Tuesday, March 27, 2012

>MCLEOD RUSSEL: Acquisition in Rwanda to boost volumes

Positive outlook for industry to aid realisation…

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.

Higher domestic realisations
Tea production in India in CY11 stood at 988.3 million kg (mkg) (expected was ~1000 mkg) against 966.4 mkg in CY10, an increase of almost 2.3%. Consumption during the period increased at a higher rate of ~3.5%. Hence, higher demand on the back of dry weather in the North East impacting production, lower carryover stock (exhausted by February, 2012) and higher cumulative deficit in the system (~50 mkg) led tea realisations to be higher by ~60-80/kg (good quality tea) and ~10-15/kg (blended realisation) in CY11. Going ahead, with demand expected to remain robust (domestic and export), tea realisation for CY12 would further increase by ~20-25/kg.

Acquisition in Rwanda to boost volumes
MCL has bid for two tea gardens in Rwanda that could increase the yield from Rwanda for the company to ~7 mkg (current production is ~2 mkg). With margins from Rwanda gardens being higher at ~50% compared to MCL’s margins at ~28%, we believe the acquisition would contribute notably to MCL’s earnings. Further, with funding for the acquisition to be through internal accruals there would not be any pressure on interest payments, hence protecting the bottomline.

At the CMP, the stock is trading at 10.5x and 8.6x its FY12E and FY13E EPS of | 25.1 and | 36.6, respectively. With realisations set to improve, we expect earnings to perk up. Hence, we have valued the stock at 10x its FY13E EPS, arriving at a target price of | 305, with a BUY rating.

To read the full report: MCLEOD RUSSEL