indian tea sector ritika shewakramani - icici...

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December 18, 2009 | Tea

Sector Report

Indian Tea Sector

Tea prices on the boil… With tea prices soaring due to torpid production over the past five years and sustainable consumption in the country, the fundamentals of the tea industry have improved significantly. Simultaneously, unfavourable weather conditions in major tea exporting countries have resulted in a considerable decline in global production in 2009. This has led to a surge in global tea prices. Given the negligible area addition under tea during the 2000-07 period, production would stagnate, going forward. This, in turn, would keep tea prices firm. We are initiating coverage on tea sector with a positive view on McLeod Russel, Jayshree Tea and Harrison Malayalam.

Domestic demand-supply gap to tighten further The precipitous decline in tea auction prices during 2001-2005 had adversely affected tea plantation activity in India. As a result, tea production in India has been lagging behind consumption in the past few years resulting in a depletion of carry-over stocks. Conversely, demand for tea has been steadily growing at 2.9% per annum. In light of the relatively lengthy gestation period of a tea plant, which is typically around five years and the lack of area under plantation, the country is unlikely to register any significant growth in the near term, thereby tightening the deficit even further. Favourable global demand-supply dynamics

Led by a protracted dry season, Kenya, the world’s biggest exporter of black tea, has witnessed a 12.1% decline in production to around 209.5 kg in January-September 2009. Likewise, Sri Lankan tea output has also fallen by 16.8% to around 208.1 million kg in January-September 2009 as against 250.1 million kg in the corresponding period last year. This, coupled with negligible area additions under black tea, has exacerbated the deficit situation causing global tea prices to surge. Tea prices expected to remain firm

Domestic tea prices have risen by almost 22% to Rs 135 per kg in 2009 due to the decline in tea production in India. Currently, domestic tea prices are the highest since the last nine years. Poor weather conditions in India have taken a toll on tea production and has resulted in a decline to 830.4 million kg in January-October 2009. This, coupled with high consumption levels, has led to the emergence of a tight demand-supply scenario. Moreover, a decline in the production of tea in key exporting countries has resulted in a surge in global tea prices. Kenyan tea prices hit a record high with the Broken Pekoe Ones (BP1s) average price touching $5.2 per kg. We believe global and domestic tea prices would remain firm on the back of negligible area addition under tea over the last four to five years.

Valuation The Indian tea sector is going through a positive pricing scenario as production has remained stagnant over the past five years and consumption is growing steadily. We believe tea prices will remain firm due to lower production because of negligible area additions under tea. Given the fixed cost structure of the companies, high prices would result in a concomitant rise in the EBITDA margin. Our rating rationale is based on P/E and price to book value (BV).We prefer McLeod Russel (MRIL), Jayshree Tea (JST) and Harrison Malayalam (HML) in this order purely on the back of the large capacities of these companies. We believe MRL, with the largest capacity, would benefit from the rise in volumes and price realisations. We value MRIL, JST and HML at 13x, 12x and 11x its FY12E EPS respectively, which are 2.0x, 1.9x and 0.87x of their respective FY12E book values.

Analysts’ Name

Sanjay Manyal [email protected] Ritika Shewakramani [email protected]

McLeod Strong Buy

CMP Rs 252

TP Rs 334

Upside % 32.5 Market Cap Cr 2845.9

FY10E FY11E FY12E

Revenue Rs cr 1053.2 1282.1 1411.0 EBITDA Rs cr 289.4 360.6 405.3 EBITDAM % 27.5 28.1 28.7 PAT Rs cr 165.6 227.0 274.9 PATM % 15.7 17.7 19.5 EPS Rs 15.1 20.7 25.1

Jayshree Strong Buy

CMP Rs 339

TP Rs 410

Upside % 20.9

Market Cap Cr 365.4

FY10E FY11EE FY12E

Revenue Rs cr 377.7 457.0 499.3 EBITDA Rs cr 43.2 61.5 67.8 EBITDAM % 11.5 13.8 13.9 PAT Rs cr 28.8 32.1 36.6 PATM % 7.7 7.2 6.2 EPS Rs 25.8 28.7 32.8

Harrison Buy

CMP Rs 131

TP Rs 149

Upside % 13.7

Market Cap Cr 208.4

FY10E FY11E FY12E

Revenue Rs cr 309.8 353.1 384.4 EBITDA Rs cr 24.7 30.4 39.0 EBITDAM % 8.0 8.6 10.2 PAT Rs cr 12.0 18.8 25.1 PAT % 3.9 3.8 8.6 EPS Rs 6.5 10.2 13.6

Comparative return ratios

Stock return 1M 3M 6M 12M

McLeod 21.2 27.8 149.2 205.6 Jayshree 23.1 57.9 137.1 244.8 Harrison 23.8 22.3 51.7 93.3

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Content Page No.

• Global demand-supply dynamics

Production shortfall in key exporting countries 3 Negligible area additions under black tea 3-4 Global black tea demand outpacing supply 5

• Decline in global tea production to benefit Indian exports 6

• Domestic demand-supply scenario likely to remain tight 7

Poor weather conditions result in production shortfall 8 Re-plantation to result in a loss of production in short-term 9 Paradigm shift from CTC to Orthodox 10 Consumption steadily rising 10

• Tea prices to remain firm 11 • Risks to our call 12

• Valuation 13-15 • Initiating Coverage

• McLeod Russel 16-27

Volume growth, high price realisation to boost sales Highest EBITDA margin in the industry Rising exports to enhance margins

• Jayshree Tea 28-37 Price realisation led revenue growth Export of high quality Darjeeling tea to enhance margin Scouting for acquisitions to increase volumes • Harrison Malayalam 38-50

High tea realizations to drive growth Rising crude prices to trigger spurt in rubber prices Forward integration to expand reach

Annexures 51-52

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Global demand-supply dynamics to exert upward pressure on prices After a prolonged spell of excess production, the demand-supply dynamics of the global tea industry have been radically altered. Unremittingly adverse weather conditions have led to a major shortfall in production of tea to around 89 million kg in major black tea producing countries from January to September 2009. This includes India, Sri Lanka and Kenya (which account for around 80% of the global production of 2000 million kg of black tea). This led to a decline in total global output by 6.5%, compared to the same period last year (January- September 2009). This has led to a rise in global tea prices by around Rs 130-150 per kg. However, given the currently dry weather conditions, the decline is expected to be about 140 million kg (7% decline) by the end of 2009. We believe that global tea prices would further go up due to the lack of area addition in major tea exporting countries. However, any unprecedented increase in production would not result in a major correction in tea prices due to lower inventories and a sustainable rise in global tea consumption. We believe that firm tea prices would result in sustainable margins and improvement in earnings for major tea producing companies.

Production shortfall in key exporting countries India, Kenya and Sri Lanka together account for more than 50% of global tea exports. Kenya is the world’s biggest exporter of black tea and produces approximately 350-360 million kg of tea. Led by a prolonged dry season, Kenya has witnessed a 12.1% decline in production to around 209.5 million kg during the January-September 2009 period. Similarly, Sri Lanka has also witnessed a drop in tea output by 16.8% to around 208.1 million kg during the January-September 2009 period as against 250.1 million kg in the corresponding period last year.

Exhibit 1: Global tea prices ($ per kg)

1.01.52.02.53.03.54.04.5

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Sri Lankan Prices ($ Per kg) Kenya Tea Prices ($ per kg)

Indian Auction Prices ($ per kg)

Source: Tea board of Kenya, India and Sri Lanka, ICICIdirect.com Research

With the global shortfall of tea estimated to be around 140 million kg, tea prices are on an uptrend.

