Topline to remain flat in FY17; wages to grow 8%: McLeod Russel

Mcleod Russel's domestic and international sales have been lower in the first half of current fiscal year due to subdued demand, says Kamal Baheti, Chief Financial Officer, McLeod Russel. But the demand and subsequently the price have seen a pick-up in November, he says.But due to a weak first half, the topline at the end of this fiscal year may remain flat or marginally higher, says Baheti. But the margins may continue to suffer due to increasing wage costs. Baheti says employee costs will grow by 8 percent in FY18 due to wage agreements. Margins will take sometime to make a comeback, he adds.The opening season of next year will look much better for the company, Baheti says.Below is the transcript of Kamal Baheti’s interview to Mangalam Maloo and Sumaira Abidi on CNBC-TV18. Mangalam: Seasonally, second quarter, you had earlier told us is the best quarter for the company. Despite that we see a total income decline of 13.5 percent. What exactly caused that? What was the volume growth and the price growth? A: When I said that the second quarter is going to be the best quarter, I actually wanted to say that from the profitability point of view. As far as the second quarter is concerned, the crop from our own production had been higher by around three million kg, but it has been lower from the small gross by around a similar amount, so the crop had been same. The sales had been lower both in the export and domestic market and mainly because of the subdued demand. What we had seen now post the second quarter in the month of October and part of November is that demand has picked up and prices have picked up. Since we have got a lot of stocks on September 30, the benefit on the price increase and the topline will come in the third and fourth quarter. So, at the end of the year, we will be similar if not higher than what the last year’s topline had been. Sumaira: One of the worrying things in your earnings has been this high employee cost. This time around as well, it is up 19 percent. In fact for the first half of the year, if I take your employee cost as a percentage of your sales, it has gone up to 64 percent. What is the reason for this and when can we see some sort of stabilising on this front? A: You are right. This had been one of the cause of worry for us. Last two years, we had seen a substantial increase in the wage cost and the prices in this quarter has not gone up in percentage terms, it look even higher. Next year, the increase is going to be around 8-9 percent because of the wage agreement, so you will see a subdued impact even in the second half of this year as well as in the next year. So, the worst is over as far as the wage increase is concerned. But for the industry, for the margins to come back, we have not seen the price increase for the last 3-4 years. We have seen demand picking up now. We are also seeing some export inquiry coming and the price increase is also happening in the Kenyan teas, in the Mombasa auctions. So, things are just turning around. The worst seems to be over, but will it have an impact in the current year’s financials, not much, because major part of the season is over. So, a major impact will come on the profitability into the next financial year. Mangalam: You said that you are sitting on a strong inventory pile. How much does that cover in terms of sales periodically and what is the average cost of that inventory, versus what is the average expected realisation of that inventory that you have? A: We have sold around 50 percent of our tea. So, balance 50-60 percent is still left to be sold and these inventories are valued at around Rs 135-140 per kg. Average selling price is Rs 170-180 per kg. So, if the price trend continues to be there, the margin will really kick in. But let me again explain. Since the fourth quarter is a low production quarter, the cost will be there and there will be losses in the fourth quarter. What I mean to say is that the growth in the topline and some kind of a pick up in the margin will come in the third quarter. Overall profitability for this year, seems similar to last year. It does not look better because the price increase has not happened for the first six months. But if the trend on the prices continue to be on the higher side for now, the opening season of the next year looks much better. The prices are much lower than our earlier expectations, but this is how it has been as far as the demand is concerned. We hope that the demand which has picked up in the last one and a half month continues to be there into the peak season of the consumption. Sumaira: Is it likely that your export mix may change? You are exporting about 40 percent currently I understand. Is there likely to be any change in this mix going forward? A: We produce around 30 million odd kg in overseas markets and they have done fairly well. This will be one of the best years for them and this is all exports. Out of India, we export around 20 odd million. This year, we will be in the range of around 14 million because of the very good production in Kenya. Kenya seems to be lowering their production because of the weather conditions. So, we expect 19-20 million to come into next year. So, exports, this year will continue to be around 14 million from Indian operations, around 30 million from overseas. But going forward, we expect this 40 million odd to really go up to around 45 million kg.