>MCLEOD RUSSEL (ICICI DIRECT)

McLeod Russel is one of the world’s largest bulk tea producing companies with annual production of 75 million kg per annum. The company exports one third of its production and has a market share of 10% in the North Indian tea market. Over the past four years the company has acquired four tea plantations (three in India and one in Vietnam). The company currently has over 59 tea gardens spanning across Assam, West Bengal and Vietnam.

Tight domestic demand-supply to boost tea prices
Tea prices have surged above Rs 130 per kg, almost 30% higher than last year on the back of shrinking inventories. The precipitous decline in auction tea prices during 2001-2005 had adversely affected tea plantation activity in India. Subsequently, several tea estates in India have been afflicted with low yields and require investments in replantation. This, in turn, has lead to sluggish growth in tea production during 2006-2009. Tea consumption in India, on the other hand, has grown at a consistent pace of 3%, resulting in shrinkage of tea inventories from 305.9 million kg in 2006 to 220.7 million kg in 2009. Simultaneously, a significant decline in tea production in major tea exporting countries like Kenya and Sri Lanka has further aggravated the situation. With black tea consumption growing steadily and adverse weather conditions taking a toll on tea production, primarily in major tea exporting countries we expect tea prices to remain firm,
going forward.

Best play in the industry
McLeod Russel is the largest bulk tea producer in the country, accounting for 8% of tea production in India. The company has witnessed consistent volume growth through various acquisitions of
tea estates over 2006-2009. Moreover, the company replants around 2% of its tea estates every year, in order to enhance the yields and increase production. The company’s realisations are almost 30% higher than the industry as most of its tea estates are located in Assam, which is known for its high quality tea. Rising tea prices have resulted in a higher EBITDA margin in 2009. With the company’s fixed cost structure, higher plucking productivity per plucker at Rs 25 per kg
(vis-à-vis industry average of Rs 21 per kg) and rising tea prices, we believe the EBITDA margin will further improve in 2010.

Growth through inorganic route
McLeod Russel is one of the largest bulk tea producers in India, accounting for 8% of the country’s total tea production. From 30 tea estates during 2004, the company currently operates over 59 tea estates, thereby doubling its production capacity from 40 million kg per annum in FY05 to 75 million
kg per annum in FY09. The company acquired Doom Dooma and Moran Tea Co in 2006 and 2007, respectively, with an annual production capacity of 6 million kg and 4 million kg, respectively. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US$7 million) and Olyana Holdings LLC, US (US$2.75 million), respectively, through its UK-based subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Co and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. Given the company’s aggressive acquisition plans we expect this trend to continue,
thereby driving inorganic growth, going forward.

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