Tata Consumer Products announced that it has signed pacts to acquire noodle and sauces player, Capital Foods, and a premium tea brand, Organic India, for a cumulative sum of Rs 7,000 crore.
In an online interview, Sunil D’Souza, managing director (MD) and chief executive officer (CEO) speaks about the reason behind both the acquisitions with Sharleen D’Souza/Business Standard.
How will both these acquisitions play out for Tata Consumer Products?
Both these acquisitions play out perfectly well into our already-defined platforms that we have articulated for Tata Consumer.
In tea, we have always talked about premiumisation. Organic India will do that for us.
In our pantry platform, where we only had Tata Sampann, now we can play with pastas, noodles, chutneys, sauces and soups.
We have always looked at future-looking platforms. So far, we had proteins but now we have supplements with Organic India.
From a strategy perspective, all this fits very well. We’ve also said that we will aim to get into categories which are high growth and high margin.
All the categories we are acquiring in both these acquisitions are 15 to 20 per cent growth rate ones.
They are very strong brands, and therefore, ability to grow is significantly higher.
Also, distribution is a huge opportunity with both of them. Our numeric reach is also higher.
We have 10 times of Capital Foods reach and Organic India has a presence only in 24,000 outlets.
We have always said we will look at India-based acquisitions. But if we can leverage them for global markets as well, that would be icing on the cake.
Both of these acquisitions do that. About 40 per cent of Organic India’s turnover comes from the US from very premium retailers.
I think there is scope to grow significantly. And then, in Canada, it is not even present but we are the market leaders in tea there.
We’ve got a footprint in the UK and Europe also. Capital Foods is available globally at all ethnic Indian retailers, and it has got great relationships.
We aim to leverage that relationship to take our other products globally.
In both these businesses, we see opportunities to increase margins by looking at optimising trade margins, because they were sub-scale.
They were paying higher than what we pay our distributors.
Therefore, the margin profile will go up. We will integrate these businesses into ours.
We see a huge amount of synergies on distribution logistics and overheads, among others.
Even if I do a standalone earnings before interest, taxes, depreciation and amortisation (Ebitda), going forward, these businesses will be substantially better than where they are currently.
Organic India has seen a gross margin contraction in FY23. Also, revenues have been largely flat since FY19. How do you plan to change that?
In 2016-17, Organic India’s Ebitda margins were close to 16-17 per cent. It had a series of issues in its business because of which the margins have come down.
There’s nothing fundamentally wrong with the business product. Due to the FabIndia heritage, it was primarily a retail store focused approach, and that’s why there are only 24,000 outlets in India.
From a margin perspective, getting our procurement efficiencies to a bare minimum and getting our logistics efficiencies right, we can maintain if not grow the gross margins.
Its gross margin is already in the 50-55 per cent range. It’s significantly accretive to what my portfolio currently is.
After these two buys, will you make more acquisitions in the food space?
We’ve still got space to run and become a stronger food and beverage player. In the long term, we aim to be a strong fast-moving consumer goods company.
In the short term, the focus is to deliver business cases that we put out against the acquisitions.
We will make sure that we create value. We will again look for organic and inorganic opportunities.
Do you think you have overpaid for Organic India?
We’ve always said we will not overpay for acquisitions. We’ve done the math of what we think we can do with these businesses.
If you look at its FY23 Ebitda, it was negative because of a one off write-off.
But on an ongoing basis, I think we are quite comfortable and can create greater shareholder value.
Capital Foods is a leader in some categories already. How do you think it will play out for Tata Consumer? Do you think you got it at the right price?
We’ve got a very astute board and the fact that we’ve shown them that we can create value with this, they’ve told us to go behind this acquisition.
This speaks volumes because we do think we can deliver value at the prices we paid for.
Capital Foods is number one or two in five different categories.
Also, this is after being distributed in 350,000 outlets and Tata Consumer directly touched 1.5 million outlets and numeric reach is 3.8-3.9 million.
So, if anything, the leadership positions will be strengthened dramatically and we will bring our R&D muscle as well.
We are making sure that Ajay Gupta, the founder of Capital Foods, continues with us in the form of an investor because he carries a 5 per cent stake which he can divest later.
Are the other shareholders still staying on, since you are currently only buying 75 per cent of the business?
Artal Asia is staying on with 20 per cent and Ajay Gupta is staying on with 5 per cent. They will exit at a later stage.