McLeod Russel India Ltd-BUY

McLeod Russel India Ltd. (MRIL), the world’s largest tea plantation company, is engaged in cultivation, production and marketing of tea. The company produces over 70 million kilos of tea from 53 tea estates in 34,000 hectares land spread across Assam and West Bengal. The company operates in India and outside India and accounts for approximately 7.7% of the total tea production in India and approximately 2% of the global tea production.

 
Investment Rationale

• Indian tea prices are expected to rise 15-20 percent in 2009-10 due to absence of winter showers in the growing regions and a crop shortage from Kenya due to a drought and political unrest. Domestic consumption, which is rising at an annual rate of 3-3.5 percent, and firm export demand despite the global recession, are expected to boost prices further.

• The company has increased its exposure in the Middle East, especially Iran, which is predominantly the market for orthodox teas and that is also helping company’s exports. The company is also expected to benefit from its increased presence in the orthodox tea market, as price realisation is 20-25 rupees per kg higher than CTC (crush, tear, curl) variety of tea. McLeod will export over 30 million kgs in 2009, an 11 percent rise from 27 million kgs last year, as overseas demand turns to India in the wake of a shortfall in main rival Kenya.

• McLeod Russel, which recently forayed into Vietnam with purchase of 100% stake in Phu Ben Co., is now looking at Africa for further acquisitions. The company’s aim is to have 15-20 mn kgs of production from overseas over the next 5-10 years. The company has a capex plan of 200-250 million rupees for FY2010.

• The company has asked the Vietnamese Government for an additional 1,000 hectares to step up its production. At present, its production in Vietnam is about 4.5 million kg annually, spread over 1,000 hectares and the company is likely to double its production in Vietnam over the next five years. 

• In 2008-09, McLeod Russel’s total production jumped to 81.5 million kg, including 4.5 million kg from Vietnam. According to company’s management, the figure should be around 84 million kg in 2009-10. 

• Riding on the tea price boom, MRIL clocked a 61.48% rise in its net profit for the quarter ended December 31, 2008. The net profit soared to Rs 48.59 crore for the Q3 of FY09 as compared to Rs 30.09 crore in the corresponding period of the previous year.