Target over 20% topline growth in FY14: McLeod Russel

Kamal Baheti, chief financial officer, McLeod Russel hopes to achieve over 20 percent topline growth in FY14. 

He expects the company to grow 115 to 116 kgs of tea resulting in a 15-20 percent increase in its volumes. In an interview to CNBC-TV18, he said the latest tea producing plant acquisition in Vietnam will help the company increase its output to 7.5 million kgs. Meanwhile, taking a cue from the monsoon forecast , he expects tea prices in the country to be positive.  Also read: See Sensex at 23K by Dec; funds shifting to India: Ambit Below is the edited transcript of the interview to CNBC-TV18.

Q: What will this acquisition mean to you in terms of synergies or cheaper raw material from your Vietnam tea gardens or Vietnam as a source of supplying tea for you? A: Strategically, we had said that we would like to grow through more acquisitions in the area where we are present. Currently, we have got four tea processing factories in Vietnam with around six million kilograms of production. We added one last year. Our capacity has gone from five million to six million. Our target is to produce around 10 million kilograms in Vietnam. This is in the same area, around 10 kilometres from our existing tea processing factory. Synergically, it makes lot of sense for us. This has got a capacity of 1.2 million which we can increase. With this particular acquisition, our overall production in Vietnam is expected to be 7.5 million kilograms by next year. We just signed an agreement for total consideration of 2.8 million. It will take a month before we complete the deal. Q: Do you also export tea leaves or tea from Vietnam? Is there any trading advantage in acquiring this company? A: Basically, the additional production which will come in, whatever we produce out of Vietnam is 100 percent exported. It has got a good margin of around 20 percent for processing whatever leaves we get. Overall, the way Vietnam works is that the leaf is being sold to the company. They process it and sell the finished product in case of black tea. Q: Your EBITDA are 30 percent, aren’t they? A: Vietnam has a different kind of structure. There, the leaf is being sold by the farmers to the companies. It is basically processing margin. We take the green leaf and then process it. There, the margin is 20 percent. It is similar to what we do for the small growers in India. So, 20 percent is normally the margins for the small growers leaf processing. This has been the case for other four factories in Vietnam. It is in-line with the existing operations in Vietnam. Q: You spoke about growing the company through acquisition. The Vietnam tea processing unit is a small acquisition. Do you have any more lined up in the near future or medium term? A: There is nothing in the anvil as of today. However, we would be looking at acquiring more companies from Uganda, Rwanda and Vietnam. Plus, there are other countries like Burundi and Malawi which has got tea production including Kenya. So yes, our focus is going to be through acquisitions growing in overseas markets. In India, we would grow through the addition of capacities and taking more and more leaf from small growers. It may look small to start with, but from Vietnam’s perspective, it is adding 20 percent of capacity. Taking six million to 10 million is a step in the right direction. I believe that we would 10 million kilograms in next three-four year’s time. Q: Could you tell us what’s happening in Kenya with respect to production as well as in terms of how prices are moving because perhaps maybe just a few weeks back there was a lot of concern surrounding Kenya which has affected your stock price as well? A: Kenya had poor weather last year during January to April. This year, the weather has been pretty good. The production had been okay. The prices started off on a very high note. Last couple of weeks it has come down but cumulatively they are higher. These kinds of a fluctuation particularly month fluctuations are bound to happen in a seasonal industry which we have got in India. But we believe that overall shortage in the system is such that in couple of months’ time we will again come to stability and rise in prices trend in Kenya. In India, the new Indian prices have been Rs 5-10 higher for the good quality tea. The auction has started for new season. It gives us a sense that the tea prices will be good this year with a normal crop because the weather in India and Kenya seems to be okay. _PAGEBREAK_ Q: Would Rs 5-10 be five percent? A: It will be around seven-eight percent on price increase and if there is a recovery in the crop, we are expecting 15-20 percent increase in volumes. That actually gives McLeod Russel very good stability in margins. Being a fixed course industry, we expect this 24-25 percent margin in India to increase to 27-28 percent this year. Q: Do you process only your in-house tea leaves or do you also buy from farmers in India? A: In India, a major part comes from our own tea gardens. In fact, out of 78 million kilograms which was produced last year, 60 million kilogram came from our own tea gardens. Around 17-18 million has come from the small growers. This year, we expect 66 million kilogram from our own tea garden and around 24 million kilogram from small growers. We expect around 11-12 million kilograms of growth in tea. Our own tea margins will be higher because they are completely linked on the prices. The prices are higher, cost is under control, the margins improve. As far as the small growers are concerned, it is a variable concept. As the prices go up, the leaf prices also go up. We make a margin of around 20 percent. Additional profitability is going to come from additional volumes. Q: On a consolidated basis, what’s the expected production target for FY14 and what will that do to your sales expectations for the entire year? A: We produced around 102 million kilograms consolidated in 2012-2014. Our target is to do 115-116 million for 2013-2014 which is 15-20 percent increase in the volumes. We expect around 5-10 percent increase in the prices. So, the overall expectation is that we should really do 20 percent plus in the top-line. This should really reflect on the bottom line. We expect a similar increase in the bottom line as well. Q: For the new tea year, what are you likely to do? Can you give us guidance in terms of revenues and realisations? A: It is very difficult to really give guidance in a seasonal industry which is dependent on the weather. I think we are looking at a total of overall volume growth of around 20 percent. We are expecting that with a fix course under control, the labour wages agreement is behind us, we should be really able to improve the profitability. So, we are expecting at least 20-25 percent increase in EBITDA this year.