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Tea
Increasing global prices to improve export realisations
Tea production in Kenya has declined by 21.1% during the first four
months of 2011. Simultaneously, flat production in Sri Lanka of
139.7 million kg (138.1 in the corresponding period), has resulted in
~10-12% increase in global tea prices. Tea prices in Kenya are
prevailing at US$3.2 per kg. Low export availability from Kenya and
other African countries would divert export demand to India. Higher
global prices would help Indian companies to export greater
quantity at a higher price. In the Q1FY12, we believe companies will
sell a similar quantity as June 2010. However, realisations would be
strong. We believe North India based tea companies would benefit
from stronger tea prices as demand for higher quality tea remains
strong in the UK and other European countries.
Domestic production to increase marginally
Tea production in India would remain in the range of 980-1000
million kg (mkg) in 2011. Limited area under tea cultivation and very
slow pace of increase in yields has capped the production at ~980
million kg in the last five years. We believe sustainable growth of
~3% in consumption and increasing export demand would result in
higher realisations for the companies. In Q1FY12, domestic prices
would remain steady on the back of export demand. Exports from
India are likely to increase above ~200 million kg, which would keep
domestic tea prices above ~| 150 per kg.
McLeod to benefit from export
McLeod Russell, being the largest bulk producer in the country,
would benefit the most from higher prices. We believe consolidation
of acquired subsidiaries in Africa and Vietnam would help increase
volumes by ~10 million kg in 2011. This would result in higher
revenue growth and earnings for the company.
Company specific view
Company Remarks
Harrison
Malayalam
We expect rubber & tea sales volumes to be lower YoY at 2.3 mkg & ~4.3 mkg,
respectively. However, realisations would be higher at ~| 77/kg for tea & ~| 210/kg
for rubber. Led by higher realisations, we expect margins to improve to 4.6% (0.2% in
Q1FY11) and bottomline to be back to black at ~| 4 crore
Jayshree
Tea
Jayshree Tea would be selling 3.6 mkg of tea with average realisations of | 132 per kg
compared to 3.1 mkg with | 130 per kg realisations in Q1FY11. With the increase in
volumes and increase in realisations, margins for the company will improve to ~21%
from ~9.6% in Q1FY11
McLeod
Russel
On a standalone basis, the company is likely to sell 8.9 mkg of tea with average
realisations of | 152.0 per kg as against 8.7 mkg of volumes with average realisations
of 140 per kg in Q1FY11. The company would be selling 5.2 mkg of tea (African
subsidiaries) at an avg realisation of | 81/kg
Source: ICICIdirect.com Research