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Exhibit 2: Key exporting countries (million kgs)

348.3 312.2 343.7 383.4 260.9

298.8 314.9 294.3 298.8213.6

286.6 286.6 289.4 296.9

233.8

199.1 218.7 178.8 203.1

150.0

87.9 105.1 110.9115.0

56.2

95.083.795.3102.3

0

200

400

600

800

1000

1200

1400

FY05 FY06 FY07 FY08 FY09*

Kenya Sri Lanka China India Vietnam Indonetia

Source: Tea board of India, ICICIdirect.com Research

* From January to September 2009

Exhibit 3: Tea production in key tea exporting countries (million kgs)

-12.06-16.80

0.24

19.08

3.21

-8.20

-1.762.40

-0.26

0100200300400500600700800900

Indi

a

Keny

a

Sri L

anka

Indo

nesi

a

Mal

awi

Tanz

ania

Zim

bam

bwe

Bang

lade

sh

Ugan

da

-20-15-10-50510152025

2008 2009(E) % decline in production

Source: Tea board of India,,ICICIdirect.com Research

Negligible area additions under black tea Negligible additions to area under black tea across key tea exporting countries coupled with the relatively long gestation period of a tea plant are unlikely to lead to a rise in tea production globally, going forward. This would tighten the global supply deficit thereby exerting an upward pressure on tea prices.

Exhibit 4: Area addition under black tea across key exporting countries (million hectare) Country 1999 2000 2001 2002 2003 2004 2005 2006 2007India 0.49 0.50 0.51 0.52 0.52 0.52 0.56 0.57 0.57Sri Lanka 0.20 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19Kenya 0.12 0.13 0.13 0.14 0.13 0.13 0.14 0.15 0.15Others 0.35 0.77 0.67 0.73 0.67 0.69 0.75 0.74 0.75Total 1.16 1.59 1.50 1.58 1.51 1.53 1.63 1.65 1.66 Source: Tea board of India, ICICIdirect.com Research

Prolonged drought conditions in key exporting countries has led to a shortage

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Global black tea demand outpacing supply India, Sri Lanka and Kenya are the largest producers and exporters of black tea. Over the past five years, the demand for black tea (exports and domestic consumption) in these countries has surpassed production, thus bringing down their stock levels. This has led to a rise in black tea prices. We believe tea prices are expected to remain firm as supply would not improve in the future due to the negligible area addition under tea.

Exhibit 5: Black tea demand and production in Sri Lanka (million kgs)

307 307

316

332

311

338

303308

315308 305

328

280

290

300

310

320

330

340

350

2003 2004 2005 2006 2007 2008

Demand Production

Source: Crisil, ICICIdirect.com Research

Exhibit 6: Black tea demand and production in Kenya (million kgs)

285

350 356331

361400

294325 328 311

370345

50

100

150

200

250

300

350

400

450

2003 2004 2005 2006 2007 2008

Demand Production


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Exhibit 7: Black tea demand and production in India (in million kg)

888

933946

999982

1023

878893

927956 945

981

800

850

900

950

1000

1050

2003 2004 2005 2006 2007 2008

Demand Production


Decline in global tea production to benefit Indian exports Being the second largest producer of tea, India accounts for approximately 14% of world exports. India exports both crush tear curl (CTC) and orthodox tea (estimated to account for 30-45% of export volumes) to Russia, Middle East and Iran, which mainly consume orthodox tea. Orthodox tea fetches higher realisations (almost Rs 15-20 per kg) higher than that of CTC tea. Since domestic consumption of orthodox tea is minimal, over three-fourths of the domestic orthodox tea production is exported. With key tea exporting countries (Kenya and Sri Lanka) witnessing a shortfall in production, the demand for Indian tea has been looking up. Additionally, the surge in domestic tea prices has also resulted in a firming up of export realisation prices to Rs 142 per kg in 2009 as compared with Rs 102 per kg last year. This will positively impact margins given the fixed cost structure of the tea industry. Moreover, given that India exports a significant proportion of orthodox tea, which commands higher realisations than that of CTC tea, we expect margins of tea exporting companies to further improve.

Exhibit 8: Indian exports (million kg)

207.0183.0

201.0

174.0197.6 199.1

218.7

178.8203.1

150.0

0.0

50.0

100.0

150.0

200.0

250.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

Source: Tea board of India, ICICIdirect.com Research *January to October

With auction tea prices in Kenya, Sri Lanka, Bangladesh and Indonesia up by 12-22% during October 2009 vis-à-vis 2008, export realisations are maintaining their upward trend.

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Domestic demand-supply scenario likely to remain tight India is the largest consumer and second largest producer of tea in the world. Accounting for around 40% of the world’s black tea production, India is the largest producer of black tea in the world. However, tea production in India has been lagging behind consumption during the last few years. This has resulted in shrinkage of tea inventories from 306.9 million kg in 2006 to 220.7 million kg in 2009. It is expected to be 206.5 million kg in 2010E, which is just 2.9 months of consumption (lower than the five months of consumption in 2006).

Exhibit 9: Domestic tea carry over stocks (million kg)

299.9306.9

285.9

264.7

220.7206.5

200

220

240

260

280

300

320

2005 2006 2007 2008E 2009E 2010E


The country has witnessed sluggish production growth of around 2.4% CAGR over 2002-2009. It is unlikely to register any significant growth in the near term. This is due to the comparatively lengthy gestation period of a tea plant and the lack of any new land under tea plantation in the last few years.

Exhibit 10: Domestic tea production growth (million kg)

838.4 878.1 893.0 946.0 982.0 986.4 981.0 968.0 1020.0

0

200

400

600

800

1000

1200

2002 2003 2004 2005 2006 2007 2008 2009E 2010E

Production (million kgs)

Source: Tea board of India , ICICIdirect.com Research

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With incremental consumption growing at 3.0% CAGR over 2002-2009, domestic demand is outpacing incremental production. As a result, the carry over stocks of previous years have been exhausted. Although a rise in tea prices is likely to attract more investments in tea plantations and drive up production in the long term (which would still take 4-5 years to impact production) we expect the demand-supply scenario to remain tight in the near term, thereby exerting an upward pressure on tea prices.

Exhibit 11: Domestic consumption and export demand (million kg)

693 714 735 758 780 803 826.2 850 874.5

201 174 197.7 205.8185.3 190.6 177.8218.2

196.7

200300400500600700800900

10001100

2002 2003 2004 2005 2006 2007 2008 2009E 2010E

Domestic Consumption Exports

Source: Tea board of India ,ICICIdirect.com Research

Poor weather conditions to result in production shortfall With unfavourable weather conditions having led to a long-standing dry spell and monsoons playing truant, tea production this year is likely to witness a significant shortfall. During the January-October 2009 period production dipped to 830.4 million kg as against 832.5 million kg during the corresponding period last year. It is likely to decline further on account of the paucity in monsoons. Consequently, we anticipate the demand-supply gap to widen further. Exhibit 12: Domestic tea production (in million kgs)

17.8

50.5

80.070.3

105.4

131.0 123.1107.0

133.6

125.8

21.6

101.5

134.4

21.6 15.3

45.0 62.6

71.4

118.1127.0

020406080

100120140160

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

2008 2009


Domestic demand backed by consumption growth (3% CAGR over 2002-9) is outpacing production

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Re-plantation to result in loss of production in short-term The precipitous decline in tea prices during 2001-2005 period had hampered tea plantation activity in India. Subsequently, several tea estates in India have been afflicted with low yields and require investments in re-plantation. Yields in North India have declined from 1.64 tonnes per hectare to 1.60 tonnes per hectare. This would result in lower production in the country, going forward as North India contributes 75-77% of the country’s production.

