Disappointing quarter!!! • McLeod Russel :: ICICI Securities, PDF link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->

Disappointing quarter!!!
• McLeod Russel reported disappointing Q2FY15 results with sales flat
at | 487.2 crore (I-direct estimate: | 543.1 crore) mainly due to a loss
of 2 million kg (mkg) of crop after the 3 mkg loss in Q1FY15
• Sales volume was 26 mkg with average realisation of | 186.4 per kg.
Domestic volumes remain flat at 21 mkg with realisations seen
increase of 8% to | 176/kg. Exports volumes dipped from 7.3 mkg
(realisation | 206/kg) to 5.0 mkg (realisation | 231/kg). The company
has seen a fall in export demand of low quality tea mainly due to
bumper production from Kenya
• Operating margins dipped 193 bps to 51.6% with 2 mkg loss of crop
in the quarter. This resulted in 9.8% decline in earnings
Tight domestic demand supply to benefit in FY16E
McLeod Russel (MRIL) is the largest tea producer with domestic
production of ~87 mkg (FY14) and production from Vietnam & Africa at
~25 mkg (FY14). With tea production in the country not expected to
witness an uptick in the near term (lack of area under tea plantation) and
domestic consumption expected to continue growing at a sustained rate
of ~2% every year, we believe MRIL would be the key beneficiary of
increasing prices due to this tight supply-demand scenario.
Higher domestic tea prices to aid in reviving sales in FY16E
Tea prices in North India are already trending higher by ~| 15/kg YoY
following a crop loss of ~5.0 mkg in North India in H1FY15. Further, with
inventory in India staying lower at 2.5 months of consumption tea prices
are expected to remain strong through FY15E. In FY14, tea prices had
witnessed an increase of only | 4-5/kg as production was higher at 1208.8
mkg against 1135.2 mkg in FY13. However, with production expected to
range between 1130 and 1150 mkg in FY15E following the crop loss and
consumption increasing at 2.5% per annum, we expect prices to remain
higher by | 12-15 kg in FY15E. The higher realisations would, thereby,
provide support to McLeod’s revenues and earnings that would have
otherwise suffered from the loss in sales volume. We have modelled a
sales volume of ~78 mkg and average realisations at ~| 180.5/kg for
FY15E vs. sales of ~86 mkg and realisation of ~| 168/kg in FY14.
Revenues from international operations/exports to remain subdued
Though domestic realisations are witnessing an uptick, international and
export volume of low grade tea have remained muted through H1FY15.
Prices have remained subdued following healthy production in the largest
exporting nations (Kenya and Sri Lanka). Kenya reported its highest ever
production of 432 mkg in CY13. Further, production in January-May, 2014
is at par with last year’s production at ~195 mkg, thereby keeping
international prices lower YoY by ~20%. Further, with production in Sri
Lanka also expected to remain healthy, we believe MRIL’s
international/export operations would not witness any significant
improvement in performance in FY15E.
Higher realisations to support earnings; maintain BUY
With domestic tea prices set to witness an increase of ~8-10% and
volume decline with the loss of 5 mkg crop in FY15E, we expect flat sales
& earnings in FY15. However, volume recovery would lead to strong sales
& earnings growth in FY16E. We value the company at 10x FY16E EPS of
| 29.2 and arrive at a target price of | 292/share.

LINK
http://content.icicidirect.com/mailimages/IDirect_McLeod_Q2FY15.pdf