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Dec 27, 2011, 04.27 PM IST
Speaking to CNBC-TV18, chief financial officer of McLeod Russel, Kamal Baheti says that he expects Indian tea production to hit a record high of 990 million kgs this year.
Another factor he believes that could push up prices is the possibility of production becoming stagnant.
Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: There is some amount of reports doing the rounds that tea imports have declined for India and that is basically used for re-exporting. Can you just take us through the impact on the domestic volume and price, if any? Also, the Kenyan production has fallen, so what will the impact on McLeod Russel financials?
A: No, basically the imports in India is being done for the re-exports and it is mainly being done by the merchant exporter. Since there had been some payment issues with Iran this year the import has been less and simultaneously the exports has also been lower this year. So this is actually like to like from import to export. It does not have much impact on the Indian prices or the Indian availability of tea into the markets.
How the prices actually get impacted in India depends on Indian total production as well as exports happening out of India out of its own production. This year what we had seen that till September we had the highest ever crop, particularly in North India, and exports had been lower again because of the Iran issues. But still the prices held out. In fact, prices were better as compared to last year. So I would say fundamentally defining year for us, had been good. This year, higher prices, higher production and it looks like that going forward this kind of a trend is here to stay.
As far as total overall production in Kenya is concerned, Kenyan production is down by around 30 million kg as compared to last year and that does have an impact on the export prices. Kenyan prices are higher by around 10% as compared to last year and that is actually having an impact on our exports. We export around 23 million kg of tea from India and our exports prices are higher by about Rs 10-15 as compared to last year.
Q: You said that this year production is at a record in India. Can you give us some numbers or the total output? Also, how much were the exports lower by because of the Iranian payment issues?
A: Total production in India is expected to be around 990 million kg for the calendar year 2011. Last year, because of the pest attack and the weather issues, we produced 967 million kg. So we expect it to be around 20-22 million kg higher. Exports till September had been lower by 13 million kg from India. Normally the total exports from India happens in the range of around 190-195 million kg. We expect it to be around 180 million kg odd. So this is the way it had actually worked out.
This means that there would be 25 million kg of extra supply into the market which will actually be catering into the shortages which got created in the last year. So there is no excess supplies, consumption is growing. In fact, we expect the inventories to be lower by the end of the year and that is the reason we are seeing firm trend in prices in the last couple of weeks. We believe the new season which will start sometime in April will be the same.
Q: What would your guess be for the next quarter? Should we expect at least a 5% reduction in tea prices?
A: No, what I meant to say is that last year we reduced our total production by around 15 million kg and created bigger shortage as far as the inventory is concerned. With the consumption the way it is growing we need 25-30 million kg extra tea in any case for consumption growth and that kind of additional supplies has not come in this year. I think in the last quarter there will be drop in crop because the weather had been a little unfavorable, the winter has been setting in a little early and that normally has a good impact.
Next quarter we will not have much of tea to be really sold into the auctions because of the off-season. But sometime in March-April we expect prices to be really very firm because your inventory corrections, which is in any case lower, has not happened.
Q: So even on a year-on-year terms there is no reduction in prices?
A: No. In fact for good quality teas that we had we are up by around Rs 6 per kg as compared to last year. For some kind of the lower category teas the prices are little lower because some of the exporting countries may have got impacted. But I think going forward, looking at the total overall exchange rate, the exports from India are likely to increase.
The production would remain stagnant because even in the worst weather conditions we have been equal to what the normal production had been, so we believe going forward at least the visibility is very clear on the production cycle next three-four years. Consumption is growing and shortages will build-up. Prices will actually have to go up to really meet up these kind of shortages.
Q: Take us through how Vietnam is doing and Uganda and Rwanda at this point in time and what sort of EBITDA performance we can see from them?
A: This has been a sterling year for all these companies. Our overseas production is around 23 million kg as compared to around 17-18 million kg last year, because we have added one garden in Rwanda this year. We expect total EBITDA of USD 13 million from them and EBITDA operating margin of 32-33%, which is one of the highest. The prices in Uganda is higher, but Vietnam is higher in crop and plus we have got another 2 million kg. So we expect around USD 13-14 million of total EBITDA being added by the subsidiary companies oversees this year.
Q: Take us through what the borrowings of the company stand at? What sort of interest are you all servicing at this point in time?
A: We have hardly any debt; debt-equity ratio is 0.2:1. The total debt on 31st March was Rs 314 crore for the consolidated company including working capital. This year we expect it to be around Rs 250 crore odd, so reduction of Rs 50-60 crore and debt-equity of 0.1:1.
The net debt is expected to be Rs 100 crore in 2012-13 depending on whether there are any further acquisitions or not. So we are very healthy on balance sheet. We have improved substantially from 0.5:1 two years back to around 0.1:1. So there had been a substantial improvement. Of course there had been a lot of capital expenditure and acquisitions, but that we will manage well within our internal generation itself.
Q: What will you do by way of earnings in FY12? Can you give us some window into FY13 or will it all depend on the crop?
A: It will depend on crop and prices, but taken that the weather will be constant and we will be able to make the kind of crop which we made this year, there will be some kind of price increase which we expect because the consumption growth will help them and that will actually increase the EBITDA margins. No doubt there is a pressure on cost, particularly on wage cost, but what we are seeing in large three four years of around 70% increase in prices, I think the same thing can really replicate in next three-four years. When and how actually depends in commodity over the period of time.
As far as the availability of the case and utilization of the case is concerned going forward, I think we had been acquiring companies every year last three-four years and going forward I think our emphasis is going to be on further acquisitions overseas and in India as well.
Q: Some of the research reports are giving you an earnings of Rs 24-24.5 for the current year and around the same number for 2013. Is that a good number to work with?
A: I think we should be able to really meet it. We will beat last year’s numbers as far as the consolidated numbers are concerned. We are already done with around nine months and this is off season. So we are pretty sure that we will be able to do better than last year. We expect 15-20% increase over last year in net profit and we should really better that in the next year as well, because every year it had been higher profit in last four years.
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