Exhibit 13: Average yield (tonnes per hectare)

1.64 1.651.58 1.60 1.63 1.65 1.68 1.67

1.60

1.82 1.77 1.80

2.00 2.001.90 1.91

1.85

2.06

1.701.711.731.701.711.691.631.681.68

1.20

1.40

1.60

1.80

2.00

2.20

2000 2001 2002 2003 2004 2005 2006 2007 2008

North India South India Overall

Source: Tea board of India,ICICIdirect.com Research

Although the government has undertaken several initiatives towards uprooting and replanting activities in order to improve yields, the impact of these measures will only be evident in the long-term as new tea bushes will take time to achieve the desired yields. In addition, almost all the quality land in Assam and West Bengal has already been brought under plantation. Hence, it is unlikely that any significant new area can be brought under tea cultivation. From 2004-2009, only 57,055 hectare has been brought under tea cultivation. This would lead to a incremental jump in tea production by not more than 20-30 million kg per annum. This will cause production to remain comparatively stagnant further contributing to the tight domestic supply scenario.

Exhibit 14: Tea prices (Rs per kg) and area additions (hectare) from 1998-2007

05

1015202530354045

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Hect

ares

('00

0)

50.00

55.00

60.00

65.00

70.00

75.00

80.00

Pric

es (R

s pe

r kg)

Area additions Auction Prices

The fall in tea prices had led to lower area additions


The lack of new area additions coupled with the lengthy gestation lag of a tea plant is likely to cause a dilutive impact on production

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Paradigm shift from CTC to Orthodox India, which predominantly produces the CTC variety of tea, is likely to see a paradigm shift in production towards the orthodox variety, which is typically exported. With a rise in demand for orthodox tea emanating from Russian and Middle Eastern countries entailing higher realisations, a foreseeable shift can be envisaged, going forward. Likewise, in an attempt to garner a greater share of the global market, the government of India is offering a subsidy of Rs 3-5 per kg as an incentive scheme to enhance the production of orthodox tea which commands a premium price in contrast to that of the CTC variety. This shift is likely to further tighten the demand-supply gap and trigger an upswing in prices.

Consumption steadily rising While production has grown at a CAGR of 2.4% (2002-2009), consumption has grown at a 3.0% CAGR over the same period. With the per capita consumption of tea in India clocking an annual growth rate of around 1-1.2% and disposable incomes on the rise the demand for tea is likely to remain healthy, going forward. We expect consumption to grow at a CAGR of 3.0% in 2009 and 2010. Although tea prices have been steadily rising in recent times, over the past few years tea prices have lagged well behind the rise in index prices of all other commodities. Moreover, since tea constitutes an insignificant portion of family expenses on food items, any further beverage price inflation is unlikely to have a major impact on demand.

Exhibit 15: Per capita consumption (grams per head)

654

663

672

681

691 693 696701

630

640

650

660

670

680

690

700

710

2001 2002 2003 2004 2005 2006 2007 2008

Per capita consumption (grams per head)


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Tea prices to remain firm Domestic tea prices have risen by almost 22% to Rs 135 per kg in 2009 due to the decline in tea production in India. Currently, domestic tea prices are the highest since the last nine years. Poor weather conditions in India have taken a toll on tea production. This has resulted in a decline to 830.4 million kg in January-October 2009. This, coupled with high consumption levels, has led to the emergence of a tight demand-supply scenario. Moreover, a decline in production in key tea exporting countries has increased the overseas demand for Indian black tea. We believe domestic tea prices would remain firm on the back of negligible area addition under tea over the last four to five years and firm global tea prices.

Exhibit 16: Tea prices (Rs per kg)

40.050.060.070.080.090.0

100.0110.0120.0130.0140.0

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9


The continuing global production shortfall along with the lack of any new area additions to tea has resulted in the upswing of tea prices.

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Risks to our call

Tea prices susceptible to demand-supply dynamics Since tea prices are largely dependent on the demand-supply scenario, any significant increase in production levels could hamper tea prices, thereby adversely affecting margins and profits. On the other hand, a higher than expected increase in tea prices could lead to better than expected profitability and, hence, higher multiples. Currency risks India exports around 14% of its tea production to countries such as Russia, Middle East, Pakistan and Europe. Any major fluctuations in currency will negatively impact the profitability of tea producing companies. Exhibit 17: Exporters of tea from India (million kgs)

36.99 42.02 40.44

23.21 17.88 19.3

21.88 24.55 24.88.6710.39

9.57 11.339.55

15.913.14

9.558.54

0

20

40

60

80

100

120

140

2006 2007 2008

Russia UK UAE Iran Kazakhstan USA

Source: Company, ICICIdirect.com Research

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Rise in labour costs Employee costs constitute a substantial portion of a company’s costs. Any noteworthy rise in wages will affect margins. Exhibit 18: Employee Cost (% to sales)

38.8

27.632.9

05

1015202530354045

McLeod Russel Jayshree tea Harrison Malayalam


Higher rainfall than estimated The global shortage in tea is primarily on account of dry weather conditions and the paucity in monsoons in key exporting countries such as Kenya, Sri Lanka and India. However, any chances of these countries receiving above average rainfall after a drought might lead to a higher than expected supply and lower prices.

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Valuations The Indian tea sector is going through a positive pricing scenario as production has remained stagnant over the past five years and consumption is growing steadily. The stock prices of most tea companies have surged over the past few months, reflecting this phenomenon. We believe tea prices will remain firm as any new area addition under tea cultivation would result in higher production only after four to five years due to the long gestation lag. Given the fixed cost structure of tea companies, any significant rise in prices would be clearly reflected in the expansion of EBITDA margins. Our rating rationale is based on P/E and price to BV. We believe that steady cash flows over the next few years would result in debt repayment by companies which in turn, would lead to higher return rations. We prefer McLeod Russel, Jayshree Tea and Harrison Malayalam in this order purely on the back of the large capacities of these companies. We believe MRIL with the largest capacity and the highest EBITDA margins would emerge as a key beneficiary of rising volumes and higher price realisations. Historically, we have seen MRIL trading at a 9.6% and 70.6% discount to JST and HML. MRIL suffered during the downturn due to its large capacities and low EBITDA per kg. However, in light of the emergence of favourable demand supply dynamics, MRIL is likely to register the highest volumes in the current upturn in tea prices and thereby, the highest margins. We believe MRIL should command a higher valuation multiple due to its ability to fetch higher realisations from exports. HML has been trading at a 31.1% premium to JST due to higher rubber prices during the 2006-2008 period as the natural rubber business contributes more than 50% to its revenues. Exhibit 19: Combined P/E(x)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

McLeod Harrison Jayshree


Our earning estimates also reflect a similar valuation rationale. We expect MRL’s net profit to grow at a CAGR of 47.5% compared to 42.1% and 57.8% for JST and HML, respectively, during FY09-12E.

