MCLEOD RUSSEL INDIA LTD BUY. July 16, Investor s Rationale

MCLEOD RUSSEL INDIA LTD July 16, 2012 BSE Code: 532654 NSE Code: MCLEODRUSS Reuters Code: McLeod Russel India Ltd, the largest tea producer of I...
Author: Jesse Harmon
9 downloads 1 Views 1MB Size
MCLEOD RUSSEL INDIA LTD

July 16, 2012 BSE Code:

532654

NSE Code:

MCLEODRUSS

Reuters Code:

McLeod Russel India Ltd, the largest tea producer of India is benefitting from rising tea prices led by increasing demand and shortfall in global tea production. Further, the company is targeting acquisitions to expand and aim to become a 150 million player in the next couple of years. Currently, the company is looking for acquisition in African market where the company has exposure of 19 million kg.

Investor’s Rationale

 McLeod Russel India Ltd is expected to record higher earnings in FY13E as both top-line and bottom-line are expected to increase by 15-20% and margins to improve from 26-27% to around 30% on back of hike in tea prices. The rise in tea prices are driven by increasing demand and insignificant growth in production.



MCLE.BO

Bloomberg Code:

MCLR:IN

Market Data Rating

BUY

CMP (`) Target (`)

315

392 ~24%

Potential Upside Duration 52 week H/L (`) All time High (`) Decline from 52WH (%) Rise from 52WL (%) Beta Mkt. Cap (` bn) Enterprise Value (` bn)

Long Term 323.4/165.5 323.4 2.6 90.3 0.7 34.5 36.9

Fiscal Year Ended FY11A

FY12A

FY13E

FY14E

McLeod would also benefit from a shortfall in global production as

Revenue (`mn)

12,692

14,453

17,344

20,466

decline in production in Kenya and Sri Lanka would boost export demand from India, thereby supporting better realizations. A shortfall in production across the globe has also led prices for the 2012 season to open almost `30 per kg higher.

Net Profit(`mn)

2,492

2,943

3,737

4,477

 With continued focus on its building blocks, the company is producing the largest volume of best quality tea at the lowest cost. It has designed its facilities to address peak load and process the day’s harvest within 16 hours, leading to consistent quality management at peak volume.

Share Capital

547

547

547

547

EPS (`)

22.5

26.3

34.1

40.9

P/E (x)

14.0

12.0

9.2

7.7

P/BV (x)

2.3

2.0

1.7

1.4

EV/EBITDA (x)

10.3

9.5

6.9

5.6

ROE (%)

16.4

16.8

18.2

18.4

ROCE (%)

17.2

16.7

20.7

22.2

Dec’11

Diff.

One year Price Chart

 McLeod has doubled the domestic plantation capacity from 42 million kg in FY05 to 87 million kg at present. The company has further consolidated its position globally by doing acquisitions which helped it to strengthen its position in the industry. Further, the company has made a bid for two tea gardens in Rwanda that could increase the yield for the company to 7 million kg from current production of 1.9 million kg in Rwanda.

 Strong traction in Indian operations powered the FY12 revenue growth of McLeod by 14% at `14,453.2 million on consolidated basis. The company’s net profit during the year surged by 18% at `2,942.7 million, driven by 15% growth in the revenues from Indian operations at `12,353.3 million and 8% increase in the revenues from Uganda operations at `1,427.5 million.

Shareholding Pattern

Mar’12

Promoters

45.7

45.7

-

FII

32.3

32.4

(0.03)

DII

5.9

6.8

(0.90)

16.1

15.1

0.93

Others

A ~`35 billion Company, largest tea producer in India McLeod Russel India Limited is part of the Williamson Magor Group, which has been in the tea producing business for almost one and-a-half centuries. In July 2005, McLeod Russel, by acquiring Borelli Tea Holdings Limited, U.K., gained control over its subsidiary Williamson Tea Assam Ltd with 17 Tea Estates in India. In 2006 and 2007, the company acquired Doom Dooma Tea Co Ltd and the Moran Tea Co (India) Ltd.

