Disappointing quarter… • McLeod Russel :: ICICI Securities

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

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McLeod Russel India-Q3 EBITDA miss, outlook for FY14 positive:: Nomura research

Mcleod Russel reported numbers which were below our estimate at the
operating level, adjusting for the provision for staff salaries (pertaining to
the first 3 quarters) taken in this quarter. While in the short term the stock
may react negatively, we would use it as an opportunity to accumulate
the stock as the outlook for tea prices in FY14F remains extremely
positive, in our view.
In-line revenue for standalone business, decent realization uptick
evident even after a higher mix of bought leaves in this quarter
McLeod Russel reported standalone sales of INR4481mn (up 10.6% y-y)
which in line with our expectation of INR4485mn. Tea production at
~21.7mn kg was 2.3mn kg higher than in Q3 FY12, split between
16.2mn kg from own garden (vs ~16.6 mn kg of tea Q3FY12; our
estimate of 18.7mn kg) and 5.8mn kg from bought leaves (our estimate
of 3mn kg). Actual sales were 24.9mn kg (0.7mn kg lower than last year)
but in line with our estimate of 24.9mn kg. We understand that the sale
of an additional 3mn kg produced versus last year will manifest in the
next quarter.
EBITDA misses our estimate driven by provision for staff wages,
higher power and fuel costs
Reported EBITDA of INR1364mn (EBITDA per kg of INR56.2) was
~10% lower than our expectation of INR1515mn (EBITDA per kg of
INR63) and Q3FY12 of INR1340mn (EBITDA per kg of INR52.3).
However had the company sold the additional 3mn kg produced versus
last year (assuming EBITDA per kg of INR50) that has been pushed to
Q4, EBITDA would have been INR150m higher than the reported
number this quarter. Apart from higher-than-expected power and fuel
costs, the operating outcome was also affected by a INR50m provision
for staff wages (pertaining to ~500 staff spread over 57 gardens) after an
agreement effective April 1 2012 ex an FX loss of ~INR35m (versus our
expectation of INR54m) ex of which adjusted EBITDA was 9% lower
than our estimate. The miss at the EBITDA level reflected at the net
level, where reported net of INR1232mn was 11% below our estimates
Overseas business: crop loss in Uganda impacts margin, Rwanda
margins robust but decline from highs in CY12, solid performance
in Vietnam
 Performance in Uganda was weak on account of crop loss which
resulted in an increase in costs and thus impacted margin. Uganda
produced ~15.6mn kg of tea in CY12 vs ~16.2mn kg in CY11 (~0.6mn
kg crop loss y-y). While price increased by ~6% from USD1.94 in
CY11 to USD2.06 in CY12, EBITDA decreased by ~13% y-y (from
USD11.8mn in CY11 to USD10.3mn in CY12). EBITDA margin fell
from 38.1% in CY11 to 32.2% in CY12 (~590bps decline y-y).
 Tea production in Rwanda increased from 1.9mn kg in CY11 to 2.3mn
kg in CY12. Part of this increase in production was due to McLeod’s
acquiring Gisovu Tea Company Limited, Rwanda in Feb’11.
Realization improved from USD3.4 in CY11 to USD3.68 in CY12 (~8%

Mcleod Russel :: ShareKhan Diwali Muharat Picks 2012

Mcleod Russel is the world’s largest tea producer with an annual tea production of close to 100 million
kg. With tea estates in India and Africa, it is well poised to take advantage of the current favourable
global demand supply scenario. With the expectations of a substantial improvement in its sales realisation
and a volume growth in mid-to-high single digits (in the domestic market and the international subsidiaries),
the company’s consolidated top line and earnings are expected to grow at CAGR of 18.5% and
20% respectively over FY2012-14.
Mcleod Russels tea production was affected by abnormal weather conditions in north India during the
key tea producing season (July-September). The weather has improved and the tea production was
estimated to be better in October 2012. The management indicated in the conference call that the
positive impact of the increase of ~Rs20 per kg in the blended realisation on the profitability would be
seen in Q3 and Q4 of FY2013.
In view of expectations of normal production in FY2014, we expect Mcleod Russel to post a strong
bottom line growth in FY2014 on account of an improvement in the OPM (due to higher blended
realisation of the stand-alone entity and increased contribution from the African subsidiaries, which
have much better margins than the consolidated entity).
At the CMP the stock trades at 11.1x its FY2013E (consolidated) EPS of Rs27.1 and 8.5x its FY2014E EPS
of Rs35.4. Our price target of Rs356 valuing the stock at 10x its FY2014E earnings, which is in line with
the last six years’ average one-year forward multiple of 10x.