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Exhibit 20: Combined Price to book value(x)

0.15

0.65

1.15

1.65

2.15M

ar-0

7

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09



Exhibit 21: RoNW Vs EV/million kg (FY12E

5.0

10.0

15.0

20.0

25.0

30.0

35.0

4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0RoNW (%)

EV/ m

illio

n kg

(Rs

cr)



Exhibit 22: EPS CAGR FY09-12E vs. FY12 PE

9.2

9.4

9.6

9.8

10.0

10.2

10.4

10.6

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

EPS CAGR(%)

FY11

P/E

McLeod Russel Harrison Malayalam Jayshree Tea


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Exhibit 23: Comparative Valuation Year End Mar 31 McLeod Russel Harrison Malayalam Jayshree TeaCMP (Rs) 252 131 339Rating Strong Buy Buy Strong BuyPrice Target (Rs) 334 149 410upside (%) 32.5 13.7 20.9

ValuationFY10 P/E 16.7 20.2 13.2FY11 P/E 12.2 12.9 11.8FY12 P/E 10.0 9.6 10.3

FY10 EV/EBITDA 10.6 13.4 11.3FY11 EV/EBITDA 8.3 10.5 7.5FY12 EV/EBITDA 7.1 7.7 6.4

CAGR (%) growth rate (FY09-12)Revenue 19.4 10.2 11.3EBITDA 24.6 21.8 42.8PAT 47.5 57.8 42.1EPS 48.8 57.8 40.0

ProfitabilityEBITDA Margin (%), FY11E 28.1 8.6 13.8EBITDA Margin (%), FY12E 28.7 10.2 13.9

Return RatiosRoNW (%) FY11E 14.7 6.4 16.5RoNW (%) FY12E 15.3 8.2 16.8

RoCE (%) FY11E 11.6 3.4 7.3RoCE (%) FY12E 14.3 6.1 11.1


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Analysts’ Name


Sales & EPS trend

1053.2 1282.1 1411.0828.9654.24.3

7.6

15.120.7

25.1

100

600

1100

1600

FY08 FY09 FY10E FY11E FY12E0.0

10.0

20.0

30.0

Net Sales EPS (Rs.) Stock Metrics

Bloomberg Code MCLR IN

Reuters Code MCLE.BO

Face value (Rs) 5

Promoters Holding 45.36

Market Cap (Rs cr) 2845.9

52 week H/L 217.7 / 35

Sensex 16863

Average volumes 394190 Comparative return metrics


Mcleod 21.2 27.8 149.2 205.6

Jayshree 23.1 57.9 137.1 244.8

Harrison 23.8 22.3 51.7 93.3 Price Trend

3070

110150190230270310350

4-Ja

n-08

4-M

ar-0

8

4-M

ay-0

8

4-Ju

l-08

4-Se

p-08

4-No

v-08

4-Ja

n-09

4-M

ar-0

9

4-M

ay-0

9

4-Ju

l-09

Absolute Sell

Target Price

Absolute Buy


Initiating Coverage

McLeod Russel (MCLRUS)

The Perfect brew… McLeod Russel India Ltd (MRIL), the largest producer of bulk tea in the country with an 8% market share, is set to benefit from soaring tea prices and added capacities it has created over the years through synergistic acquisitions. With tea volumes and realisations set to rise, we expect the company’s EPS to witness a CAGR of 48.8% over FY09-12E. We initiate coverage on the stock with a STRONG BUY rating. Volume growth, high price realisation to boost sales MRIL is the largest bulk producer of tea in India with a majority of its tea estates located in Assam, which is known for its high quality tea estates. With the widening gap between the demand and supply of tea putting an upward pressure on prices, we expect realisations to rise to Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E, respectively thereby enabling sales to grow at a CAGR of 19.4% from FY09-FY12E to Rs 1411.0 crore in FY12E from Rs 828.9 crore in FY09. Highest EBITDA margin in the industry MRIL enjoys the highest EBITDA margins in the industry as most of its tea estates are situated in high yielding areas in Assam. Given the fixed cost structure of tea, the company’s higher plucking average per worker and its focus on exports, we believe that a rise in tea prices would directly reflect in EBITDA margin expansion to 28.1% in FY11E and 28.7% in FY12E. Rising exports to enhance margins MRIL mainly exports to UK, Germany, Ireland, Japan, Middle East, US and Pakistan. With the emergence of favourable global demand supply dynamics triggering a spurt in tea prices, we expect the company to export 34.6 million kg in FY12E and register a 25.0% CAGR in export revenues from FY09-FY12E, which will entail a considerable improvement in earnings. Valuations Historically, the stock has traded in a price band of 6-21x its one-year forward earnings. At the current market price of Rs 252, MRIL is trading at 12.2x its FY11E EPS of Rs 20.7 and 10.0x its FY12E EPS of Rs 25.1. On an EV/EBITDA, basis it is trading at 8.3x its FY11E EBITDA and 7.1x its FY12E EBITDA. On a price to book value basis it is trading at 1.8x its FY11E P/BV and1.5x its FY12E P/BV. We value the stock at 13x its FY12E EPS with a target price of 334. We are initiating coverage on the stock with a STRONG BUY rating.

Current Price Rs 252

Target Price Rs 334

Potential upside 32.5%

Time Frame 12 months

STRONG BUY

Exhibit 1: Key Financials (Rs crore)

Year to March 31 FY08 FY09E FY10E FY11E FY12E

Net Profit (Rs crore) 46.4 85.6 165.6 227.0 274.9

Shares in issue (crore) 10.8 10.9 10.9 10.9 10.9

EPS (Rs) 4.3 7.6 15.1 20.7 25.1

Growth (%) -41.7 78.0 98.4 37.1 21.1

P/E (x) 58.8 33.0 16.7 12.2 10.0

Price/Book (x) 2.38 2.29 2.05 1.79 1.54

EV/EBITDA (x) 47.4 15.1 10.6 8.3 7.1

EBITDA Margin (%) 10.2 25.3 27.5 28.1 28.7

Net Profit Margin (%) 7.1 10.3 15.7 17.7 19.5

RoNW (%) 4.1 7.1 12.3 14.7 15.3

RoCE (%) 0.9 1.5 8.5 11.6 14.3


1 8 | P a g e

Background McLeod Russel India Ltd (MRIL), the tea company of the BM Khaitan group, was originally incorporated as Eveready Co India Pvt Ltd on May 5 1998. The company is one of the largest tea plantation companies, accounting for 8% of India’s production and 3.75% of global production. MRIL owns more than 59 high quality tea estates spread across 35,971.3 hectares, primarily in Assam and some in the Dooars region of West Bengal. In 2004, the company was demerged from Eveready Industries to focus on its core tea business. Ever since then the company has grown via the inorganic route by acquiring Borelli Tea holdings in 2005, which gave it access to large high quality estates of Williamson Tea Assam (WTAL). In 2006 and 2007, MRIL acquired two more quality tea companies, namely, the Doom Dooma Tea Co and the Moran Tea Co India Ltd. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US $7 million) and Olyana Holdings LLC, US (US $2.75 million), respectively, through its UK based subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Co and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. The bulk tea produced by the company is sold via auctions and direct sales in India. MRIL also exports about one-third of its production to UK, Middle East, CIS, etc. Exhibit 2: MRIL’s revenue mix (FY09)


McLeod Russel (Rs 829 crore)

Exports (39%) Domestic (61%)

Private Sales (9%) Depot Sales (16%) Auction (40%)

Shareholding pattern (Q2FY10)

Shareholders % holding

Promoter 45.4

Institution 30.9

Individual 16.1

Other investor 7.7 Promoter & Institutional holding trend (%)

