CMP: Rs.197                 Recommendation: Buy 

Background

Mcleod Russel (MCRL) is one of the world’s largest tea producer and has production capacity of approximately 100 million (mn) kg which comes from Tea Estates of Assam, West Bengal, Vietnam and Uganda. Of the total produce about one third is exported to countries in the North America, Europe and Middle East.

Analyst’s Notes :

On a consolidated basis for FY10 the company reported a healthy topline which grew by 33 per cent at Rs. 11,062 million. While its EBIDTA of Rs. 3,627 million jumped 73 per cent on a y-o-y basis. This healthy growth was on the back of improved volumes and higher realisation.

Backed by a strong operating performance the Net profit stood at Rs. 2,337 million as against Rs. 856 million in the previous year enabling  the company to post a Net Profit Margin (NPM) of 21 per cent. 

Going forward, the tea supply is likely to decline on account of pest attacks and heavy rainfall in the North Eastern states which has adversely affected the tea produce. As typically, the North eastern states contribute about 70 per cent of the total tea output in the country, these factors have already led to uptrend in the tea prices.  Notably,  the domestic markets the average tea prices have sharply increased by about 17 per cent as they stood at Rs.135 – Rs. 140 per kilogram in one of India’s biggest auction centre in Kolkata as compared to Rs. 115 – 120 per kg as reported in the second week of June.

Globally too the prices have increased from $2.06 to $ 2.43 in the Kenya auction market for the second week of June. Thus with overall demand-supply situation likely to remain under pressure the prospects for MCLR appear favourable.

With the acquisition of Ruwenzori tea estate the annual production of MCRL will increase by 15 million kg leading to higher net sales for FY11 thereby positively impact the earnings.

However on the flipside, inorder to meet future needs, the company purchases tea from the auction market. This implies that that higher prices may impact margins negatively to an extent.

Investment Argument:

Overall, with the net realisation likely to improve in FY11 the bottomline of the company will be positively impacted. Further, the company’s plan to boost its sales volumes by acquisition of tea estates in Africa and Vietnam too will lead to growth in operations in the medium to long term.
 
For now the stock trades at a P/E multiple of less than 10 times which is lower than the industry P/E of close to 14 times thereby making it attractive for investor. Thus prudent investors could do well to accumulate the stock at lower levels.