Aggregate production capacity of the company stands at ~103.8 million kg, 82.6 million kg in India, 4.5 million kg in Vietnam, 15 million kg in Uganda and 1.7 million kg in Rwanda.

McLeod is among the world’s largest tea-producing companies in the private sector, with operations spread across 64 estates and 62 processing factories in 4 countries and 2 continents. The company has 39,358 hectares under tea cultivation globally. It accounted for over 8% of all the tea produced in India and around 16% of all the tea produced in Assam. Aggregate tea production capacity of the company stands at ~103.8 million kg, 82.6 million kg in India, 4.5 million kg in Vietnam, 15 million kg in Uganda and 1.7 million kg in Rwanda. It forayed globally in 2008 with acquisition of Phu Ben Co. in Vietnam, acquired Rhwenzori Tea Investments Ltd. in Uganda in 2010 and in 2011 it acquired Gisovu Tea Garden in Rwanda. McLeod is engaged in the cultivation, processing and sale of tea. The Company primarily produces crushed, torn and curled (CTC) tea, which accounts for more than 90% of its production; the rest of the tea manufactured by the Company comprises the Orthodox variety. The Company, with its subsidiaries, produced 102.9 million kg of tea in 2011-12 and it is one of the largest global black tea exporters. The Company has established a state of the art tea blending factory at Nilpur, Assam to cater to the growing demand from customers for bespoke blends of the Company’s own teas from India. McLeod Russel Middle East DMCC, a subsidiary of the Company, was set up in 2011 at Dubai, UAE to serve as a trading and marketing hub for multi origin blends from Group’s own estates in India, Vietnam and Africa. McLeod Russel Middle East is able to provide turnkey solutions to customers looking for teas in straight line, blended or value added form. The Company exports its tea to 22 countries namely, Australia, Bangladesh, Canada, Chile, China, Egypt, Germany, Indonesia, Iran, Ireland, Japan, Kazakhstan, Kenya, Pakistan, Poland, Russia, Saudi Arabia, Sri Lanka, Netherlands, UAE, UK and USA.

Organisation Structure

Subsidiaries

Borellia Tea Holdings Ltd, UK (100%)

Phu Ben Tea Co. Ltd (100%)

Domestic acquisitions (since amalgamated)

Gisovu Tea Co. Ltd (60%) Gisovu Tea Co. Ltd (60%) Rwenzori Tea Invt. Ltd (100%)

Williamson Tea Assam Ltd

McLeod Russel Uganda Ltd (100%)

Moran Tea Co. (India) Ltd

Doom Dooma Tea Co. Ltd

Stellar FY12 earnings; led by higher tea prices

Total income from operations of McLeod surged by 14% at `14,453.2 million in FY12, driven by 15% growth in the revenues from Indian operations

During FY12, on the consolidated basis, total income from operations of McLeod surged by 14% at `14,453.2 million in FY12, driven by 15% growth in the revenues from Indian operations at `12,353.3 million and 8% increase in the revenues from Uganda operations at `1,427.5 million. McLeod Russel Uganda Limited (MRUL) sold and exported 16 million kg at an average price of USD 1.95 per kg (in 2010 - USD 1.84 per kg) and achieved turnover of USD 31 million in the second year of operation under McLeod Russel Group. During the year, prices remain higher by 6% as compared to last year. The revenues from Vietnam operations grew 15% to `409.2 million and from Rwanda stood at `241.3 million. Phu Ben Tea Co, Vietnam sold and exported 4.9 million kg of tea at an average price of USD 1.74 per kg as against 4.7 million kg at USD 1.70 per kg in the previous year. Gisovu tea Co Ltd, Rwanda sold and exported 1.5 million kg of tea at an average price of USD 3.39 per kg in the first year of operation under management of McLeod Russel Group. The company’s sales quantity during the year grew by 8% to 102.7 million kg while crop grew 7% to 102.9 million kg. Total exports during the year stood at 24 million kg at `170 per kg against 21 million kg at `156 per kg last year. Other Income of the company grew 27% to `410.7 million in FY12. Interest cost jumped 36% to `567.4 million while that of depreciation de-grew 3% to `369.7 million. After accounting forex loss of `86.8 million and 47% dip in taxation at `338.1 million, PAT came higher by 18% to `2,942.5 million. Trend in Sales, EBIDTA and EBIDTA margin

