Tata Consumer falls 1.5% on Rs 7,000-crore acquisition of Capital Foods, Organic India

Tata Consumer Products traded in the red as the FMCG company signed a definitive agreements to acquire a 100 percent stake in Capital Foods, the owner of Ching’s Secret and Smith & Jones, and Organic India in a phased manner.

At of 12.55 pm, Tata Consumer Products was trading at Rs 1,143.1, down 1.37 percent on the NSE from the previous session.

The enterprise value on a “no cash/no debt basis” for 100 percent of Capital Foods is Rs 5,100 crore. While  75 percent of the equity shareholding will be acquired upfront, the remaining 25 percent will be acquired within the next three years.

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The Tata Group company also signed definitive agreements to acquire up to a 100 percent stake in Organic India, an organic brand spanning food and beverages and herbal and traditional supplements. The enterprise value of a “no cash/no debt basis” for 100 percent of Organic India is Rs 1,900 crore.

The company said its board will meet on January 19 to consider fundraising via debt issues and equity issues through rights issues.

The recent acquisitions of Capital Foods and Organic India come as bad news for the company’s return on equity (RoE) and return on capital employed (RoCE), said Alok Shah of Ambit Capital. He assumes borrowing worth Rs 5,000 crore against immediate acquisition cost of Rs 5,725 crore and cash balance of Rs 1,500 crore.

In a note to investors, he said, “This (borrowing) will be arranged via rights issue too which would lead to higher equity base, impacting return ratios.” This could lead to net profit cut of 10 percent in FY26 and RoCE dip of 350-400 basis points.

Also Read | Tata Consumer’s acquisitions seem like good buys but its valuation screams ‘goodbye’

In a note, JM Financial wrote that the immediate task following the acquisition would be to leverage Tata Consumer’s distribution scale to unlock value in the estimated total addressable market to improve profitability. “This, in our view, could take a couple of more years of work versus the management’s guidance of breaking even in year two,” said the brokerage.

The FMCG player’s share price jumped almost 20 percent over the past month. In comparison, the Nifty 50 index gained around 2.8 percent during the same time period.

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