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.
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