Margins should improve next year: McLeod Russel

The largest bulk tea company in the world, McLeod Russel reported a marginal increase of three percent in its net profit at Rs 230.31 crore for the second-quarter.

Net sales of the company rose by four percent to Rs 430.06 crore from Rs 414.81 crore in the same quarter of 2011-12. In an interview to CNBC-TV18, Kamal Baheti, chief financial officer of McLeod Russel says margins should improve with higher quantities, improvement in the production and recovery in next year. "We expect next one year to be very strong on the top-line as well as the bottom-line," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee. Q: Your top-line seems quite subdued. Can you take us through why that has happened? Was it because of the production being affected? A: This quarter, we have been down by four million kilograms on our own crop and a million higher on the bought-leaf side, which is the out grower’s leaf. So, basically the quantity has been lower. The prices have been higher by Rs 20-21 per kg. That has taken it a little on higher side as compared to last year, but still remained a little subdued. Normally, the second quarter is the quarter where the production quantity is higher than the sales quantity as compared to third quarter where the sales quantity is much higher than the production quantity. So, the price kick-in impact on the top-line actually comes in the third and fourth quarter, more than the second quarter. So, yes, the second quarter was affected because of the lower production. Q: What is the situation on the ground now in terms of production? What are the realisations in the market? A: Production, till September, has been substantially lower, particularly in North India. We have seen this is one of those years when there had been floods in Assam during the month of September. But, the third quarter, which is the last quarter for production in tea industry in North India, the production seems to be in line with last year. October had been a little lower. November seems better because of the weather improvements. So, we will be able to do the production numbers for the last quarter, in line with last year, maybe improve a little bit on the out grower’s leaf. So, it looks good. Because of the shortfall, which has been there till September, the prices continue to be very strong. We will be expecting another increase in prices in the next couple of months. That should take us around Rs 25-30 higher prices as compared to last year. This will also have an impact on the opening season next year because your pipeline stock will be low. So, the price trend for the next 6-12 months looks very strong. We hope that the weather plays good and we have normal crop going forward. Q: Will this be able to support your margins despite wage hikes? A: Yes. Infact we should be able to do much better in the third and fourth quarter and take our overall profitability higher than last year with the price increase. We should really improve the margins by another two-three percent because of the price increase we expect to proceed with normal production. Despite taking the wage increase, its major impact has already come this year. For the next couple of years, the wage increase will be lower at around five-six percent. We expect the price increase to be more than the cost increase. So, margins should actually improve with higher quantities, improvement in the production and recovery in next year. We expect next one year to be very strong on the top-line as well as the bottom-line.