45.6 45.6 45.36 45.4

26.9 27.9630.9

34.9

0.05.0

10.015.020.025.030.035.040.045.050.0

Q3FY09 Q4FY09 Q1FY10 Q2FY10

Promoter Institution

1 9 | P a g e

Investment Rationale Volume growth, high price realisation to boost sales MRIL is the largest bulk tea producer in India with majority of its tea estates located in Assam, which is known for its high quality tea. Buoyed by volume growth through acquisitions of five tea estates during the 2005-09 period, MRIL’s revenues have grown at a CAGR of 22.4% from Rs 302.9 crore in FY06 to Rs 828.9 crore in FY09. The company reported a 59.5% growth in sales in FY06 post the merger of Williamson Tea Assam Ltd. These acquisitions have resulted in a rise in consolidated volumes from 40 million kg in FY05 to 75 million kg in FY09. This expansion via the inorganic route coupled with a surge in tea prices on account of a severe supply crunch in major tea exporting countries (Kenya and Sri Lanka) would enable the company to witness a significant rise in average realisations to Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E, respectively. Tea prices are expected to remain firm on the back of a lengthy gestation lag of a tea plant (five years) and the lack of any new area additions. Hence, we expect MRIL to register a CAGR of 19.4% in sales from FY09-FY12E led by 6.9% volume growth and 11.8% realisation growth. Moreover, we believe that any further acquisitions undertaken in the future would enhance production levels and spur revenue growth, going forward. Exhibit 3: Sales growth from FY05-F12E

320.2 510.8 605.5 828.9 1064.0 1307.0 1411.0654.2

6.0

18.5

8.0

26.7 28.422.8

8.0

59.5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E100

300

500

700

900

1100

1300

1500

Sales (Rs Crore) Sales growth % (Y-o-Y)

Merger of Willimson

t

Acquired Doom Dooma

Acquired Moren Tea

Acquired Phu BenTea

Acquired Olyana Holding

Possible Acquisition


Exhibit 4: Volumes and realisations of tea

56

1114

1427 27

33 35

51 534861565335

5

60.0

80.0

100.0

120.0

140.0

160.0

180.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Real

isat

ions

(Rs

per k

g)

0102030405060708090100

Prod

uctio

n (in

mill

ion

kgs)

Volume (Domestic) Volume (Exports)

Realisations (Domestic) Realisations (Exports)


2 0 | P a g e

Strategic expansion via the inorganic route MRIL has witnessed consistent volume growth through various acquisitions of tea estates over 2005-2009. The company currently operates over 59 tea estates from 30 tea estates in 2004, thereby doubling its production capacity from 40 million kg per annum in FY05 to 75 million kg per annum in FY09. The company acquired Doom Dooma and Moran Tea Co in 2006 and 2007 with an annual production capacity of 6 million kg and 4 million kg, respectively. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US$7 million) and Olyana Holdings LLC, US (US$2.75 million), respectively, through its UK-based subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Company and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. Given the company’s aggressive acquisition plans, we expect this trend to continue, thereby driving inorganic growth, going forward. Exhibit 5: Acquisitions undertaken by MRIL

Companies YearProduction capacity (in

million kg)Cost of Acquisition

(Rs crore)Acquisition price (Rs crore

per million kg)

Williamson Tea Assam Ltd 2005 22.0 146.0 6.6

Doom Dooma Tea Company 2006 6.0 69.0 11.5

Moran Tea Company 2007 4.3 57.3 13.3

Phu Ben Tea Company 2008 4.5 34.3 7.6

Olyana Holding LLC 2009 1.7 13.5 7.9

Total 38.5 320.1 8.3


High yields vis-à-vis the industry through re-plantation initiatives Given the lack of any new area under tea cultivation in Assam and West Bengal, re-plantation is the only way to enhance production and improve yields of the existing tea bushes. Subsequently, the company has started re-planting 2% of its tea bushes every year since 1994. This means that 32% of the company’s total area under tea fetched higher yields and production increased by 0.5% every year. This has resulted in an overall yield of 2.19 tonnes per hectare, which is significantly higher than the industry average of 1.7 tonnes per hectare. The company spends around Rs 20.0 crore of capital expenditure on re-plantation every year, which will translate to higher volumes going forward. Exhibit 6: Productivity of MRIL vis-à-vis industry (tonnes per hectare)

1.59

2.082.19 2.19

1.73 1.71 1.70 1.73

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

FY06 FY07 FY08 FY09

McLeod Industry


2 1 | P a g e

Highest EBITDA margin in industry MRIL enjoys the highest EBITDA margin in the industry as the company owns most of its tea estates in high quality yielding areas in Assam. In light of the fixed cost structure of tea, the company’s higher plucking average per worker and its focus on exports, we believe the rise in tea prices would lead to high EBITDA margins. Exhibit 7: MRIL’s EBITDA margins vis-à-vis industry

4.9

10.2

25.327.5 28.1 28.7

8.4 7.5

13.1

8.0 8.69.6

6.913.2 13.913.8

11.5

6.65.0

0.2-0.4

-3.00.03.06.09.0

12.015.018.021.024.027.030.033.0

FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Mcleod Russel Harrison Malayalam Jayshree tea


Fixed cost structure to enhance EBITDA margins The company’s cost structure constitutes employee costs, power costs, raw material (bought leaf), selling costs and other manufacturing costs. With a significant portion of the company’s costs being fixed in nature, we expect any significant rise in tea prices to directly reflect in EBITDA margin expansion. Moreover, since the company commands a higher plucking productivity per plucker (25 per kg) as compared with the industry average of Rs 21 per kg, we expect the company’s margins to further benefit. Exhibit 8: A break up of realisations and EBITDA margins

110.5

4.2 11.3 8.927.8

30.1 44.8 44.5

78.475.9 75.1 107.2106.786.8

25.327.5 28.1 28.7

10.24.9 13.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY06 FY07 FY08 FY09 FY10E FY11E FY12E0.0

20.

40.

60.

80.

100

120

140

160

180

Total cost (Rs per kg) EBITDA (Rs per kg) EBITDA margins (%)


The fixed cost structure of tea along with rising tea prices will enable MRIL witness an improvement in margins.

MRIL enjoys the highest margins vis-à-vis the tea industry

2 2 | P a g e

Exhibit 9: Fixed cost structure of the company (Rs crore)


Average realization of Tea per kg 80.0 86.2 87.2 111.0 136.8 152.0 155.1

Other operating income 0.1 0.2 0.2 3.6 1.2 0.0 0.0

Raw material 4.5 4.3 5.4 5.2 5.8 12.5 11.1

Employee Cost 36.2 35.9 39.3 43.2 49.4 49.0 52.0

Power Cost 12.5 12.2 11.3 11.9 18.1 16.4 17.1

Other Manufacturing cost 6.5 6.5 6.4 7.8 17.4 9.5 9.9

Selling & Admin cost 16.2 16.2 16.0 18.6 16.0 19.7 20.5

Total Cost 75.9 75.1 78.4 86.8 106.7 107.2 110.5

EBITDA per kg 4.2 11.3 8.9 27.8 30.1 44.8 44.5


Premium quality tea estates to command higher realisations MRIL is the largest bulk tea producer in the country, accounting for 8% of tea production in India. Since a significant portion of the company’s tea estates are located in Assam and West Bengal, which are known for their high quality tea, the company is able to produce premium quality tea from these estates at a yield of 2200 kg/ha. This is significantly higher than the industry average of 1700 kg/ha and in turn, enables the company to fetch realisations that are almost 30% higher than that of the industry thereby, enabling it to improve margins. Exhibit 10: MRIL’s area under tea cultivation (hectares) Location FY07 FY08 FY09 FY10E FY11E FY12E