Mcleod Russel:: Adverse weather in Sep’12 may impact Q2 -- Nomura research,

Unfavorable weather leads to lower production globally
We believe that the heavy rains in Assam in September which produced
more than half (~51%) of India’s tea production in 2011 (according to
Tea Board of India) have caused production losses of (Hindu Business
Line, 2nd October) of another 18-20mn kg in the September month on
top of the 12mn kg lost between January –July 2012. This will mean that
India’s total production loss in CY2012 which till July was ~20.8mn may
be in the range of 28mn kg-40mn kg (August production was apparently
higher versus 2011, and if some make-up happens in Nov-Dec versus
last year when there were some crop losses last year). A similar trend
persists across other major countries including Kenya and Sri Lanka. In
Sri Lanka crop losses have intensified owing to the worst draught the
country has faced since 1992 and the output of high grown teas is down
11.6% during January to August this year from a year ago, while the
Kenyan tea board is guiding to a 5% decline in production for the full
year.

Mcleod Russel (India) Ltd: Accumulate: way2wealth

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

Buy McLeod Russel ; Target : | 305 : ICICI Securities, PDF link

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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.

Buy McLeod Russel; Target :Rs 260 ::ICICI Securities

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E a r n i n g s   l o w e r   t h a n   e x p e c t a t i o n s …
McLeod Russel’s Q3FY12 results were below our estimates as net sales
witnessed 7.4% growth to | 393.7 crore vs. | 366.7 crore in Q3FY11. The
growth has been led by 4.4% increase in volume and 2.4% price rise.
EBITDA margins declined sharply to 34% from 40.4% in Q3FY11 due to
increase in raw material cost as higher production led to increase in
inventory levels at the end of December quarter. Interest cost increased
by 57.4% to | 9.4 crore due to high interest rates. The company incurred
a mark-to-market forex loss of | 4.4 crore as it entered into forward
contracts for some of the quantities  sold. Increase in raw material cost
and other operating expenses led to the decline in net profit from | 135.3
crore in Q3FY11 to | 117.1 crore in Q3FY12.
ƒ Operational highlights
The company’s total tea production during the quarter was 19.7 million kg
against 21.8 million kg in Q3FY11. Tea sales volumes in Q3FY12 were at
25.6 million kg at an average realisations of | 152.9/kg as against 24.5
million kg with average realisation of 149.3/kg. Out of the total quantity
sold, the company has sold 16.1 million kg in India with average
realisation of |143.3/kg while 9.5 million kg has been sold at average
realisation of | 171.7/kg.
V a l u a t i o n
At the CMP, the stock is trading 7.8x and 6.7x its FY12E and FY13E EPS of
| 25.1 and | 28.8, respectively. Though domestic tea prices have come off
from their peak in June-July 2011 export prices have been continuously
strong. Considering the March quarter is generally a weak quarter, losses
would remain high in Q4FY12 due to higher levels of inventory of dust
tea. We believe tea prices would remain stable in FY13, so the growth for
the company would only contributed by higher volumes. Considering flat
tea prices in FY13, margins for the company would remain under
pressure but volumes will witness steady growth. We have valued the
stock at 9x its FY13E EPS and assigned it a target price of | 260.

Buy McLeod Russel; Target : Rs 305 ::ICICI Securities

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H i g h e r   p r i c e s   d r i v e   p r o f i t a b i l i t y   …
McLeod Russel reported its Q2FY12 results. The topline grew by 12.3%
YoY to | 405.7 crore led by an increase in both sales volume and prices.
During the quarter, the company’s sales volumes were higher by 2.3
million kg (mkg) and realisations by ~| 6/kg. Employee cost in Q2FY12
witnessed a slight moderation and stood at 29.1% of net sales compared
to 29.9% in Q2FY11. In spite of  a dip in employee costs, marginal
increases in power and fuel cost, freight and other manufacturing
expenses  kept  the EBITDA margin at  the  same  level of 58.2%  in Q2FY12.
Hence, higher sales and sustained margins helped the profitability to
increase by 9.8% YoY to | 223.2 crore against | 203.2 crore in Q1FY12.
ƒ Operational highlights
The company’s total tea production during the quarter was 36.8 mkg
against 32.9 mkg in Q2FY11. Tea sales volume in Q2FY12 stood at 26.2
mkg against 23.9 mkg in the corresponding quarter last year. Realisation
per kg was also higher by | 5.98/kg and stood at | 157.6/kg.
ƒ Tea production and prices outlook
Tea production in India is expected to be higher this year (FY12) at ~1000
mkg against ~965 mkg in FY11. The increase in production is expected
on the back of increased plantation in North India due to favourable
weather conditions. Hence, a higher production in the country, lower
inventory levels and a strong consumption growth (both domestic and
international) have led tea prices to increase by ~|10/kg during the year.
Further, with the major tea exporting country, Kenya, experiencing a
shortfall (~37 mkg till September, 2011) in production during the year, we
expect higher tea prices to remain sustainable.
V a l u a t i o n
At the CMP, the stock is trading 9x and 8.6x its FY12E and FY13E EPS of |
27.3 and | 28.8, respectively. McLeod being one of the largest tea
producers and exporters of the country and with tea prices trending
higher backed by a strong demand  growth, we expect the growth in
revenues and earnings to remain healthy, going ahead. We have valued
the stock at 11x its FY13E EPS and assigned it a target price of | 305

