 25%, that is, you know, still retained
18:20 by them. What is the other, what is the thing with the other two investors? So General Atlantic
18:27 has exited completely, is it? Yeah, General Atlantic is exiting completely.
18:33 They will exit on closing. And RTL/Inverse will continue with the 20% stake. Ajay Gupta,
18:40 apart from the 5% personnel stake that he holds, will also continue as a consultant
18:44 to the entire food business of Tata Consumer. All right. I think that makes a lot of sense.
18:51 Thank you so much, Mr. Sunil, for taking the time. It's always a pleasure talking to you.
18:57 Thank you very much for having me. Thank you. Thank you.
19:00 Thank you.
19:02 Thank you.
19:03 (dramatic music)