Bishnauth 3601.1 3742.5 3742.5 3742.5 3742.5 3742.5

Dhunseri 1260.0 1268.2 1268.2 1268.2 1268.2 1268.2

Doom Dooma 5716.9 5670.7 5670.7 5670.7 5670.7 5670.7

East Boroi 3805.2 3783.6 3783.6 3783.6 3783.6 3783.6

Jorhat 891.5 894.7 894.7 894.7 894.7 894.7

Mangaldai 2970.6 2990.0 2990.0 2990.0 2990.0 2990.0

Margherita 3478.6 3491.5 3491.5 3491.5 3491.5 3491.5

Moran 1148.5 3232.2 3232.2 3232.2 3232.2 3232.2

Thakurbari 3365.5 3211.6 3211.6 3211.6 3211.6 3211.6

Tingri 2134.4 2135.7 2135.7 2135.7 2135.7 2135.7

Dooars 3580.8 3550.7 3550.7 3550.7 3550.7 3550.7

Vietnam 0.0 0.0 2000.0 3000.0 5000.0 5000.0

Africa 0.0 0.0 0.0 1700.0 1700.0 1700.0

Total Area 31953.1 33971.3 35971.3 38671.3 38971.3 38971.3


Increasing Orthodox tea production to boost export realisation India exports tea primarily to Russia, Middle East and Iran, which mainly consume orthodox tea. Orthodox tea fetches higher realisations (almost Rs 15-20 per kg higher) than CTC tea. With the rising demand for orthodox tea, the company is increasing its capacity from 3.5 million kg in FY08 to 10 million kg FY10 onwards. We believe the company’s increased focus on orthodox tea would result in an improvement in EBITDA margins, going forward.

2 3 | P a g e

Rising exports to enhance margin A production shortfall in key tea producing countries like Kenya and Sri Lanka led by prolonged dry spells has led to a drastic decline in tea production by 12.1% to 209.5 million kg and 16.8% YoY, to 208.1 million kgs respectively, in these countries till September 2009. This decline, coupled with an increase in international demand, has lead to a surge in global tea prices. The company mainly exports to UK, Germany, Ireland, Japan, Middle East, US and Pakistan. Given the current upswing in global prices, we expect the company to export around 34.6 million kg thereby, registering a noteworthy rise in EBITDA margins. Exhibit 11: MRIL’s exports (Rs crore)

110.7 146.6 145.2

314.8378.8

562.1 615.5

51.5

13.1

17.419.9 19.0

35.634.0

38.0 38.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Exports (Rs crore) % to Sales


We expect MRIL to increase their proportion of exports given uptrend in tea prices.

2 4 | P a g e

Financials Revenues to steadily advance Sales in FY09 grew by 26.7% to Rs 828.9 crore from Rs 654.2 crore in FY08. This was on the back of higher realisations which increased from Rs 87.2 per kg to Rs 111 per kg on the back of soaring tea prices. Going forward, we expect net sales to grow at a CAGR of 19.4% over FY09-12E from Rs 654.2 crore in FY09 to Rs 1411.0 crore in FY12E. The company which has added capacities via synergistic inorganic acquisitions including the Phu Ben Tea Company in Vietnam (4.5 million kg) and Olyana Holdings in Africa (1.7 million kg) is likely to benefit from rising volumes and higher tea prices as tea production is likely to increase only after 2011. Exhibit 12: Sales growth (Rs crore)

510.8605.5 654.2

828.9

1064.0

1307.01411.0

200

400

600

800

1000

1200

1400

1600



High tea realisations to boost EBITDA margins The EBITDA margin improved from 10.2% in FY08 to 25.3% in FY09 mainly on account of high tea price realisations and the fixed cost structure of tea .Going forward, we expect the EBITDA margin to improve to 28.1% in FY11E and 28.7% in FY12E. This would be on account of rising tea prices and higher contributions from exports. Moreover, the increase in capacity of Orthodox tea (which commands a higher price vis-à-vis CTC tea) would also aid in improving margins. Exhibit 13: EBITDA margins (%)

4.9

13.110.2

25.327.5 28.1 28.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0



We expect MRIL to register 19.4% sales CAGR from FY09-FY12E.

2 5 | P a g e

Bottomline to accelerate at a CAGR of 47.5% The net profit has grown by 84.5% CAGR from Rs 46.4 crore in FY08 to Rs 85.6 crore in FY09 on the back of higher EBITDA margins led by high tea price realisations and higher contributions from exports. Further, in light of the tight global supply scenario, the company will gain from rising tea prices which will reflect in rising margins and improved earnings. Subsequently, the bottomline is expected to grow at a CAGR of 47.5% over FY09-FY12E to Rs 274.9 crore in FY12E. Exhibit 14: Net profit growth (Rs crore)

22.1

79.646.4

85.6

165.6

227.0

274.9

10

60

110

160

210

260

310



Comfortably leveraged MRIL’s debt to equity has gone down from 0.6 in 2006 to 0.4 in 2009 despite the five acquisitions undertaken by the company and the depressed tea price scenario during 2005-2008. This reflects the company’s ability to generate comfortable cash flows even in a low commodity cycle. We expect the company to generate Rs 128.9 crore of free cash flows in FY10E which will not only result in lower interest costs but also enable it to fund any further acquisitions going forward. Exhibit 15: Debt to equity ratio

0.56

0.350.40

0.36

0.270.22

0.11

0.00

0.10

0.20

0.30

0.40

0.50

0.60


Debt to Equity

.


Backed by rising margins, we expect net profit to grow at a 47.5% CAGR over FY09-FY12E.

2 6 | P a g e

Valuations Historically, the stock has traded in a price band of 6-21x its one-year forward earnings. At the current market price of Rs 252, MRIL is trading at 12.2x its FY11E EPS of Rs 20.7 and 10.0x its FY12E EPS of Rs 25.1. On an EV/EBITDA basis the stock is trading at 8.3x its FY11E EBITDA and 7.1x its FY12E EBITDA. On a price to book value basis, it is trading at 1.8x its FY11E P/BV and1.5x its FY12E P/BV. With its focus on volume growth via the inorganic route and production through bought leaf, a rise in average realisations led by higher export contributions, will benefit the company which commands the highest margins in the industry. We value the stock at 13x its FY12E EPS with a target price of 334. We are initiating coverage on the stock with a STRONG BUY rating.

Exhibit 16: P/E band

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

16x

21x

6x

11x


EPS sensitivity to tea prices We believe tea prices would remain firm on the back of a significant decline in global tea production. We have assumed the company’s average realisation to be Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E respectively. A bullish scenario Given that the production levels in key tea exporting countries are lower than estimated and tea prices register a 10% rise from our assumed prices, a bullish scenario would result in a rise in EPS to Rs 27.4 in FY11E and Rs 32.5 in FY12E. A bearish scenario On the other hand, higher than estimated production in Kenya and Sri Lanka would result in a 10% decline in tea prices and a bearish scenario would emerge causing the FY11E EPS and FY12E EPS to dip to Rs 14.1 and Rs 17.8 respectively.