Buy McLeod Russel ; Target : Rs 305:: ICICI Securities

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I m p r o v i n g   r e a l i s a t i o n s  d r i v i n g   p e r f o r m a n c e …
McLeod Russel posted robust Q1FY12 results with topline growth of 20%
to | 147 crore on the back of higher volumes as well as rising tea
realisations. The company sold 9.7  million kg of tea at an average
realisation of | 152.5/kg against 8.7 million kg at an average realisation of
| 140/kg in the corresponding quarter last year. Exports during the
quarter stood at 1.5 million kg against 1.0 million kg in Q1FY11 with
realisations surging to | 190/kg against | 63/kg. EBITDA margins
improved to 32.5% from 14.8% led by higher export realisations that are
driven by rising global demand. Employee cost in Q1FY12 increased by
13.0% to | 108 crore due to a rise in wages of labourers. Hence, in spite
of higher wages, net profits jumped by 98.7% to | 37.3 crore led by
higher tea prices and improving EBITDA margins.
ƒ Tea prices to maintain upward trend
Tea prices globally as well as in India remained in an upward trend.
Average grade prices in Kenya are hovering around US$3.68 per kg.
Simultaneously, in India, Assam tea prices, considered as high grade tea,
are ~| 145-150 per kg. We believe tea production in Kenya, which is the
largest exporting country, would be ~30 million kg lower compared to
the previous year. This would keep Indian export realisations higher.
V a l u a t i o n
At the current market price of | 267, the stock is trading at 10.2x and 9.6x
its FY12E and FY13E estimated EPS of | 26.3 and | 27.7, respectively. Tea
prices in 2011 season in  India have opened ~10% higher compared to
the previous year on the back of  higher export demand. Sales volumes
are expected to increase on the  back of a recovery in production
compared to the loss of crop experienced last year. Hence, we expect the
company to witness strong growth in both topline and earnings and
remain positive on the stock, valuing it at 11x its FY13E EPS of | 27.7 with
a target price of | 305 per share.

Mcleod Russel India Ltd. — Outlook remains robust; Buy :: Rs315 target -BofA Merrill Lynch,

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Mcleod Russel India Ltd. — Outlook remains
robust; Buy
Country Overview
Q4 below expectations; expect crop recovery in FY12
McLeod’s Q4 numbers were below expectations led mainly by more than
expected loss of crop and higher costs. While we cut estimates ~10% to account
for costs we see upside risk to estimates led by better than expected tea prices.
We retain Buy with an unchanged PO of INR315 as we roll fwd to FY13 based
multiple. PO is at 9x 1yr fwd P/E, in line with McLeod's 4yr median.  
Price realizations robust; remain bullish on price outlook
Company mentioned that tea prices currently are up INR10-15 per kg (~10%) on
a like to like basis vs last year. We remain bullish on medium term price outlook
given i) continuing shortage situation, ii) ~8% YTD loss of production in Kenya
due to weather issues and iii) no significant new supply likely to come up globally.  
FY11 hit due to lower production; expect recovery in FY12
While realized prices in FY11 were 6% higher yoy McLeod lost 2.3mn kg of
production. Of this ~4mn kg was lost in its owned gardens but was offset partially
by ~1mn kg increased production based on bought leaves. However given timely
start to monsoon in FY12 we expect McLeod’s production to recover ahead.  
Valuations remain attractive; reiterate Buy
McLeod trades at 8xFY12e PE and 7.4xFY13e. Adjusting for treasury this implies
a valuation of 6xFY12e and 5.5xFY13e PE. This is at the lower end of 6x to 26x
1yr fwd trading range for peers in the global food commodities. We believe these
are attractive valuations given i) our positive view on tea price outlook, ii) free
cash flow generation and iii) continuous deleveraging. Reiterate Buy.

Buy Mcleod Russel - Expect a strong season ahead, Traget Rs 315:: BofA ML,

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Mcleod Russel India Ltd.
  
Kenyan weather to push prices
up; Buy
„In line flat quarter; Expect a strong season ahead
McLeod’s standalone Q3 numbers were flat and in line. While higher realization
helped 9%yoy growth in revenue, margins were impacted by higher wage costs
and higher proportion of production from lower margin bought leaves. However,
led by expectation of a stronger season in 2011 we hike FY12/FY13 EPSe by 7%
as continuing dry spell in Kenya is likely to impact global tea production. Reiterate
Buy with unchanged PO of INR315 for 40% potential upside.

Mcleod Russel India -- In line results; reiterate Buy: BofA ML

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Mcleod Russel India Ltd.
In line results; reiterate Buy
􀂄 Standalone results in line; tweak estimates, maintain PO
McLeod reported an in line quarter post which we marginally tweak estimates and
reiterate Buy on the stock. Revenue was up 5% yoy led by higher realizations but
impacted by loss of production led by weather. PAT at INR2bn, up 5% yoy, was
marginally ahead of estimates. PO of INR315 is pegged at 11x 1yr fwd PE- in line
with McLeod's 4yr median 1yr fwd PE and offers 36% upside potential.