Geography-wise revenue trend

Strategic initiatives to achieve increased volume coupled with enhanced margins McLeod invested in specific initiatives as to report lower than industry declines during sectoral slowdowns and higher than industry rebounds during periods of sectoral recovery. With continued focus on its building blocks, the company is producing the largest volume of best quality tea at the lowest cost. The company has strengthened its consolidated EBIDTA margin over the last four years from 17.4% in 2007-08 to 26.9% in 2011-12. Some of the newer gardens like Gisovu Tea Company (Rwanda) reported an EBIDTA margin which is substantially higher than this corporate average. In line with these sustainability-enhancing initiatives, McLeod’s market capitalization strengthened from `2.8 billion in 2005 to `34.5 billion at present, making it one of the most valuable tea plantation companies in the world.

McLeod has strengthened its consolidated EBIDTA margin over the last four years from 17.4% in 2007-08 to 26.9% in 2011-12.

BUILDING BLOCKS

Quality Focus

Volume Growth

Cost Management

Process Orientation

-

Consistently positioned as a quality-driven tea producer to generate higher than industry average realizations

-

Enhance yields from within its own gardens and increased the purchase of tea leaves from other gardens to drive volume growth higher than the industry average Reduced the excessive dependence on tea grown from one region or country to mitigate climatic risks.

-

-

Progressively strengthened the human productivity in its tea estate, helping to amortize fixed costs more effectively and emerge as one of the lowest cost tea producers

-

Invested in an operational environment that has standardized processes and practices across workers, managers, gardens and countries which has enhanced operational predictability and replaced dependence on the diverse operating styles of managers with a stable institutionalized approach

Rise in tea prices to improve the margins

McLeod expects to report 1520% growth in both top-line and bottom-line where margins to improve from 26-27% to around 30% post hike in tea prices for FY13.

Due to 5-6 months of continuous crop loss, shortfall in the inventories and further shortfalls in the production, the prices for the new season tea is opened at around `25-30 per kg higher. Internationally also there have been a loss of crop both in Kenya, Sri Lanka and the other places as well and the prices are higher by 15-20%. Meanwhile, the company expects to maintain the production level same or higher as compared to previous year. Also, it is expecting exports to improve from 24 million kg last year to around 27-28 million kg this year. Tea prices are expected to average at around `185-190 per kg during the year as compared to `150 per kg for last year. In line with this, the company expects that it’s both top-line and bottomline to increase by 15-20% and margins to improve from 26-27% to around 30% post hike in tea prices for FY13.

Adequate infrastructure to support higher productivity

McLeod aims to invest in various initiatives to augment the growth in production of tea and increase the proportion of primary grade tea from 87% to 90%.

As 60% of the tea crop in India is picked between July and October, McLeod has designed its facilities to address peak load and process the day’s harvest within 16 hours, leading to consistent quality management at peak volume. Further, the company revamps 25% of its facilities annually with in-house engineering competence and compulsorily replaces equipment every few years for optimal returns. The average age of the company’s equipment is seven years. Also, it has the highest labour productivity among the peers in the industry, which stood at 25 kg per person per day. Besides, 75% approx. of the company’s bushes are less than 50 years old, strengthening their resistance to climate change and delivering higher yields than the industry average. These factors help the company in reporting a 90-95% average utilization. The Company pioneered and patented vacuum packing technology at the dryer mouth stage for bulk tea to retain the freshness of processed tea leading to premium realizations. It uses this technology across 15 of the company’s 62 processing units. Also, the company uses soft chemicals complying with EU standards on chemical residues in tea. Afforestation and soil conservation is mandatory in all estates of the company. Rainwater harvesting and creating water bodies are new initiatives being taken. To augment the growth in production of tea and increase the proportion of primary grade tea from 87% to 90%, the company aims to invest in various initiatives to counter the vagaries of weather, strengthen estate drainage initiatives, engage in river dredging, strictly follow viable agricultural practices to enhance bush health to cope with drought and pest activity, among others.

