Good crop recovery, firm tea prices to lift FY17 earnings:Mcleod

Better crop recovery due to favourable weather expected this year, relatively lower wage hikes and likely firming up of tea prices could lift margins significantly in FY17, says Kamal Baheti, CFO of McLeod Russel.  

Last year, lower crop recovery shaved off Rs 70-80 crore of earnings. There was also added burden of a near 25-percent wage hike, he says.  

This year, wage increase is expected at around 10 percent and tea prices are also expected to firm up by 10-15 percent aiding margin expansion to 13-15 percent from 8.5 percent in FY16.

The company reported year-on-year revenue growth of 1.9 percent in the fourth quarter at Rs 317 crore. There was a loss of Rs 228 crore at the EBITDA level and Rs 235 crore at the net level.Below is the verbatim transcript of Kamal Baheti’s interview with Reema Tendulkar & Nigel D'Souza on CNBC-TV18.Reema: We understand quarter four is not traditionally a strongest or a big quarter so let me straight away ask you about your outlook on FY17? How does it look currently what is the trend that you see on tea prices, supply in demand what should we expect next year from you?A: If we really look at last year the two factors which had affected negatively both in the fourth quarter as well as in the full year has been that there had not been any recovery of crop because of the poor weather conditions. Naturally there had been a huge increase in the wage cost because of the wage agreement. Going into 2016-2017 as of today the weather had been pretty good. We have seen rains right from February till date. It is moisture and we had seen a crop recovery happening. On the other hand the wage increase in this year is around 9-10 percentage compared to what it was 25 percent last year. So, the cost increase is well within normal limits. The crop recovery is a possibility. The other question is how the prices are going to be. If we really look at the opening prices they had been similar to last year but as we get into the main season we believe that the prices will go up because there had been shortages for two years. In the system there is shortage and we believe as we get into the peak season the prices will go up. Our expectation is that this year we are looking at a 10-15 percent increase in the price. Nigel: As you just said cost will not go up as much as prices so could that give you further upside to your margins? For FY16 you did margins of around 8.5 percent or thereabouts so could this give rise to further margin expansion and also could you tell us what is the current difference between domestic prices as well as international prices?A: Normally international prices are higher than the domestic prices mainly because the peak season the best quality tea get exported where as rest of the tea during the end of the season tea is been sold in the domestic market. However, I would say generally the export market prices are higher than the domestic average prices. Looking at total overall margins, if we recover the crop that itself will take care of the cost increase so any increase in the prices will reflect at the bottom line. We had seen in the normal year of production the margin to be around 17-18 percent I don’t know whether we will be able to really go from 8.5 percent to 19 percent in year one itself. However, we are looking at anything between 13-14 percent of margins. If we see the kind of recovery in the crop which is there and we see a little increase in prices which we are expecting and going to be for the first time in last three years. So, I think this year we will see the expansion of margins. We are expecting to be anything in between 13-15 percent again 8.5 percent last year.Reema: Can you tell us what was the amount lost because of inability of the company on cash recovery? How much did that impact FY16, if you could help in numbers?A: As far as the tea industry is concerned, since it is a fixed cost industry. Any loss in the crop is a loss in the topline and bottomline. And since we lost around 4.5 million kg of tea, that itself means that Rs 70-80 crore of the topline and bottomline is being lost.Reema: For company in FY16?A: For the company in FY16. So, for FY17, if we recover the crops, that itself will take the margin where we are today even if there is going to be cost increase. And any increase in prices will reflect. For example, if we really look at Rs 10 increase, there will be additional Rs 80-90 crore of EBITDA increase going to happen in the next year. And that is the kind of traction which you have because we are a fixed cost industry. And that is basically the reason why we see a substantial increase in the margin. Of course it will depend on the peak season prices. Our expectation this year is that monsoon is normal in the country, there is a little good demand in the rural markets. The prices will keep on going up into the peak season which is from July to October. So, keeping all these in mind, we will be looking at 13-14 percent of margin this year. This is for the domestic market. We as a company, overseas have done pretty well this year. If you really look at the consolidated numbers, we have done better than last year, even if we lost in the Indian markets. Both Uganda, Rwanda has done very well and we expect this to continue in this year. So on consolidated basis, 2016-2017 looks far better than what it has been.Nigel: I was looking at your shareholding pattern and the promoters have been nibbling into the stock. Maybe you believe that it is undervalued, close to around 4 percent is the promoter holding in the company. It has increased. Come FY17, do you believe that again, you will be looking to do that 4 percent odd increase of promoter stake at these prices?A: I think the question should be to the promoters, not to the company executives. Yes, they have increased it to 4 percent, this is what we have reported.