Exhibit 17: EPS Sensitivity Analysis Variation in Tea Prices Base case

-10% -5% 0% 5% 10%

FY11E 14.1 17.4 20.7 24.1 27.4

FY12E 17.8 21.4 25.1 28.8 32.5

Bear case Bull Case


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P&L Statement (Rs crore) Key Ratio

Balance Sheet (Rs crore) Key Ratios

Year End March 31 FY08 FY09 FY10E FY11E FY12E

Sales 654.2 828.9 1053.2 1282.1 1411.0

Growth (%) 8.0 26.7 27.1 21.7 10.1

Raw Material Cost 40.6 38.9 45.3 107.8 100.8

Staff Cost 295.3 322.0 384.3 421.4 473.2 Administrative & selling Cost 106.9 124.3 107.1 153.9 169.3

Other Operational Cost 145.9 161.1 293.3 238.5 262.5

Total Expenditure 588.7 646.4 830.0 921.5 1005.8

EBITDA 66.8 209.4 289.4 360.6 405.3

Growth (%) -15.5 213.5 38.2 24.6 12.4

Other Income 46.7 0.4 13.6 20.6 22.7

Depreciation 24.6 32.7 32.0 41.8 41.8

EBIT 88.9 177.1 271.0 339.5 386.2

Interest 36.8 75.9 41.3 41.6 32.0

Profit before tax 52.0 101.2 208.3 276.8 335.2

Growth (%) 94.4 105.9 32.9 21.1

Tax 5.6 15.6 42.7 49.8 60.3

Net Profit 46.4 85.6 165.6 227.0 274.9

Growth (%) -41.7 84.5 93.3 37.1 21.1

% to sales FY08 FY09 FY10E FY11E FY12E

Raw material cost. 6.2 4.7 4.3 8.4 7.1

Staff cost 45.1 38.8 36.5 32.9 33.5

Average cost of debt 8.1 11.9 10.3 12.0 12.0

Effective tax rate 10.8 15.4 20.5 18.0 18.0

Profitability Ratio (%)

EBITDA Margin (%) 10.2 25.3 27.5 28.1 28.7

PAT Margin (%) 7.1 10.3 15.7 17.7 19.5

Adj, PAT Margin 7.1 10.3 15.7 17.7 19.5

Per share data (Rs)

EV / per share 292.4 289.4 280.9 272.3 263.1

Book Value 105.7 109.9 122.7 141.1 163.9

Cash per share 1.8 2.5 4.2 10.1 7.3

EPS 4.3 7.6 15.1 20.7 25.1

Cash EPS 6.6 10.8 18.1 24.6 28.9

DPS 1.2 2.3 2.3 2.3 2.3

Year End March FY08 FY09E FY10E FY11E FY12E

Equity Capital 54.2 54.7 54.7 54.7 54.7

Reserves & Surplus 1090.2 1148.1 1288.1 1489.5 1738.7

Net Worth 1144.4 1202.8 1342.8 1544.2 1793.5

Total Loans 457.0 437.0 362.0 332.0 202.0

Deferred Tax Liability 49.6 49.6 49.6 49.6 49.6

Sources of funds 1651.0 1689.4 1754.4 1925.8 2045.0

Gross Block 1984.8 2014.8 2049.8 2089.8 2059.8

Depreciation 366.0 398.7 430.7 472.5 514.3

Net Block 1618.8 1616.1 1619.1 1617.3 1545.5

Capital WIP 8.2 10.0 20.0 20.0 20.0

Investment 12.3 17.3 27.3 127.3 227.3

Inventories 44.0 55.3 73.1 89.0 156.8

Debtors 28.2 34.5 43.9 53.4 78.4

Cash 19.7 27.5 45.7 110.3 80.0

Loans and Advances 87.3 103.6 146.3 178.1 235.2

Deferred Tax Asset 0.0 0.0 0.0 0.0 0.0

Total Current assets 239.6 289.9 396.8 537.7 707.2

Creditors 145.3 195.7 234.0 284.9 352.8

Other Current Liabilities 0.0 0.0 0.0 0.0 0.0

Total Current Liabilities 227.3 243.9 308.8 376.5 454.9

Net Current Assets 12.2 46.0 88.0 161.2 252.3

Application of funds 1651.5 1689.4 1754.4 1925.8 2045.0

Return ratios (%) FY08 FY09 FY10E FY11E FY12E

RoNW 4.1 7.1 12.3 14.7 15.3

RoCE 0.9 1.5 8.5 11.6 14.3

Financial Health Ratio

Operating CF (Rs cr) 74.4 157.8 257.9 351.7 287.7

FCFF (Rs cr) 52.2 58.3 128.9 220.2 225.3

Cap. Emp (Rs cr.) 1631.1 1662.1 1707.1 1778.5 1797.8

Debt to Equity 0.4 0.4 0.3 0.2 0.1

Debt to Capital Employed 0.3 0.3 0.2 0.2 0.1

Interest Coverage ratio (x) 1.1 3.4 6.2 7.7 11.3

Debt to EBITDA (x) 0.3 0.3 0.2 0.2 0.1

DuPont Ratio Analysis

PAT/PBT 0.89 0.85 0.79 0.82 0.82

PBT/PBIT 3.42 4.00 1.43 1.29 1.18

PBIT/Sales 0.02 0.03 0.14 0.14 0.01

Sales/Assets 0.33 0.41 0.52 0.63 0.69

Assets/Net worth 1.73 1.68 1.53 1.35 1.15

2 8 | P a g e

Cash flow statement (Rs crore) Working capital ratios

FY08 FY09 FY10E FY11E FY12E

Woking cap. / sales 0.6 0.6 0.6 0.6 0.7

Creditors turnover 4.5 4.2 4.5 4.5 4.0

Current ratio 1.1 1.2 1.3 1.4 1.6

Quick ratio 1.0 1.1 1.1 1.1 1.4

Cash to abs. liability 0.1 0.1 0.1 0.3 0.2

WC(excl. cash)/sale 0.6 0.6 0.6 0.6 0.7

Y-o-Y Growth (%) FY08 FY09 FY10E FY11E FY12E

Net Sales 8.0 26.7 27.1 21.7 10.1

EBIDTA -15.5 213.5 38.2 24.6 12.4

Adj Net Profit -41.7 84.5 93.3 37.1 21.1

EPS -41.7 78.0 98.4 37.1 21.1

Cash EPS -32.7 64.9 67.0 36.0 17.8

Net Worth -0.1 5.1 11.6 15.0 16.1

Valuation FY08 FY09 FY10E FY11E FY12E

PE 58.8 33.0 16.7 12.2 10.0

EV/EBITDA 47.4 15.1 10.6 8.3 7.1

EV/Sales 4.8 3.8 2.9 2.3 2.0

Div Yield (%) 0.4 0.8 0.8 0.8 0.8

Price/BV 2.4 2.3 2.1 1.8 1.5



Depreciation 24.6 32.7 32.0 41.8 41.8

Other items 5.6 49.9 41.3 41.6 32.0

Direct taxes paid -3.7 -67.7 -84.0 -91.5 -92.4 Cash Flow before working capital 78.5 116.2 197.6 268.8 316.7

Inc/dec in debtors -3.8 -6.3 -9.3 -9.5 -25.0

Inc/dec in trade receivable 0.0 -25.0 -61.4 -50.9 -107.0

Inc/dec in inventory -0.1 -11.3 -17.9 -15.9 -67.7

Inc/dec in current liability -3.9 16.6 64.9 67.7 78.4 Net cash from operating Activities 70.7 90.1 173.9 260.2 195.3

Purchase of fixed Assets -16.9 -36.8 -55.0 -140.0 -70.0

Purchase/Sale of investment -56.7 0.0 0.0 0.0 0.0

Interest and dividend received 3.1 0.0 0.0 0.0 0.0 Net cash used in investing activity -70.6 -36.8 -55.0 -140.0 -70.0

Borrowings 59.2 -20.0 -75 -30 -130

Dividend paid -56.3 -25.6 -25.6 -25.6 -25.6 Net Cash used from Financing Activity 3.0 -45.6 -100.6 -55.6 -155.6

Forex Differences -0.8 0.0 0.0 0.0 0.0

Net increase/decrease 2.3 7.7 18.3 64.6 -30.3 Op bal cash & cash equivalents 17.0 19.7 27.5 45.7 110.3

