Disappointing quarter… • McLeod Russel :: ICICI Securities

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Disappointing quarter…
• McLeod Russel (MRIL) reported dismal Q3FY15 results with the
topline increasing by a mere 2.7% with volumes and prices
increasing at a slower pace of 1.2% and 1.3%, respectively
• According to our estimates, domestic sales volumes stood at 21.4
million kg (mkg) (6.5% increase) with the average realisation of | 163
per kg. However, export volumes dipped 14% to | 5.7 mkg with the
average realisation of | 212.5 per kg
• Operating margins dipped by 10 percentage points to 22.6% as high
prices export volume decline along with considerable increase in
fixed cost (employee cost). Net profit witnessed a decline of 37.5% to
| 80.4 crore vs. | 128.7 crore in the corresponding quarter
Largest tea producer to benefit from increasing capacity
MRIL is the largest tea producer with domestic production of ~85 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 long
run (lack of area under tea plantation) and domestic consumption
expected to continue growing at a sustained rate of ~3% per annum, we
believe MRIL would be a key beneficiary on increasing its presence
through organic and inorganic route. MRIL drives ~25% of the volumes
from overseas acquired subsidiaries.
Tea price outlook muted in near to medium term
Tea prices in North India have seen ~3% increase mainly due to global
surplus of tea inventory. Kenya is the largest exporter of black tea in the
world and has seen a 10 year record production of more than 400 mkg
since 2013. This has led to a decline in export demand from India.
However, we believe export demand for high quality North Indian tea is
going to increase in the longer run, which would aid price growth for
Indian companies in future. In FY14, tea prices had witnessed an increase
of only | 4-5/kg with higher production of 1208.8 mkg vs. 1135.2 mkg in
FY13. However, as McLeod produces high quality Assam tea, we expect |
8/kg higher realisation to | 176.6 per kg in FY15E with sales volumes of
~78 mkg. However, we expect flat price growth in FY16E.
Revenues from international operations/exports to remain subdued
Though domestic realisations are witnessing an uptick, international and
export volumes 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 highest ever
production of 432 mkg in CY13. Further, production in 2014 has been
more than ~400 mkg for a second consecutive year, 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. We estimate export realisation
will decline from | 203/kg in FY15E to | 184/kg in FY16E.
Decline in export realisations; downgrade to HOLD
With global tea surplus due to high production in Kenya in the last two
consecutive years, domestic tea prices are expected to remain muted in
the medium term. This would lead to dismal profitability growth. We have
revised our FY15E and FY16E earnings numbers downwards by 31% and
27%, respectively. We value the company at 10x FY17E EPS of | 23.7 and
arrive at a target price of | 228 per share.

LINK
http://content.icicidirect.com/mailimages/IDirect_McLeodRussel_Q3FY15.pdf