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ICICI Securities Limited

Result Update

Rating matrix

   

Rating

 

:

Buy

Target

:

| 244

Target Period

:

12 months

 

Potential Upside

:

18%

Key Financials (| crore)

   

| Crore

 

FY09

FY10

FY11E

FY12E

Net Sales

 

828.9

1,106.2

1,182.1

1,543.6

EBITDA

209.4

362.7

362.0

440.0

Net Profit

85.6

230.9

265.3

298.7

EPS (|)

7.6

21.1

24.2

27.3

Valuation summary

 
 

FY09

FY10

FY11E

FY12E

P/E

26.9

9.7

8.5

7.5

Target P/E

 

35.8

12.9

11.3

10.0

EV / EBITDA

12.7

6.8

6.5

5.2

Price to Book Value

1.9

1.6

1.4

1.2

RoNW(%)

7.1

16.4

16.1

15.5

RoCE (%)

10.6

18.9

17.7

18.7

Stock data (| crore)

   

Market Capitalisation

 

| 2249 crore

 

Debt (FY10)

 

| 442crore

Cash (FY10)

 

| 103.3 crore

 

EV

| 2587 crore

52 week H/L

 

311.5 / 127.6

Equity capital

| 54.7 crore

Face value

 

|. 5

MF Holding (%)

7.8

FII Holding (%)

28

Price movement

   
 

290

240

190

140

90

290 240 190 140 90
 

5600

4400

3200

40

2000

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

 

McLeod

Nifty(R.H.S.)

Analyst’s name

   

Sanjay Manyal sanjay.manyal@icicisecurities.com

 

Parineeta Poddar parineeta.poddar@icicisecurities.com

ICICIdirect.com | Equity Research

ICICIdirect.com | Equity Research February 2, 2011 McLeod Russel (MCLRUS) | 206 WHAT’S

February 2, 2011

McLeod Russel (MCLRUS)

| 206

WHAT’S CHANGED…

PRICE TARGET

Changed from | 272 to | 244

EPS (FY11E)

Unchanged

EPS (FY12E)

Unchanged

RATING

Unchanged

Volumes from Uganda to aid topline growth…

McLeod Russel’s results were inline with our expectation with sales growing by 9.2% to |366.7 crore from |335.8 crore in Q3FY10. Sales volume increased by 1.0 million kg (mkg) to 24.5 mkg (16 mkg in domestic markets and 8.8 mkg exported) and realisations improved by 4.8% to |149 per kg in Q3FY11. However, the production in Q3FY11 declined by 1.0 mkg to 21.8 mkg. The company is currently holding 15.3 mkg of inventory (Indian operations). EBITDA margins during the quarter declined by 400 bps to 40.3% due to increase in employee cost by ~8% (Revision in labour wages by |3.5 per kg from January,2010). Also, interest cost increased by 29.4% to | 6.0 crore in Q3FY11, thereby pulling down the net profit by 1.9% to | 135.3 crore.

Operational Highlights

McLeod’s total tea production in 2010 declined from 76.1 mkg to 72.4 mkg on the back of pest attack (in May-June) and lower rainfall (in August) in Assam. However, its Vietnam subsidiary’s (Phu Ben) production improved from 4.3 mkg in 2009 to 4.6 mkg in 2010 with the average realization for the year being |77 per kg. Phu Ben’s sales for 2010 stood at |31.5 crore and EBITDA at |3.1 crore. Also, production from the Uganda subsidiary in 2010 increased to 16.8 mkg from 15.3 mkg in 2009 with the average realization being |84 per kg. The sales from Uganda stood at |135 crore and EBITDA at |49.5 crore in 2010.

Valuation

At current market price of Rs 206, stock is trading at 8.5x and 7.5x its FY11E and FY12E estimated EPS of Rs 24.2 and Rs 27.3, respectively. With tea production expected to remain stagnant in India and concern about lower production in Kenya and Sri Lanka, we believe tea prices would be higher Q4FY11 (compared to Q4FY10). Also, with higher volumes being sold by McLeod led by its acquisitions in Vietnam and Uganda would lead to higher profitability in FY11. We maintain our earning estimates for FY11 and FY12, However due to current macro headwinds and market volatility, we are compressing PE multiple to 9x (earlier 10x) it’s FY12 EPS of 27.3 with target prices of | 244.

Exhibit 1: Financial Performance

 
 

Q3FY11

Q3FY11E

Q3FY10

Q2FY11

YoY(%)

QoQ(%)

Net Sales EBITDA margin (%) Depreciation Interest Other Income Reported PAT EPS (|)

366.7

358.2

335.8

361.2

9.2

1.5

40.3

40.0

44.3

58.2

7.0

10.4

6.9

7.0

1.4

1.0

6.0

12.1

4.6

4.7

29.4

28.6

0.6

5.2

0.6

2.3

1.8

-74.7

135.3

126.0

137.9

201.0

-1.9

-32.7

12.4

11.5

12.6

17.6

-1.9

-29.6

Source: Company, ICICIdirect.com Research

ICICI Securities Limited

ICICI Securities Limited Export demand in Q3FY11 improved over Q2FY11, however, the higher prices in 2010

Export demand in Q3FY11 improved over Q2FY11, however, the higher prices in 2010 led to shrinkage in the demand over Q3FY10. Domestic demand however maintained its momentum in spite of higher prices.

