Vijay Kedia & Shyam Sekhar Trash Stock Even As Sharekhan Calls It “Piping Hot Chance” To Buy The Stock

Tea stocks surge like rockets owing to price hike

Nigel D’Souza of CNBC TV18 was the first to sound the red alert that tea stocks were on the verge of a break out owing to a slump in production and a hike in prices.

Keep an eye on Domestic tea Producers
*Tea Prices reportedly moving up on deficit in domestic mkt
*Key Global producers Kenya has also been producing less
Mcleod Russel, Jayshree Tea, GOODRICKE GRP, AVT NATURAL PRODUCTS, ROSSELL INDIA in focus

— Nigel D'Souza (@Nigel__DSouza) November 21, 2017

It is elementary that if the tea prices surge, the companies which have inventory will benefit the most by way of higher realisation.

(Image credit: Bloomberg Quint)

“The coming year is expected to begin on a good note as far as prices are concerned. There is no carryover stock now; there is a production shortfall in the face of higher demand in the country; and the export situation is also improving,” Azam Monem, chairman of the Indian Tea Association, said.

McLeod Russel, the world’s largest tea producer, confirmed this position. It stated that prices in India have increased by ~5 a kg due to increased demand from both domestic and export markets and lower production.

Kamal Baheti, the CFO of McLeod Russel, added to the bullish talk and said that the volumes would surge to 4-5% in FY18 while the margins would surge to 12-13%.

Kamal Baheti, CFO, McLeod Russel says expect 12-13% margin for FY18; Expect volumes to be up 4-5% in FY18 @SurabhiUpadhyay @Navin_Shetty1 pic.twitter.com/wswA85ZY7K

— CNBC-TV18 News (@CNBCTV18News) November 28, 2017

Naturally, all the bullish talk about higher tea prices caused tea stocks to surge like rockets.

(Source: Business Standard)

Tea Stocks are up 10% to 20% this week
This week
*Mcleod Russel +20%
*Jayshree Tea +16%
First spotted here on @CNBCTV18Live https://t.co/InYUmIDLVe

— Nigel D'Souza (@Nigel__DSouza) November 23, 2017

Tea & Coffee Stocks seems to be having a good day. Tata Coffee up 6%, Mcleod Russel up 4.9%, Coffee day Enterprises up 4%

— nickey (@OnlyNickey) November 21, 2017

McLeod Russel is “steaming hot” and ripe for a buy: Sharekhan

Sharekhan was enticed by the bullish talk about rising tea prices. It issued a “re-initiating coverage” report in which it recommended a buy of McLeod Russel.

The rationale is as follows:

“Rising tea prices to propel McLeod margins: McLeod Russel (McLeod) is the largest tea producer in India. Thus, the company will benefit from rising demand supply gap in the global tea market. For FY2018, though production is expected to be flat on a YoY basis, an uptick in realisation will help improve margins of the company. We expect realisation for the company to rise by 8% in FY2018. While for FY2019 and FY2020, we expect average realisation to increase by 15-16%. Moreover, as 45-50% of cost is fixed in nature (in terms of employee cost), operating leverage will lead to margin expansion going ahead. We expect operating margins to rise to 11.3% in FY2020 from 4.7% in FY2018.”

#OpportunityOfTheDay: This stock serves you a piping hot chance to gain 18-20%. Don’t let the steam run out! https://t.co/NmfVzGGtyP#SharekhanKar #SharekhanResearch #Stockmarket #Stockbroker #Demat #Investment #McLeodRussel pic.twitter.com/AFtfHP2ln3

— Sharekhan Limited (@Sharekhan) November 29, 2017

However, stock tanks after promoter sells stake

In a baffling event, Kamal Kishore Baheti, the promoter of McLeod Russel, sold a massive chunk of 9.1% to Nomura.

Naturally, when a promoter sells his stake, it causes anxiety amongst investors that all is not well with the Company. The stock price tanked like a ton of bricks leaving investors in a lurch.