Inorganic expansion aiding the growth McLeod has one wholly owned subsidiary, Borelli Tea Holdings Limited, U.K. (Borelli) and six step down subsidiaries. Borelli is inter alia engaged in the business of investing funds in various companies engaged in tea production, marketing and investment activities. Borelli Tea Holdings Limited has invested in its subsidiaries in Vietnam, Uganda, Rwanda, USA and Dubai. During the year ended March 31, 2012, Borelli posted a net profit of `293.7 million.

McLeod has doubled the domestic plantation capacity and has consolidated its position globally by doing acquisitions at continuous time intervals.

McLeod has doubled the domestic plantation capacity from 42 million kg in FY05 to 87 million kg at present through inorganic expansion. The company has further consolidated its position globally by doing acquisitions. It acquired 35 estates after 2004, of which, 10 of these estates were outside India and operating performance of these estates improved substantially within 2 years of acquisition. It forayed globally with acquisition of Phu Ben Co., which is considered to be the top most tea company in Vietnam in 2008. It produced 5.4 million kg in the CY11 and Yield from own plantation was pegged at 2,798 Kg/Made Tea/Hectare which was a record. In 2010, it acquired Rhwenzori Tea Investments Ltd. in Uganda and in 2011 acquired Gisovu Tea Garden in Rwanda. McLeod Russel Uganda Ltd is the country’s largest tea producer and exporter. It produced 16.3 million kg in 2011 as compared to 16.8 million kg in 2010, due to insufficient rainfall at the beginning of the year. Gisovu Tea Co Ltd achieved record production of 1.9 million kg of made tea, an increase of 15.1% compared with the previous highest crop ever recorded in Gisovu. Also, margins from Rwanda gardens are around 50% as compared to McLeod’s margins of 28%. The acquisitions have helped the company to strengthen its position in the industry. Further, the company has made a bid for two tea gardens in Rwanda that could increase the yield from Rwanda for the company to 7 million kg from current production of 1.9 million kg.

Higher realizations on back of Demand Supply gap

Rising demand and supply gap can lead to price rise for next few years and this will benefit McLeod, as it is the largest tea producer in India.

India is the largest black tea producer in the world, producing around approx. 988 million kg during CY2011, representing 38% of the global black tea production. The country exports CTC (crush-tear-curl) tea mainly to Egypt, Pakistan and the UK, and the premium orthodox variety to Iraq, Iran and Russia. Black tea production by other main tea producers during 2011 was Kenya (377 million kg), Sri Lanka (328 million kg), other African countries (168 million kg), Vietnam (145 million kg), Indonesia (57 million Kg) and Bangladesh (59 million kg). Dry weather st condition across all black tea producing countries has affected the production during the 1 quarter of CY12. Production in India during CY12 is expected to be lower as compared to st previous year due to loss of crop of 12 million kg in the 1 quarter. Significantly lower inventory in India, production shortfall and strong consumption growth should have positive impact on prices during 2012-13. Tea prices in India are currently ruling higher by `30 per kg as compared to last year. Increase in wages, normal increase in inputs and loss of crop during March and April will also have its impact on the cost during the current Financial Year. India and global tea production is likely to remain stagnant to very insignificant growth in next few years due to negligible addition of land under tea cultivation by organized sector. Demand however, is expected to increase by 2 to 3% p.a. thereby creating further shortages and lower inventory levels. We expect that rising demand and supply gap can lead to price rise for next few years and this will benefit McLeod, as it is the largest tea producer in India. Monthly Tea Production (in Million Kg)

World Production (in Million Kg)

Weekly average prices at Indian auctions (`/Kg)

Balance Sheet (Consolidated) (`million)

Profit & Loss Account (Consolidated)

