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Mcleod Russel India Ltd.
In line results; reiterate Buy
Standalone results in line; tweak estimates, maintain PO
McLeod reported an in line quarter post which we marginally tweak estimates and
reiterate Buy on the stock. Revenue was up 5% yoy led by higher realizations but
impacted by loss of production led by weather. PAT at INR2bn, up 5% yoy, was
marginally ahead of estimates. PO of INR315 is pegged at 11x 1yr fwd PE- in line
with McLeod's 4yr median 1yr fwd PE and offers 36% upside potential.
Tea prices are up given shortages; volumes hit by weather
Uptrend in tea prices resulted in 7% yoy increase in realizations for McLeod in
Q2. However a loss of 3.5mn kg production in the quarter due to weather,
impacted revenue. Staff costs that were up 15% yoy post wage revision in Jan
2010 impacted margins. While the company has lost a further 1 mn kg production
in October, further ~3% increase in realizations to ~INR155/ kg will help earnings.
Maintain bullish view on tea price outlook
We remain bullish on medium term tea price outlook given shortages that will
likely widen in CY10 despite normal crop in Kenya and Sri Lanka due to demand/
supply mismatch. Also as per channel checks, CY11 season will likely begin on a
strong note given current demand. We see an upside risk to FY12 est from this.
Valuation remains attractive
McLeod trades at 7.3x FY12e PE (8.6x FY11e PE) - at the lower end of the 7x to
30x FY12e PE range for peers in the global food commodities. Adjusting for
treasury shares, it is at 5.5x FY12e PE, which we believe is attractive given
upbeat tea price outlook, strong free cash flow generation and expected
deleveraging. We reiterate Buy for 36% upside potential.
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