World’s largest tea plantation company with 39,318 ha. dedicated tea plantations spread across
47 tea estates in Assam, 5 in West Bengal, 4 in Vietnam, 5 in Uganda and 1 in Rwanda. Aggregate
production capacity stands at ~100 mn kgs - 82.6mn kgs in India, 4.5mn kg in Vietnam, 15mn kg in
Uganda and 1.7 mn kgs in Rwanda.
Forayed globally with its first acquisition of 100% stake in Phu Ben Co. in Vietnam in 2008, having
a capacity of 4.5 mn kgs . In 2010, Mcleod acquired Rhwenzori Tea Investments Ltd. in Uganda
having a capacity of 15 mn kgs. And the latest acquisition was of 1.7mn kg Gisovu Tea Garden, in
Rwanda in 2011.
Accounts for ~7.8% of India’s total tea production and ~2% of the global tea production.
Industry outperformer
The country has witnessed stagnant production over the last 4-5 years while domestic
consumption has been growing at a CAGR of 2.5%+ over the last 10 years.
India has been witnessing falling yields over the last 5 – 7 years due to the aging of bushes. Of the
11th Plan target there was 66 per cent shortfall in sanctions against a target of 54,524 ha area for
replanting in the first four years (April 2007 - March 2011) as only 18,642 ha area was sanctioned
for replanting. The impact of replantation efforts will be visible from FY14-15 as the pace of it picks
up, however by that time domestic consumption too would have grown resulting in no major
buffer.
Investment Rationale
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Consolidation initiatives by Mcleod have started contributing from FY11.Improved profitability and
return ratios to enable the company to increase its operating cash flows and hence reduce
leverage.
Over the last 2 to 3 years, McLeod has followed the inorganic route & doubled the plantation
capacity to 87mn kgs currently from 42mn kgs in FY05 domestically and has further consolidated
its position globally by adding 20.2 mn kgs.
Through a series of acquisitions, McLeod acquired high quality plantations in the Assam (North
Indian) belt.
Forayed globally in 2011. recently with purchase of 100% stake in Phu Ben Co. in Vietnam in 2008
having a capacity of 4.5 mn kgs , In Uganda in 2010 acquiring Rhwenzori Tea Investments Ltd.
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having a capacity of 15 mn kgs and the latest acquisition of 1.7mn kg Gisovu Tea Garden, in
Rwanda
We believe these acquisitions have helped strengthen McLeod's position in the industry. McLeod
is favourably placed to take advantage of the industry uptrend.
Mcleod produces superior quality tea from its north India plantations which commands higher
prices over the average tea auction prices.
As per industry reports black tea production has recorded a shortfall in production of ~ 50
mn. kgs till year to date (2012).
India, world’s largest black tea producer has started the year with lower production and is expected
to be stagnant with a downward bias on account of weather conditions. South India production is
also lower by 9% at 44.7 mn kgs vs. 48 mn kgs till Mar 2012. North Indian production for the
industry is estimated at 37.5 Million kgs upto Mar as compared to 40.7 Million kgs last year. We
expect domestic prices to stay firm in the wake of a third year of stagnant 975-985 mn kgs of
production in 2012 and rising consumption.
Kenya production is also lower due to adverse weather conditions.
Sri Lanka also has gone into CY12 with lower than expected production.
With carry forward inventory reducing on the back of higher demand and stagnant supply, we
expect prices to stay firm and increase further. The tea industry is on the verge of the long term
structural upward trend & Mcleod is the player with significant scale in the industry.
Seasonal fluctuations: The production is dependent on the climatic conditions & hence
susceptible to vagaries of weather. Any unexpected further shortfall in production will neutralise
the impact of rising prices on the bottomline front.
Labour cost is a major component for the integrated tea players and is governed by the
Plantation Act & includes high social costs. In other tea producing nations labour cost is
productivity driven. This drawback in the domestic tea industry cost structure makes Indian tea
unremunerative vis-a-vis Kenyan tea in the export markets. If the company is forced to make
unreasonable increases in the labour spend, the benefits of the increased prices & cash flows can be blunted.
With fall in production, labour cost remains firm. This can impact the cost & hence trickle
down profitability.
With structural shift towards rising demand and supply gap year over year due to steadily rising global
consumption, the tea prices are set to rise over long term.
With all 3 main country producers of CTC reporting lower production going into CY12 there will be
continued pressure on carry forward stocks and hence exert upward pressure on auction prices.
We expect group consolidated production of 104.5 mn kgs (incl Vietnam, Uganda and Rwanada assets
of McLeod) for FY13. Domestic & export realizations which had softened due to the normal
production in all 3 producing countries in 2011 has again started to harden due the adverse weather
conditions in North India.
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