In a bid to streamline its businesses and create a focused consumer products company, Tata Sons has transferred its consumer products businesses from Tata Chemicals Ltd (TCL) to Tata Global Beverages Ltd (TGBL).
The combination of the two consumer-focused businesses is expected to benefit both sets of shareholders. After the merger, TGBL will be renamed Tata Consumer Products Ltd that will have key brands such as Tata Salt, Tata Tea, Tata Sampann and Tetley under a single umbrella.
The move will create a focused consumer products major with a combined turnover and operating profit of Rs 9,099 crore and Rs 1,154 crore respectively, for the twelve months period ended March 31, 2019, on a proforma basis.
Speaking to CNBC-TV18, CEO of TGBL Ajoy Kumar Misra said the merger would put the company on an aggressive growth path. “With the two platforms coming together and the synergy in terms of distribution, R&D and innovation, and all the cost efficiencies that we will bring in, we will have a very aggressive growth path,” he noted.
Excerpts from the interview. What is the revenue target that you have in mind in two years’ time? Currently you are at Rs 9,099 crore. Give us an idea about what the target would be because the target for the growth of the Tata Chemicals consumer business itself was quite substantial.
While I cannot give you a forward statement about the growth that will come, we know that we are poised for a very aggressive growth. With the two platforms coming together and the synergy in terms of distribution, R&D and innovation capabilities, the additional cash flows that the merged entity will have access to for investments and all the other cost efficiencies that we will bring in, efficiency drivers that will come in in terms of scale and supply chain, we think we will have a very aggressive growth path.
However, this is Day One and we have to go through the whole process. In terms of the integration team we will relook at whatever Tata Chemicals had as its medium term plan for their business versus what we have as our medium term plan. But these plans were made in standalone ways. Now with the two entities coming together, the synergistic growth target will be worked out.
Analysts are pegging already a CAGR growth of about 16 percent over FY19-21 for Tata Consumer Products. Would that be fair or is it too early?
I would not like to comment on it. To be fair this is too early. What we need to understand is that until now we hadn’t announced and hence we could not really engage in this exercise. So, it will be clear in the days to come.
There is no transfer of debt from Tata Chemicals but there is a marginal transfer of working capital. Can you quantify how much would that be and would there be additional investment put into the merged entity?
It is a little too early to talk about the additional investments because the categories that are coming together, how much we should expand what --- we will have to carefully study these things.
However there would be additional investment put in once the merger is done?
Yes, and that is never going to be a constraint.
You also mentioned that there will be a transfer of 300 employees to Tata Consumer Products. Would there be any kind of restructuring at the management level, what would the management structure look like, is there a plan in place?
The consumer products division of that company will come to this new merged entity and that has roughly 300 employees. Once the integration committee gets going, we will approach it with the fact that this is coming together for aggressive growth that we want to unleash for which we will require talent, we will require people. So, there will be adequate opportunities for people to see growth but it is again too early.
At the time of synergies there are often layoffs that may be looked at, that is not on the plan, in fact you are looking at hiring now?
No. I am saying they are coming in to this entity and we have growth ambitions. While salt may be a mature category, their pulses and derivatives, spices, snacks and food category, which is in the nascent stage with Tata Sampann, all of that we have to grow. These are huge categories with large unorganised and unbranded segments. So, there is scope for growth and we will require talent and people. And there is a Tata way of dealing with people, so I am sure that will always be something we will be true to.
In terms of synergies, if we can go a little into the details, what analysts have estimated is that synergies of 2-3 percent of combined India branded business would happen over a period of 18-24 months. Based on that, would you effectively see about Rs 100-150 crore, is that the value you would put to the synergies?
Yes. 2-3 percent synergy is our initial estimate of the combined India businesses. So, if I take Tata Global Beverages’ India business and this India business of the consumer products, it is roughly about Rs 5,000 crore. So, 2-3 percent of that is in that ballpark.
So, Rs 150 crore and for that 18-24 months?
