Kenyan drought to help boost tea exports: McLeod Russel

Below is the transcript of Kamal Baheti’s interview with Sumaira Abidi & Reema Tendulkar on CNBC-TV18.Reema: Can you give us an update on the weather situation in Kenya, are we expecting a drought, if yes how will it impact the supply of tea from Kenya and how will it impact the prices? A: If we go by the last year’s production in Kenya, first quarter production of Kenya was at record level. This year right from the beginning, from the month of January we have seen a dry period up to March and believe we have lost around 15-20 million kilograms, maybe more depending on the numbers once we get and that had impacted the prices in Kenya. The prices are up by around 25-30 percent for the year. What will be the situation going forward will depend on how the weather is as far as Kenya is concerned but it should have a positive impact both from the quantities and the price point for the exports out of India. Reema: You are saying in the January to March period Kenya has already lost production of 15-20 million kilograms and therefore tea prices are higher by 25-30 percent? A: Absolutely right, these are the numbers which are currently available with us.Sumaira: Your realisations for domestic companies have remained quite weak in Q3. Can you give us a sense of whether these could significantly increase from hereon? A: If you go by the last year’s numbers, domestic companies got impacted due to two factors. Number one was the crop loss which happened in Assam because of very dry period initially and much lower rainfall during monsoon. This year we have got good rain in Assam in the last 15 days and hopefully the monsoon will be better and we should be able to recover the crop which we lost. So, that is one positive for the domestic companies. Domestic companies also suffered because the quantities and the prices of exports were lower as compared to the previous years. With drought in Kenya or the lower production in Kenya, the quantity should pick up and the prices should be higher. So, both those counts looks positive for the industry going forward particularly for the domestic companies in India. Reema: Would that help the company export more? How much does McLeod Russel currently export and would it open up an opportunity for you to export more? A: In fact we dropped from 23 million kilograms in the previous year to around 13-14 million kilograms last year. With this kind of a situation we hope that we will be able to go back to 20-22 million kilograms of exports out of India for the company and that normally happens at much higher levels. So, not only it should help by 8-10 million kilograms of additional exports but it should be at much higher prices which should help overall averages on the prices.Sumaira: Is this just for you or could this be an industry wide phenomena? A: It will be industry wide also but we are mainly located in Assam. Kenya is replacing with the quality from India. So industry will definitely be higher on quantity side. We lost around 20 million kilograms last year as an industry. We should be able to get back to that 20-25 million kilograms additional. Also, with Iran getting settled and likely that the trade with Iran from India will be higher as compared to last year, both on Iran count as well as the drought which is happening in Kenya, the overall quantity should be back to normal, f not higher. So, both for the company and the industry it should be positive both on quantity as well as price particularly on the export side.Reema: You indicated in your earlier answer that tea prices have gone up by 25-30 percent in the January to March period due to the production loss in Kenya. Can we expect a positive set of earnings from McLeod Russel in this Q4 FY15? A: I said 25-30 percent increase in prices for the Kenyan production not for India. India hardly produces in the month of Q4. Q4 was equally bad as compared to Q1 to Q3 last year. What it will have positive is going forward into the first quarter to second and third quarter in the current financial year, we should be able to get higher quantities, higher prices and better production from India.

So, Q4 will not have any positive impact but going forward into the first quarter onwards we should be better than what we have done last year.Sumiara: You had intended a Rs 100 crore capex for FY15, can you give us a sense of whether this entire capex was complete and when these units can start generating or contributing towards your revenues? A: It has been basically into the existing unit itself. Rs 40-50 crore of total capex has been the maintenance capex and another Rs 40-50 crore had been for the additional capacities into our existing factories. That should bring in around 3-4 million kilograms of additional production as compared to what we have done in the previous years plus the additional production because of the weather. So, what we are expecting this year that our overall production will be 7-8 million kilograms higher than the previous years. We should get back that 85-86 million kilograms of production which we did only 77 million kilograms last year. So, this is how Rs 100 crore of capex is been done. The plan going forward for future years is also the same that we should be able to add 4-5 million kilograms of additional capacities plus continue to do some kind of maintenance capex. Some capex will also get into irrigation which has been the bone of contention and the major issue in the previous years. Reema: You indicated that perhaps we could hope for a rub off of the Kenyan tea prices at least for the domestic tea prices in the coming quarters. What do the current tea prices currently stand at and how much do you think they could rise by?A: We have just opened the new season. So, there are hardly any price indicators for the new season. It will take another couple of weeks before we really get into such kind of price indications. Normally, the exports and domestic price gap is 15-20 percent. So, the additional quantity should get us 15-20 percent higher prices plus with lower production last year carry forward being much low we expect domestic prices in any case to increase.So, overall increase for the year 2015-2016 we are expecting 10-15 percent increase in prices with recovery in crop. I think things would be much positive. It will have major impact in the second and third quarter but we believe that the first quarter should be better than the previous year.Sumaira: The new wage cycle has begun in this Q4 and after negotiations it is about 30-35 percent that have been the wage hikes that have been undertaken as against expectations of just 25 percent. Could this be a significant impact on your company? A: It does have a significant impact. In fact this is the agreement which has happened for a period of three years where the impact in the first year is much more than the second and third year. 50-55 percent of the total cost is the wage cost, so it does have a significant impact.

However, since it is an industry wide agreement the cost of the production is increasing for everybody in the industry. Normally, we had seen the price increase happening in the domestic prices to compensate that. So, we hope that the same situation happens this year and the price increase will take care of this kind of a cost increase. However, it does have a significant impact on us.Reema: With greater production levels of nearly 85 million kilograms this year as well as with higher prices of about 10-15 percent what could be the potential growth McLeod Russel could see in FY16? A: In 2014-2015 we have dropped substantially because of the crop losses and we believe that with this kind of a price increase which is expected and recovery of crop we should be nearer to what we did in 2013-2014. How much it will be? It is too early to comment right now. However, as we go along sometime in June or July we should be able to take the call for full year. However, we are more likely to do what we did in 2013-2014. 2014-2015 may just be an aberration year.Reema: What was the growth that the company enjoyed in 2014?A: 2014 our total EBITDA consolidated was around Rs 450 crore. We will drop by around Rs 200 crore this year. We should get to Rs 400 crore of consolidated EBITDA next year.Reema: Since the company is going to be exporting more this year compared to the previous year and you indicated that export prices generally are higher than domestic prices by close to about 10-15 percent. Will this positively impact your margins, what is the differential?A: Yes, in fact with the recovery of the crop and higher prices the margin should improve. We have dropped from 25 percent odd of our own crop margins to around 14-15 percent this year. Export normally gives us a margin of around 28-29 percent.

So, with higher quantities we should get back normally to that 21-22 percent of consolidated margin this year and we are considering this lower margin because there will be a wage impact cost increase which will come. Going forward we should get back to 24-25 percent of margin in the future years.