Hold Mcleod Russel India: Way2Wealth

Way2Wealth has recommended hold rating on Mcleod Russel India in its January 31, 20132 research report. According to the research firm, the tea industry is on the verge of the long term structural upward trend & Mcleod is the player with significant scale in the industry.

"Mcleod Russel India, topline grew by 10.5% in Q3FY13 to Rs 434.1 backed by 13.4% improvement of blended realizations while volumes dropped by ~3%. Realizations were at Rs 173.9 per kg for Q3 vs. Rs 153.31 per kg I n Q3 previous year. Export sales were grew by 17.5% at Rs 189.8 crs. attributed to higher realizations of 15.1% at Rs 193.7 per/kg and higher volumes of ~ 2% at 9800 tons. Domestic sales volumes though where lower by 5.6% at 15,100 tons. Domestic realization moved up Rs 17.8/kg to Rs 161.9 from Rs 144.1/kg while that of exports improved from Rs 168.2 to Rs 193.7/kg. Dry weather in Kenya and African countries affected global production so the export realization was higher. For the 9MFY13, McLeod recorded revenue of Rs 1016.6 crs growing by 6.8%. Volumes decreased by 6.0%. Topline was supported by a 13.5% improvement in blended realizations.

Production in Mcleod plantations was at 22000Tons vs. 19700 Tons 11.7% higher than in Q3FY12. 9MFY13 production was lower by ~2.3% at 76800 Tons. Production pickup post October after a dry spell from Jan to may and heavy rainfall since till September. The mix of bought leaf to own production tilted towards the former. This quarter own leaf was 74% of the production compared to 84% last year same quarter. This increased cost of production for the company.

EBIDTA margins for the quarter contracted by 190 BPS YOY in Q3FY13 to 31.4%. Margins were impacted in Q3FY13 due to higher staff cost, power cost, and loss of crop which lead to higher bought leaf content. A provision for staff salary has been made to the tune of Rs 5 crs. This quarter own leaf was 74% of the production compared to 84% last year same quarter. This increased cost of production for the company hence impacting gross profit. Power cost was higher on account of higher coal prices and gas prices in this quarter. PAT margins were a trickle down impact of EBIDTA at 27.5% in this quarter.

Outlook & Valuations: With carry forward inventory reducing on the back of higher demand and stagnant supply, we expect prices to stay firm and increase further. The tea industry is on the verge of the long term structural upward trend & Mcleod is the player with significant scale in the industry. The prices are in an uptrend and are expected to remain firm YOY on the back of loss of crop. The company expects to lower production figure this year and higher quantity of higher bought leaf. This quarter own leaf was 74% of the production compared to 84% last year same quarter. This increased cost of production for the company hence impacting gross profit. But the realizations increase benefit will flow to profitability but slightly lower levels on account of bought leaf. At the CMP of Rs 358.50/- the company is available at 13.8x FY13E earnings of Rs 26 & 11.6x it FY14 estimated EPS of Rs 31. The expected improvement in return ratios & debt ratios and the prospects of price sustaining at these levels warrants a re-rating of the stock. We recommend investors to HOLD the stock," says Way2Wealth research report.

Institutional holding more than 40% in Indian cos

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