Mcleod Russel India - Prices hold up but costs play spoilsport; Buy - Anand Rathi

Higher prices drive revenues. In FY13 the standalone Mcleod Russel registered 11% revenue growth, to Rs. 138bn, in line with our estimate. Inclement weather in north-east India resulted in a 1.4% yoy crop loss to 78.2m kg. Consequently, sales declined 3% yoy to 78.1m kg. Supply shortages and precarious inventory levels of black tea in India resulted in prices in the fiscal firming up by Rs. 22 a kg, to Rs. 172 (up 15%). The consolidated performance was not very different. A 1% volume drop (to 102m kg) in conjunction with a 16% spike in realisations (to Rs. 160 a kg) saw revenue in FY13 jump 15% yoy to Rs. 16.7bn.

Cost escalations restrict EBIDTA and PAT growth. The company could not capitalise on buoyant tea prices as the steep rise in per-kg prices of bought-out leaf and the escalation in payroll costs took a toll on operational profitability in both the domestic and international divisions. The standalone per-kg profit was Rs. 43 (flat yoy), settling at Rs. 41 for the consolidated business (3% lower yoy). Consequently, in FY13 the company clocked a consolidated EBIDTA of Rs. 3.8bn (down 2% yoy) while consolidated PAT came in at Rs. 2.7bn, ~15% below our estimates.

Our take. The FY13 disappointing performance notwithstanding, we are fairly optimistic about the company's short-term prospects. Domestic output of black tea is expected to settle at CY11 levels of 1,115m kg. However, the low inventory levels of black tea in the country would keep prices firm in the near term. Additionally, with stable payroll and fuel costs, the profit margin in FY14 is expected to expand. At the ruling price of Rs. 301, the stock trades at a P/E and EV/EBIDTA of 8.1x and 5.7x respectively, discounting its FY14e consolidated figures. By averaging the outcomes of the EBIDTA and earnings multiples for our FY14e figures, we arrive at a price target of Rs. 400 and maintain our Buy recommendation.

Source : Equity Bulls

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