FY11A

FY12A

FY13E

FY14E

547

547

547

547

Reserve and surplus

14,618

16,919

20,000

23,820

Net Worth

15,165

17,467

20,547

24,367

Loan funds

2,812

2,699

1,806

1,428

Minority Interest

-

117

117

117

EBIT

Net Deferred Tax Liability

723

769

769

769

Capital Employed

18,700

21,052

23,239

Total Fixed assets

17,668

18,953

Investment

336

Net Current Assets

Share Capital

Capital Deployed

(`million)

FY11A

FY12A

FY13E

FY14E

Total Operating Income

12,692

14,453

17,344

20,466

Expenses

9,088

10,559

12,141

14,121

EBITDA

3,604

3,894

5,203

6,344

382

370

392

423

3,222

3,524

4,811

5,921

Other Income

323

411

380

385

26,682

Interest

417

567

400

337

20,255

22,644

Exceptional Item

-

87

-

-

190

320

380

Profit Before Tax

3,128

3,281

4,791

5,969

695

1,909

2,664

3,658

636

338

1,054

1,492

18,700

21,052

23,239

26,682

2,492

2,943

3,737

4,477

Key Ratios

Depreciation

Tax Net Profit

Valuation and view FY11A

FY12A

FY13E

FY14E

EBITDA Margin (%)

28.4

26.9

30.0

31.0

EBIT Margin (%)

25.4

24.4

27.7

28.9

NPM (%)

19.6

20.4

21.5

21.9

ROCE (%)

17.2

16.7

20.7

22.2

ROE (%)

16.4

16.8

18.2

18.4

EPS (`)

22.5

26.3

34.1

40.9

P/E (x)

14.0

12.0

9.2

7.7

BVPS

138.5

159.6

187.7

222.6

P/BVPS (x)

2.3

2.0

1.7

1.4

EV/Operating Income (x)

2.9

2.6

2.1

1.7

EV/EBITDA (x)

10.3

9.5

6.9

5.6

EV/EBIT (x)

11.5

10.5

7.5

6.0

McLeod Russel India Ltd, the largest tea producer of India is expected to record higher earnings in FY13E with both topline and bottom-line are expected to increase by 15-20% and margins to improve from 26-27% to around 30% on back of rise in tea prices led by increasing demand and shortfall in global tea production. Over the years, the company has also gained strong foothold in both the domestic and international markets by acquiring various companies across the geographies. Further, the company is targeting acquisitions to expand and aim to become a 150 million player in the next couple of years. Currently, the company is looking for acquisition in African market where the company has exposure of 19 million kg. Considering, the above aspects we recommend ‘BUY’ on McLeod Russel Ltd. At the current market price of `315.0, the stock is trading at a P/E of 9.2x on FY’13E EPS of `34.1 and 7.7x on FY’14E EPS of `40.9.

Indbank Merchant Banking Services Ltd. I Floor, Khiviraj Complex I, No.480, Anna Salai, Nandanam, Chennai 600035 Telephone No: 044 – 24313094 - 97 Fax No: 044 – 24313093 www.indbankonline.com

Disclaimer @ All Rights Reserved This report and Information contained in this report is solely for information purpose and may not be used as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. The investment as mentioned and opinions expressed in this report may not be suitable for all investors. In rendering this information, we assumed and relied upon, without independent verification, the accuracy and completeness of all information that was publicly available to us. The information has been obtained from the sources that we believe to be reliable as to the accuracy or completeness. While every effort is made to ensure the accuracy and completeness of information contained, Indbank Limited and its affiliates take no guarantee and assume no liability for any errors or omissions of the information. This information is given in good faith and we make no representations or warranties, express or implied as to the accuracy or completeness of the information. No one can use the information as the basis for any claim, demand or cause of action. Indbank and its affiliates shall not be liable for any direct or indirect losses or damage of any kind arising from the use thereof. Opinion expressed is our current opinion as of the date appearing in this report only and are subject to change without any notice. Recipients of this report must make their own investment decisions, based on their own investment objectives, financial positions and needs of the specific recipient. The recipient should independently evaluate the investment risks and should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document and should consult their advisors to determine the merits and risks of such investment. The report and information contained herein is strictly confidential and meant solely for the selected recipient and is not meant for public distribution. This document should not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced, duplicated or sold in any form.