Fw: Stock Idea: Mcleod Russel India (Take a sip when it is hot)

 

 

Stock Idea [April 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA Mcleod Russel India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs339 Current market price: Rs267 Take a sip when it is hot Key points  Favourable global demand-supply scenario: Another year of a production shortfall in the key tea exporting countries (including Kenya) has widened the demand-supply gap in the global tea markets in CY2011. In India too the demand exceeded the supply with the black tea production increasing by 2.3% YoY to 988.3 million kg in CY2011 against a 3% growth in tea consumption. This resulted in a deficit of 55 million kg in the Indian market in CY2011. The scenario is favourable for the tea producers as their realisation would continue to improve due to the demand-supply mismatch globally. We expect a growth of Rs10-15 per kg in the realisation in the next two years.  Mcleod Russel-the largest black tea producer: Mcleod Russel India (MCR) is the world's largest tea producer with an annual tea production of close to 100 million kg. This is close to 5% of the global black tea production of around 1,945 million kg. The company has 62 tea estates covering a total area of 38,758 hectares (1.1% of the world's total area under tea cultivation). With a domestic production capacity of close to 92 million kg MCR is well poised to capitalise on the growing demand for Indian black tea in the global markets.  Higher realisations to boost margins: Tea manufacturing companies have a higher operating leverage, as any significant improvement in their realisation results in a strong improvement in their profitability. MCR's consolidated OPM improved from 10.3% in FY2008 to 26.8% in FY2011. What's more, we expect its blended realisation to go up by Rs11-12 per kg annually over the next two years which will keep the margins firm and leave scope for another 120-130-basis-point improvement going ahead. Cash inflows to remain robust: Keeping in view its robust performance in the last couple of years, MCR has reduced its debt-equity ratio to 0.1x. With expectations of strong cumulative operating cash inflows of around Rs730 crore over the next two years, MCR is expected to improve the dividend pay-out and/or build a cash war chest for potential inorganic initiatives in future.  Outlook and valuation: MCR, which has tea estates in India and Africa, 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), MCR's consolidated top line and earnings are expected to grow at CAGR of 16% and 21% respectively over FY2011-14. Even after excluding the upside from the treasury shares (25% of the outstanding shares), the stock's valuations are attractive as it is trading at 8.5x its FY2013E EPS of Rs31.4 and 7.1x its FY2014E EPS of Rs37.7. We initiate coverage on the stock with a Buy recommendation and a price target of Rs339.   Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.