Expect profitability to improve in FY14: Mcleod Russel

Kamal Baheti, CFO, Mcleod Russel is of the opinion that more or less pricing environment for tea is stable. However, prices of quality tea are higher by Rs 5-10 compared to last year, he adds.

He expects profitability to be substantially better in FY14 because of recovery in crops compared to last year and also due to stability in costs.
With expectations of overall volume growth both in India and overseas being in the range of 10-15 percent and 5-7 percent of price growth, we expect around 20 percent of topline and bottomline growth this year, says Baheti.
There could also be a likely increase in dividend payouts, he adds. Also read: Need more sentiment boosting moves; see better H2FY14, says GCPL Below is the verbatim transcript of his interview on CNBC-TV18 Q: There is a Merrill Lynch report which says that post the interactions with the company they believe that tea prices this year would be flat compared to 9 percent growth. How would you react to that?
A: If you look at the previous year there was crop loss which happened both in Kenya and India because of the weather. This year the crop has been good and we had seen a huge increase in prices last year. We were expecting that on recovery of crop, the prices will stabilize.  So with the volume growth and cost being under control, operating wise this year should be good and it seems to be panning out in that manner.
However, for quality tea the prices are higher by Rs 5-10 as compared to last year, which is positive from our point of view whereas for the other tea the prices are flat, compared to last year. So, I would say it is more or less stable pricing environment. Q: You indicated that quality tea prices are higher, how much of that is a percentage of your total portfolio?
A: I would say around 50-60 percent of our own crop will be in the high quality bracket. The balance is also of mid quality variety, where the prices are stable. So, McLeod Russel mainly will be in the quality range, not in the lower range. Q: Going forward what is your prognosis for tea prices, are they likely to remain flat and maybe with a bit of a positive bias for quality?
A: This year we are looking at the positive bias to continue.  However, from a little longer-term and the kind of stagnancy in production in India coupled with consumption growth that is happening, we believe structurally there is a change in the Indian tea industry. We believe that the prices will continue to go up. It should go up more than the cost increases which happens every year. So, the margins would expand over the longer-term. But in the shorter-term and medium-term this year we are looking at positive bias for the quality tea and the margins would slightly improve as compared to last year.
Overall profitability impact should be substantially better because of the recovery in the crop and also stability in the overall costs. Q: Last year you reported earnings per share (EPS) of Rs 25, what would be a fair estimate for this year?
A: Looking at the overall volume growth, last year consolidated we did around 102 million kilograms of production. We are expecting in the range of around 114-115 with a growth both in India and overseas. So, it is 10-15 percent of volume growth. We are looking at 5-7 percent of price growth with stability in the cost, so we expect around 20 percent of topline and bottomline growth this year. Going by what the trend is there and expect that both the weather and the trend will continue for the balance year.
_PAGEBREAK_ Q: Is there a possibility of the company increasing the dividend payout?
A: Our policy has been to increase the payout. If you look at on the standalone basis our payout had been 40 percent this year which was around 32-33 percent last year. On consolidated basis from 25-26 percent we have gone to 30 percent.
Since our debt is marginal, we will be in net cash by the end of the year. I think dividend payout with the kind of profitability is a possibility. I do not want to comment because there is no stated policy on this but going by the previous trends, the payouts have increased and the trend may likely to continue. Q: You spoke about 20 percent increase in your revenues and you also indicated that margins will improve. Could you tell us how much the margins could go up by in this fiscal year?
A: We are looking at similar margins in the overseas and slightly increase of 1-1.5 percent increase in India and thereby looking at overall 20 percent growth at the bottomline area.