Domestic

production in India, However export prices declined due to increase in production in Sri Lanka and Kenya

lower

realisations

rose

due

to

Wages increased by ~| 3.5 per kg, resulted in lower EBITDA margins

ICICIdirect.com | Equity Research

Exhibit 2: Domestic and Export Sales Volume (million kg)

100% 1.2 1.9 5.7 8.5 7.5 8.8 80% 10.3 60% 7.5 40% 6.7 18.3 15.7
100%
1.2
1.9
5.7
8.5
7.5
8.8
80%
10.3
60%
7.5
40%
6.7
18.3
15.7
14.5
16.0
13.2
20%
0%
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Domestc
Exports

Source: Company, ICICIdirect.com Research

Exhibit 3: Domestic and Exports Realisations(| per kg) 163.2 170 156.4 153.7 155.0 151.0 149.0
Exhibit 3: Domestic and Exports Realisations(| per kg)
163.2
170
156.4
153.7
155.0
151.0
149.0
155
140
150.8
149.4
126.0
137.0
125
136.0
134.6
133.0
110
111.0
95
80
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Domestic (| per kg)
Exports (| per kg)

Source: Company, ICICIdirect.com Research

Exhibit 4: EBITDA and PAT Margins(%) 80 60.4 58.2 60 44.3 40.3 35.5 40 55.9
Exhibit 4: EBITDA and PAT Margins(%)
80
60.4
58.2
60
44.3
40.3
35.5
40
55.9
55.6
14.8
41.1
36.9
20
25.8
-12.0
0
15.4
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
-20
-40
-42.6
-60
EBITDA Margins (%)
PAT Margins(%)

Source: Company, ICICIdirect.com Research

Page 2

ICICI Securities Limited

ICICI Securities Limited North India Production declined by ~2%, resulted in higher domestic prices North India

North India Production declined by ~2%, resulted in higher domestic prices

North India tea prices have increased by ~| 4 per kg

Tea Production in Kenya rose resulted in softing of tea prices earlier in 2010. However production would not remain at the same level in 2011.

ICICIdirect.com | Equity Research

Exhibit 5: North India Tea Production (in million kgs) 140 120 100 80 60 40
Exhibit 5: North India Tea Production (in million kgs)
140
120
100
80
60
40
20
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
-20
2010
2009

Source: Company, ICICIdirect.com Research

Exhibit 6: North India Tea Prices (| per kg) 140.0 130.0 120.0 110.0 100.0 90.0
Exhibit 6: North India Tea Prices (| per kg)
140.0
130.0
120.0
110.0
100.0
90.0
80.0
70.0
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10

Source: Company, ICICIdirect.com Research

Exhibit 7: Tea Production in Kenya (in million kgs)

45 40 35 30 25 20 15 10 5 0
45
40
35
30
25
20
15
10
5
0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

 
  2009 2010

2009

  2009 2010

2010

Source: Company, ICICIdirect.com Research

Page 3

ICICI Securities Limited

ICICI Securities Limited ICICIdirect.com Universe (Tea)     McLeod Russel   Sales (| crore)

ICICIdirect.com Universe (Tea)

   

McLeod Russel

 

Sales (| crore)

 

EPS (|)

PE (x)

EV/E (x)

RoNW (%)

 

RoCE (%)

Idirect Code

MCLRUL CMP

206

FY10

 

1106.2

21.1

9.7

6.8

16.4

18.9

Target

244 FY11E

1182.1

24.2

8.5

6.5

16.1

17.7

MCap

2249.3 Upside

18.4

FY12E

1543.6

27.3

7.5

5.2

15.5

18.7

Jayshree Tea

 

Sales (| crore)

 

EPS (|)

PE (x)

EV/E (x)

RoNW (%)

 

RoCE (%)

Idirect Code

JAYTEA CMP

154

FY10

 

406.0

27.6

5.6

3.7

33.4

22.7

Target

193 FY11E

447.4

32.3

4.8

5.1

32.6

24.5

MCap

362 Upside

25.3

FY12E

562.6

34.7

4.4

2.9

28.4

30.3

Harrison Malayalam

 

Sales (| crore)

 

EPS (|)

PE (x)

EV/E (x)

RoNW (%)

 

RoCE (%)

Idirect Code

HARMAL CMP

81.0

FY10

 

326.4

6.3

12.9

8.2

4.1

7.0

Target

86.0 FY11E

339.4

1.5

54.0

16.6

1.0

4.6

MCap

150.0 Upside

6.2

FY12E

363.7

5.3

15.3

11.8

3.4

6.3

Source: Company, ICICIdirect.com Research

   
   

Recommended History

 
 

300

Rating:Buy TP: | 273 Rating:Strong Buy TP: | 273 Rating:Strong Buy TP: | 273 Rating:
Rating:Buy
TP: | 273
Rating:Strong Buy
TP: | 273
Rating:Strong Buy
TP: | 273
Rating: Buy
TP: | 244

260

220

180

140

100

 

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Source: Company, ICICIdirect.com Research

 

ICICIdirect.com | Equity Research

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ICICI Securities Limited

ICICI Securities Limited RATING RATIONALE       ICICIdirect.com endeavours to provide objective opi

RATING RATIONALE

   
 

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Add, Reduce and

Sell. The performance horizon is two years unless specified and the

notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

 
 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

ICICIdirect.com Research Desk, ICICI Securities Limited,

 

7

th

Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

 

research@icicidirect.com

ANALYST CERTIFICATION

   

We /I, Sanjay Manyal MBA (FINANCE) Parineeta Poddar MBA (FINANCE)

research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research

report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:

ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading

underwriter of securities and participate in virtually all securities trading

markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities

generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities

from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities and its affiliates might have managed or co-managed

a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received

compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Sanjay Manyal MBA (FINANCE) Parineeta Poddar MBA (FINANCE) research analysts and the authors of this report have not received any compensation from the

companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

It is confirmed that Sanjay Manyal MBA (FINANCE) Parineeta Poddar MBA (FINANCE) or advisory board member of the companies mentioned in the report.

research analysts and the authors of this report or any of their family members does not serve as an officer, director

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities

described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICIdirect.com | Equity Research

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