Yes, but these are initial estimates.
Based on that, what would be the cost saving on an annual basis?
It is too early to be so specific.
Distribution business synergy is very critical. So, what is the estimated growth in outlet coverage? If I do the math correctly, retail outlets currently for the combined entity are 2.5 million, stockists are at 5000. So, this suggests almost a 20-30 percent distribution outlet growth if I am correct?
Yes. Today we may have 1.8 or 1.9 million outlets that Tata Tea reaches, but with the combined entity, there is an element of overlap, we could be somewhere in the region of 2.5 million outlets – direct and indirect -- that we would be reaching. So, our retail reach and the number of distributors should go up because we are multi-category now.
So, outlet coverage also increases?
20-30 percent would be a fair figure of the outlet coverage increase?
Yes, these are all initial estimates. We would have definite numbers once the work starts but it is a fair estimate and certainly it would create distribution synergies.
When would the synergies start? Would you wait for all the approvals to come in and the merger to go through or would you kick start the process from now itself because it is Q4 FY20 or Q1 FY21.
The stock exchanges, National Company Law Tribunal, shareholder approvals -- there are those elements that will actually determine the duration it will take. We would like it as fast as possible. When will the integration work start? It has started as of now.
What would the management structure be like? What would be the CEO, CFO breakup, have you finalised that yet for Tata Consumer Products? Too early. However, till such time as we get the approvals, it is business as usual. So, the food business continues to run the way it is being run and our beverage business continues to run the way it is being run. But at some stage, in the integration committee we will be talking about what will be the management structure going forward. Tata Consumer will basically enter into a long term 25-year supply arrangement deal with Tata Chemicals. So Tata Chemicals continues to produce their salt. What is the revenue share agreement over here? What is the financial consideration for that supply agreement?
Even at this point in time, because Tata Chemicals was doing segment reporting, there was a supply agreement. Similarly, we have an arm’s length supply arrangement that has been independently verified and that will continue to be in place. Yes, it is a long term supply arrangement.
What is the financial consideration there, can you take us through the financial details of this transaction?
Cannot get into that.
Currently, the EBITDA margins enjoyed by Tata Salt is anywhere between 25-27 percent. So if you break that up, how much goes to Tata Global and how much stays with Tata Chemicals?
Once again there is segment reporting that Tata Chemicals has been doing for the last couple of years, and you will see from the segment that they report, their EBITDA margins are contained there and it is largely salt.
Revenues are at Rs 9,099 crore, your net profit for the merged company will be Rs 612 crore. This has given you significant scale, so what is the vision to be able to compete with peers that are right now at some Rs 9,000 net profit figure.
This whole play is not just about tea business coming together with salt and with some food. Yes, that is the existing business situation when you combine the two, but I think what we are most excited about with this momentous decision that has been taken yesterday by the two boards is the platform that it creates. That platform can actually take a pipeline of products and categories, which makes sense for us in the FMCG space. FMCG is slated to grow at anything from 14 percent to 15 percent CAGR.
That does not daunt you competing with players like Hindustan Unilever and ITC considering now you are in an end-to-end multi-category play?
It does not daunt us because we have our roots of Tata Global. For example at Tata Tea, we were a plantation tea company. We decided to get into branded tea, we became what we have become in tea. Similarly Tata Salt has been a market leader by far, it revolutionised in 1983 when it produced. So I am saying we are known, the DNA of these companies is such that we have taken on momentous decisions and executed it.
The core that is coming from the consumer product group is salt and Tata Sampann products which are spices and condiments, and food and snacks. So this let us say is the core. There is need to strengthen the core. For the last couple of years, we have managed to bring good growth back into our businesses and now we need to strengthen the newer categories that are coming in.
As far as the structure is concerned, you have outlined a couple of points. One is deepening the core. So, what would that be, what specifically are going to be your focus areas in the core and what are the newer high growth and high margin businesses that you will enter into? Tea, coffee, salt and Himalayan -- that would be the core?