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Mcleod Russel India Ltd.
Kenyan weather to push prices
up; Buy
„In line flat quarter; Expect a strong season ahead
McLeod’s standalone Q3 numbers were flat and in line. While higher realization
helped 9%yoy growth in revenue, margins were impacted by higher wage costs
and higher proportion of production from lower margin bought leaves. However,
led by expectation of a stronger season in 2011 we hike FY12/FY13 EPSe by 7%
as continuing dry spell in Kenya is likely to impact global tea production. Reiterate
Buy with unchanged PO of INR315 for 40% potential upside.
Kenya’s loss of production in CY11 can push prices up
As per Kenya Tea Board, Kenya is likely to witness a 12% decline in tea
production in 2011 given current dry spell because of ‘La Nina’. We expect this
will put upward pressure on tea prices in addition to the current shortage situation
and demand supply mismatch. We up India tea price assumption for FY12 to
INR159 (vs INR154 earlier). We also see upside risk to estimates from this.
Q3 saw loss of production led by weather; Prices firm
While Q3 realizations moved up 5%yoy, margins were down 390bps due to i) loss
of 1.3mn kg in tea produced from owned gardens and ii) 9% higher employee
costs as wage hikes were effected in Jan 2010. However, reported Q3 numbers
don’t include profits from McLeod’s Ugandan tea plantations.
Valuations remain attractive; Buy for over 40% upside
McLeod trades at 6xFY12e PE- at the lower end of the 6x to 24x FY12e PE range
for peers in the global food commodities. Also adjusting for treasury shares, it is at
4.3x FY12e PE. FCF yield is at 19% on unadjusted basis and 25% on adjusting
for treasury. Valuations are attractive given upbeat tea price outlook, strong free
cash flow and expected deleveraging. Buy for over 40% upside potential.
Price objective basis & risk
Mcleod Russel India Ltd. (XCVFF)
Our PO of Rs315 is based on 9x 1yr fwd P/E, in line with McLeod's 4yr median
1yr fwd PE. After adjusting for 25pct of the equity shares of the company held in a
trust owned by a 100pct subsidiary company, the target PE is 6.7x 1 yr fwd PE.
This compares favorably with (1) valuations of global food commodity/plantation
peer-group companies which are valued at 6-28x 1-year forward target P/E
multiples and (2) the company's historical 1-year forward P/E band.
Risks: (1) failure of monsoon leading to drastic decline in production, (2) Stronger
rupee affecting export realizations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mcleod Russel India Ltd.
Kenyan weather to push prices
up; Buy
„In line flat quarter; Expect a strong season ahead
McLeod’s standalone Q3 numbers were flat and in line. While higher realization
helped 9%yoy growth in revenue, margins were impacted by higher wage costs
and higher proportion of production from lower margin bought leaves. However,
led by expectation of a stronger season in 2011 we hike FY12/FY13 EPSe by 7%
as continuing dry spell in Kenya is likely to impact global tea production. Reiterate
Buy with unchanged PO of INR315 for 40% potential upside.
Kenya’s loss of production in CY11 can push prices up
As per Kenya Tea Board, Kenya is likely to witness a 12% decline in tea
production in 2011 given current dry spell because of ‘La Nina’. We expect this
will put upward pressure on tea prices in addition to the current shortage situation
and demand supply mismatch. We up India tea price assumption for FY12 to
INR159 (vs INR154 earlier). We also see upside risk to estimates from this.
Q3 saw loss of production led by weather; Prices firm
While Q3 realizations moved up 5%yoy, margins were down 390bps due to i) loss
of 1.3mn kg in tea produced from owned gardens and ii) 9% higher employee
costs as wage hikes were effected in Jan 2010. However, reported Q3 numbers
don’t include profits from McLeod’s Ugandan tea plantations.
Valuations remain attractive; Buy for over 40% upside
McLeod trades at 6xFY12e PE- at the lower end of the 6x to 24x FY12e PE range
for peers in the global food commodities. Also adjusting for treasury shares, it is at
4.3x FY12e PE. FCF yield is at 19% on unadjusted basis and 25% on adjusting
for treasury. Valuations are attractive given upbeat tea price outlook, strong free
cash flow and expected deleveraging. Buy for over 40% upside potential.
Price objective basis & risk
Mcleod Russel India Ltd. (XCVFF)
Our PO of Rs315 is based on 9x 1yr fwd P/E, in line with McLeod's 4yr median
1yr fwd PE. After adjusting for 25pct of the equity shares of the company held in a
trust owned by a 100pct subsidiary company, the target PE is 6.7x 1 yr fwd PE.
This compares favorably with (1) valuations of global food commodity/plantation
peer-group companies which are valued at 6-28x 1-year forward target P/E
multiples and (2) the company's historical 1-year forward P/E band.
Risks: (1) failure of monsoon leading to drastic decline in production, (2) Stronger
rupee affecting export realizations.
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