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http://content.icicidirect.com/mailimages/ICICIdirect_McLeodRussel_EventUpdate.pdf
P o s i t i v e o u t l o o k f o r i n d us t r y t o a i d r e a l i s a t i o n …
McLeod Russel (MCL), the largest tea producer of India, is expected to
record higher earnings (FY13E) on the back of improving tea prices led by
increasing demand and shortfall in global tea production. MCL would
benefit from a decline in production in Kenya and Sri Lanka that would
boost export demand from India, thereby supporting better realisations.
Further, the company’s bid for tea gardens in Uganda would aid MCL’s
volume sales (increase by ~5.5 mkg) in the coming years. Hence, we are
revising our target price, maintaining a BUY rating on the stock.
Higher domestic realisations
Tea production in India in CY11 stood at 988.3 million kg (mkg) (expected
was ~1000 mkg) against 966.4 mkg in CY10, an increase of almost 2.3%.
Consumption during the period increased at a higher rate of ~3.5%.
Hence, higher demand on the back of dry weather in the North East
impacting production, lower carryover stock (exhausted by February,
2012) and higher cumulative deficit in the system (~50 mkg) led tea
realisations to be higher by ~60-80/kg (good quality tea) and ~10-15/kg
(blended realisation) in CY11. Going ahead, with demand expected to
remain robust (domestic and export), tea realisation for CY12 would
further increase by ~20-25/kg.
Acquisition in Rwanda to boost volumes
MCL has bid for two tea gardens in Rwanda that could increase the yield
from Rwanda for the company to ~7 mkg (current production is ~2 mkg).
With margins from Rwanda gardens being higher at ~50% compared to
MCL’s margins at ~28%, we believe the acquisition would contribute
notably to MCL’s earnings. Further, with funding for the acquisition to be
through internal accruals there would not be any pressure on interest
payments, hence protecting the bottomline.
V a l u a t i o n
At the CMP, the stock is trading at 10.5x and 8.6x its FY12E and FY13E
EPS of | 25.1 and | 30.3, respectively. With realisations set to improve,
we expect earnings to perk up. Hence, we have valued the stock at 10x its
FY13E EPS, arriving at a target price of | 305, with a BUY rating
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_McLeodRussel_EventUpdate.pdf
P o s i t i v e o u t l o o k f o r i n d us t r y t o a i d r e a l i s a t i o n …
McLeod Russel (MCL), the largest tea producer of India, is expected to
record higher earnings (FY13E) on the back of improving tea prices led by
increasing demand and shortfall in global tea production. MCL would
benefit from a decline in production in Kenya and Sri Lanka that would
boost export demand from India, thereby supporting better realisations.
Further, the company’s bid for tea gardens in Uganda would aid MCL’s
volume sales (increase by ~5.5 mkg) in the coming years. Hence, we are
revising our target price, maintaining a BUY rating on the stock.
Higher domestic realisations
Tea production in India in CY11 stood at 988.3 million kg (mkg) (expected
was ~1000 mkg) against 966.4 mkg in CY10, an increase of almost 2.3%.
Consumption during the period increased at a higher rate of ~3.5%.
Hence, higher demand on the back of dry weather in the North East
impacting production, lower carryover stock (exhausted by February,
2012) and higher cumulative deficit in the system (~50 mkg) led tea
realisations to be higher by ~60-80/kg (good quality tea) and ~10-15/kg
(blended realisation) in CY11. Going ahead, with demand expected to
remain robust (domestic and export), tea realisation for CY12 would
further increase by ~20-25/kg.
Acquisition in Rwanda to boost volumes
MCL has bid for two tea gardens in Rwanda that could increase the yield
from Rwanda for the company to ~7 mkg (current production is ~2 mkg).
With margins from Rwanda gardens being higher at ~50% compared to
MCL’s margins at ~28%, we believe the acquisition would contribute
notably to MCL’s earnings. Further, with funding for the acquisition to be
through internal accruals there would not be any pressure on interest
payments, hence protecting the bottomline.
V a l u a t i o n
At the CMP, the stock is trading at 10.5x and 8.6x its FY12E and FY13E
EPS of | 25.1 and | 30.3, respectively. With realisations set to improve,
we expect earnings to perk up. Hence, we have valued the stock at 10x its
FY13E EPS, arriving at a target price of | 305, with a BUY rating
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