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Tea (Uptrend in prices to continue) Positive
With the total tea production in the country estimated to be ~965 million kg
in CY11 (lower by ~20 million kg compared to CY10), we believe tea prices
will remain firm during the year with volumes taking a setback. Also, a
higher production of ~100 million kg in Kenya and Sri Lanka would
adversely impact the exports. However, companies like McLeod Russel and
Jayshree Tea would witness volume growth led by their acquisitions in
Africa and Asia.
⇒ Led by the dip in production in North India (accounting for 75% of total
tea production of the country) prices in North India have already risen
by ~| 15 per kg. Also, with consumption in India increasing by 3.5%
annually and FY11 beginning with a shortage of 50 million kg, we
believe prices will remain firm during CY11 also
⇒ In spite of higher production in Kenya and Sri Lanka, we believe prices
in the international market will remain firm at ~$3.8-$4 per kg as
higher tea production in 2010 may not sustain in 2011
⇒ In our coverage universe, McLeod Russel remains our top pick with
sales and earning growth expected at 19% and 20%, respectively, in
FY12E. At CMP, the stock looks attractive as it trades at only 8x its
FY12E EPS of | 27.3
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