Friday, June 1, 2012

>McLeod Russel India Ltd

Mcleod Russel registered a mere ~12% decline in its standalone net profit for FY’12 at `2,601 mn owing to loss of crop during the months of November, December and March. On the profit side, the company has posted a standalone net loss of `1,572 mn for the fourth quarter of FY’12 in comparison to a net loss of `1,229 mn in Q4FY’11

For the quarter ended March’12, the company has reported ~14% increase in the total sales at `2,601 mn and ~28% increase in net loss `1,572 mn. Sales for the quarter grew ~13% to 190 lakh kgs while crop size declined sharply ~72% to ~7 lakh kg. Prices remained flat at `1,373 mn per kg in quarter under review. On the price front, the season has started off on a positive note for McLeod. The ruling price today is `30 to `40 higher than last year. This is due to two reasons. From the month of November the company had lost crops due to early winter and we
lost crop in Nov’-Dec’ and March. Basically, the inventory levels at the frontend are depleted and buyers had to come in with a higher force to pick up the tea. Going into the FY’13E season, if the weather holds well, we believe that this deficit of April and May will not really catch up. However, weather forecast for the FY’13E period does not holds good & might see fall-out in crops in Q1FY’13E. 

Operating margins were under pressure and slipped 350 bps to 24.6% owing to spike in the raw material cost, power cost and employee cost.
Costs per kg were higher by `8/kg mainly on account of midterm revision of wages in Assam effective 1st Jan’12 (additional impact `2/kg) increase in fuel cost (additional impact `1/kg), irrigation and fertilizer costs due to dry weather from November to March (additional impact `2/kg). The Raw material cost as percentage of sales net of stock adjustments inched up 120 bps to ~9.2% while that of employee cost increased 50 bps to ~34.7%, power and fuel inched up 70 bps to ~9.7% and other expenses grew 50 bps to 1~1.8% in period under review. Resultantly, operating profit tumbled marginally 2% to `3,044 mn.

Valuation Uptick continues faster than we expected and output this year in North India and with the prices at `30-`40 higher, should remain at a much higher level going into the season. At CMP, the stock trades at a P/E of ~8.7x and P/BVPS of ~1.5x of FY’13E EPS. We revalue Mcleod Russel from our earlier TP of `215 to `300, however, re-iterate our HOLD stance with a potential upside of ~7.5% from current levels. At our TP, the stock would be trading at a **P/E of ~9.3x and P/BVPS of ~1.7x, factored over FY’13E EPS of `32 and BVPS of `181.