Mcleod Russel: SKP Securities’ Research Report

SKP Securities is bullish on Mcleod Russel and has recommended BUY rating on the stock with a target of Rs 329 on the following investment rationale:

Mcleod Russel, the flagship tea company of the B M Khaitan group, was originally incorporated as Eveready Company India Private Limited on 5th May 1998. Mcleod Russel is the world’s largest tea plantation company, which produces over 80 million kgs of high quality tea from its 53 tea estates in Assam and West Bengal. As India’s largest tea exporter, Mcleod Russel maintains strong connections with buyers in United Kingdom and Europe. Mcleod Russel‘s tea is marketed under the registered Elephant trade mark. Mcleod Russel has the certification for various credentials to its products from Fairtrade Labelling Organisation International (FLO), Hazard Analysis Critical Control Point (HACCP), Suppliers Ethical Data Exchange (SEDEX) and Ethical Tea Partnership (ETP).

Tea, a soft commodity, is expected to have a lag up effect of sustained high inflation of over last one year plus. Tea demand will grow at a CAGR of 2-3% with supply unable to increase at the same rate. This demand-supply mismatch shall result in higher tea prices. Based on a combination of above factors, we sense a sustained upward traction in tea prices of CAGR 5-6% per annum going into FY13. In Assam, where Mcleod Russel produces 70% of its tea, next wage agreement is due in FY13. Since wages comprise nearly 50% of Mcleod Russel’s expenditure, no wage pressures for the next two years augurs well for the bottom line of the company. Non-availability of additional substantial tea producing land will escalate the demand –supply gap.

In FY11, Mcleod Russel’s cost per kg has increased by Rs. 11 per kg to Rs 107 per kg owing to loss in production of 2 mn. kgs of tea due to bad weather. As most of Mcleod Russel’s cost is fix in nature, subsequent recovery of production of own tea in FY12 will reduce the cost per kg for the company. Mcleod Russel‘s stock is currently trading at a PE of 9.15x FY12E and 7.86x FY13E EPS. We recommend BUY rating on the Mcleod Russel stock with a 15 months target price of Rs 329, at 10x FY13E earnings, giving it an upside of 27% from the current levels.