MCLEOD RUSSEL
NOMURA TRUST & BANKING CO LTD buys 60.58 lk shares @ Rs 205.08/-
NOMURA FUNDS IRELAND PUBLIC LTD NOMURA FUNDS IRELAND INDIA EQUITY buys 23.14 lk shares @ Rs 205.09/-
KAMAL KISHORE BAHETI sells 1 cr shares @ Rs 205.26/- (promoter)(9.1% stake

— SONAM MEHTA (@sonamcnbcawaaz) December 1, 2017

McLeod Russel India eatends losses, falls 6% after block deal https://t.co/KDUt95QrX0

— Cogent Advisory (@rajatdhar1) November 30, 2017

Thankfully, thereafter the management did damage control. They explained that the money would flow back into the Company (probably by way of equity infusion) and would be used to repay the debts and reduce interest costs.

Mcleod Russel Promoters sell 9% stake but money will flow back to company & be used to reduce debt by 200cr; Annual finance cost as a result will fall by Rs 20cr; #tea cycle turning they say. Stock rebounds sharply @CNBCTV18Live #stocks

— Surabhi Upadhyay (@SurabhiUpadhyay) November 30, 2017

McLeod Russel has seen a large trade where 1 crore shares exchanged hands. Kamal Baheti, CFO, McLeod Russel says promoter confirms selling 9.1% stake; Will look at deleveraging balance with the funds raised via this large trade #OnCNBCTV18 @SurabhiUpadhyay @latha_venkatesh pic.twitter.com/EruMfT9EB7

— CNBC-TV18 News (@CNBCTV18News) November 30, 2017

Vijay Kedia enraged at sequence of events

Vijay Kedia did not take kindly to the action of the management of McLeod Russel of talking up the stock price and thereafter selling their stake.

He hinted that there was some sort of manipulation because the stock price had surged 40% “without any reason” on the eve of the promoter dumping his stake.

He advised the person asking for advice to not do “crazy things” like buying the stock.

1) price of #MCLEODRUSSEL goes up 40% in last 15 days without any reason
2) then mgmt.appears on TV and paints a bullish picture
3) then next day they sell 9% shares reducing their holding to 40%
Now u want to buy.
Don't do crazy things in crazy mkt.Be doubtful, fearful, careful. https://t.co/RSvwZ2gmbA

— Vijay Kedia (@VijayKedia1) December 1, 2017

He explained that even there is a rise in the price of tea, it would have minimal impact on the tea companies as they presently have limited inventory due to the off-season.

Its off season for Tea crop. Factories are almost closed for repairing.Hardly 10% of unsold stocks are there with tea cos. Any price rise in the product during this period will have no positive impact as season is off but all the expenses are still on.

— Vijay Kedia (@VijayKedia1) December 1, 2017

He later fumed that “a manager’s mistake can be forgiven but his mischief CAN NOT”.

I always remind myself that a manager's mistake can be forgiven but his mischief CAN NOT.

— Vijay Kedia (@VijayKedia1) December 6, 2017

It is not clear if Vijay Kedia made the remark in the context of McLeod Russel.

Prima facie, it appears to be so because there is no other provocation for him to make such a caustic remark.

Vijay Kedia’s analysis met with approval of other influential investors including Shyam Sekhar.

Promoter knows so little compared to us that he sells 9% just when market geniuses want us to think there is a great upside in their Co. Time to believe whatever we want. Consequences be damned.

— Shyam Sekhar (@shyamsek) December 1, 2017

He also complimented Vijay Kedia for “speaking up” and “bold calling of the bluff”.

Bold calling of the bluff being perpetuated on retail investors. Salute @VijayKedia1 ji for speaking up. Truth will prevail. https://t.co/8fSZWGP3vl

— Shyam Sekhar (@shyamsek) December 1, 2017

Some novices argued with Vijay Kedia and Shyam Sekhar that the “commodity cycle” is turning and that tea stocks are a good buy now.

However, it is worth recalling that Shyam Sekhar has a deep understanding of the way in commodity cycles work given that he has raked in a fortune from sugar and steel stocks.

So, we cannot disregard his opinion that the time is not ripe to buy tea stocks.

Conclusion

Anyway, the bottomline of the whole episode is that we will have to regretfully turn down Sharekhan’s offer to buy the “steaming hot” stock!