McLeod Russel eyes acquisition opportunities in Africa

In an interview with CNBC-TV18, Kamal Baheti, CFO of McLeod Russel said the company is considering opportunities for acquisition in Africa.

Below is an edited transcript of Baheti’s interview on CNBC-TV18. Also watch the attached videos.  

Q: Credit Suisse report has said that it sees upside in the company on the back of an up cycle in tea prices. How has been the opening season for tea, black tea in particular, and could you walk us through the outlook for prices in this year?

A: The story started panning out sometime the last quarter of the last season itself. There was shortage because of the early winter. It has opened up this year Rs 30-40 higher as compared to last year, which is much higher than what we expected, but that was on backdrop of loss of crop, which happened in the month of March because of a bit of dry weather.

However, rains have come. The weather is good now. The crop should come up but we expect that because of this shortage the prices should remain firm. The outlook for next couple of years in prices remains good, so that's the reason the overall profitability we expect of the company going forward to be good.

Q: The other thing that is mentioned in the report is the fact that the strong cash flows that McLeod Russel has will enable them to acquire new plantations. Is there any acquisition that you guys have planned on the anvil and what is the cash flow situation currently?

A: In fact, debt equity ratio is hardly anything. It’s 0.2:1 and we will be net cash by the end of this year the way the situation is currently and the way the profitability is. If you look at the last five-six years we have acquired companies both in India and overseas and we continue to focus on acquiring more companies particularly in Africa. We should be able to take more acquisitions going forward.

Q: Is anything planned in the next one year?

A: We would like to but as of now nothing is there on the anvil. But there will be opportunities which will come and whatever it comes we will look at it.

Q: How is FY13 looking now? What is the kind of growth rate you expect for the company in terms of sales, margins and we profitability?

A: As far as volume is concerned, it’s very difficult to make a call because of the weather. As far as prices are concerned, we expect this would be higher by Rs 20-30 as compared to the last year on revision in wages, which may go up by around Rs 10 per kg.

We expect margin to improve from 27-28% to 31-32% consolidated this year.

Q: If we can get some ballpark figure because some analysts believe that from the Rs 1,400 crore that you are sitting on, in terms of revenue, it could jump all the way up to close to Rs 1,700 crore in FY13 and vis-à-vis for profits also, from the sub Rs 300 crore that you are sitting on there is an expectation that it can go to about Rs 350 crore or so. Is this a realistic assumption that the company can manage to do?

A: As far as the topline is concerned, it will depend on the volumes. As far as the profitability is concerned, it is a fixed cost industry. It is very much doable as far as Rs 350 crore are concerned. The topline will depend on the weather, the overall crop. Normally, when we lose crop we get much higher prices. So profitability should be okay. Topline, we will wait a bit till the main season comes from July to October.

Q: A word on the tea prices and the trend like you mentioned Rs 30-40 higher, do you see this higher tea prices sustain despite the production shortfall?

A: It is not only because of production shortfall. If you look at last four-five years production globally has been very stagnant, consumption growing by around 2-3% so there has been shortage which has been building up. I don’t think that Rs 30-40 opening price levels can sustain. We expect it to be around Rs 25-30 for the full year and on that basis we are expecting profitability of Rs 350 crore bases and not on Rs 40.