Closing cash/ cash equivalent 19.7 27.5 45.7 110.3 80.0

2 9 | P a g e

Analysts’ Name


Sales & EPS trend

9.5 12.0 25.8 28.7 32.8

258.5

354.9 375.3445.5

489.3

100.0

200.0

300.0

400.0

500.0

600.0

FY08 FY09 FY10E FY11E FY12E0.0

10.0

20.0

30.0

40.0

Stock Metrics

Bloomberg Code JTI IN

Reuters Code JYST.BO

Face value (Rs) 10

Promoters Holding 40.01%

Market Cap (Rs cr) Rs 365.4

52 week H/L 366/ 60.6

Sensex 16863



McLeod 21.2 27.8 149.2 205.6

Jayshree 23.1 57.9 137.1 244.8


50100150200250300350400450500

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Absolute Buy

Absolute sell

Target Price


Initiating Coverage

Jayshree Tea (JAYTEA)

Robust prices to enhance growth… Jayshree Tea (JST), the second largest producer of tea in India, would benefit from the synchronous rise in domestic and global tea prices. With a rise in tea realisations and increasing contributions from high quality Darjeeling tea, we expect net profit to grow at a CAGR of 42.1% from FY09-FY12E. We initiate coverage on the stock with a STRONG BUY rating.

• Price realisation led revenue growth JST is the second largest tea producer in India with tea estates located across North and South India. With tea prices expected to remain firm on the back of negligible growth in area under tea, the company’s sales will grow at a CAGR of 11.3% during FY09-FY12E. • Export of high quality Darjeeling tea to enhance margin The company owns six estates in Darjeeling, (which is synonymous for its high quality orthodox tea) and produces 10% of its total production here. With exports of Darjeeling tea having increased from Rs 25.0 crore (15.8% of sales) in 2006 to Rs 65.0 crore (22.8% of sales) in 2009, the company plans to raise production of Darjeeling tea which in turn, would enhance the overall EBITDA margins to 13.8% in FY10E and 13.9% in FY12E respectively. • Scouting for acquisitions to increase volumes Post the acquisition of Jayantika Tea in 2008, (which produces 1.1 million kg of tea per annum) the company has been able to increase its volume from 18.2 million kg in FY08 to 21.5 million kg in FY09. The company is aggressively looking for acquisitions of tea gardens in Kenya and Uganda with an annual capacity of 15-20 million kg. We believe that any further acquisitions would augment the company’s volumes which in turn, would benefit the company in a high tea pricing scenario. Valuations Historically, the stock has been trading at a range of 4-15x its one-year forward earnings. At current market price of Rs 339, JTS is trading at 11.8x its FY11E EPS of Rs 28.7 and 10.3x its FY12E EPS of Rs 32.8. On an EV/EBITDA basis, it is trading at 7.5x its FY11E and 6.4x its FY12E EBITDA. With tea prices set to climb on the back of higher domestic demand and a global supply crunch, we believe JST, being the second largest producer of tea in India is well placed to benefit from the rise in tea prices and the concurrent rise in margins. We value the stock at 12.5x its FY12E EPS with a target price of 410. We initiate coverage on the stock with a STRONG BUY rating.

Current Price Rs 339

Target Price Rs 410



STRONG BUY

Exhibit 1: Key Financials (Rs crore)

Year to March 31 FY08 FY09E FY10E FY11E FY12E



EPS (Rs) 9.5 12.0 25.8 28.7 32.8

Growth (%) 76.4 26.4 115.5 11.4 14.2

P/E (x) 35.9 28.4 13.2 11.8 10.3

Price/Book (x) 2.26 2.22 2.07 1.8 1.6

EV/EBIDTA (x) 37.7 21.9 11.3 7.5 6.4

EBITDA Margin (%) 5.0 6.6 11.5 13.8 13.9

Net Profit Margin (%) 3.9 3.6 7.7 7.2 7.5

RoNW (%) 6.5 7.9 16.6 16.5 16.8

RoCE (%) 0.8 2.0 8.1 7.3 11.1 Source: Company, ICICIdirect.com Research

3 0 | P a g e

Background Jay Shree Tea & Industries Ltd (JST) is a diversified company that is involved in the production of tea, chemicals & fertilisers, tea warehousing and other investment activities. Tea being the core business of the company contributes 80% of the total revenue followed by chemicals and fertilisers that account for 32.84%. JST operates over 21 tea estates with the total area under tea cultivation being 9168 hectares. This includes 2064 hectares in Darjeeling. The company produced 21.5 million kg of tea in 2009 which includes 1.28 million kg of Darjeeling tea. Apart from tea, JST manufactures superphosphate and sulphuric acid at its two plants at Khardah (West Bengal) and one plant in Pataudi (Haryana) with a total installed capacity of 2,25,721 tonnes of super phosphate and 95,710 tonnes of sulphuric acid.

Exhibit 2: JST revenue mix (FY09)


Shareholding pattern (Q2FY10) Shareholders % holding

Promoter 40.01 Institutional 12.53 Individual 29.58 Other Investor 17.88 Promoter & Institutional holding trend (%)

41.3 41.9 40.0 40.3

12.7 12.7 12.53 11.62

0

10

20

30

40

50


Promoter Institution

Jayshree Tea (Rs 357.8 crore)

Phosphate (Rs 20.5 crore)

Sulphuric Acid (Rs 52.4 crore)

Tea (Rs 284.9 crore)

Exports (Rs 65 crore)

Domestic (Rs 219.9 crore)

3 1 | P a g e

Investment Rationale Price realisation led revenue growth JST is the second largest tea producer in India with tea estates spanning across North and South India. The company has witnessed a sales CAGR of 17.8% from FY06-09 led by 0.6% volume growth and 17.1% realisation growth. With depleting carry over stocks, a persistent global demand supply mismatch and the lack of any new area additions, the country has witnessed flat to negative production of tea. This has led to a surge in tea prices which in turn, has boosted price realisations for JST by 8.2% and 19.6% in FY08 and FY09, respectively. With tea prices expected to remain firm on the back of negligible growth in area additions, we expect the company to register a sales CAGR of 11.3% from FY09-FY12E. In light of rising sulphuric acid prices we believe that the company would witness a sales CAGR of 14.9% in its chemical business. Exhibit 3: Sales (Rs crore) and sales growth (%)

397.318.5 16.1 34.2

52.4 65.675.6

78.5

157.5 181.8 157.0284.9 300.6

359.5

23.4

26.527.6 21.3

20.521.8

21.9

0.0

100.0

200.0

300.0

400.0

500.0

600.0


Sales from tea (Rs crore) Sales from sulphuric acid (Rs crore) Sales from phosphate (Rs crore)

17.8 % CAGR

11.3 % CAGR


Exhibit 4: Tea volumes and realisations

21.1 22.7 18.2 21.5 22.7 23.6 24.7

74.7 79.986.5

104.0

132.6

152.0161.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0


17.0

19.0

21.0

23.0

25.0

27.0

Total Sales (in million kg) Average Realizations(Rs per kg)


With tea contributing around 80% of its revenues, JST is capitalised to gain from high tea prices.

Rising tea prices to trigger a rise in realistaions

3 2 | P a g e

Exports of high quality Darjeeling tea to improve margins The company owns six estates in Darjeeling, which is known for its superlative quality of orthodox tea. Darjeeling tea is mainly exported to Russian and Middle East countries. In 2009, the average realisations of Darjeeling tea were Rs 270 per kg as compared with Rs 103 per kg for black tea. The company’s exports have increased from Rs 25 crore in 2006 to Rs 48.6 crore in FY08 and Rs 65.0 crore in FY09 respectively. With higher realisations accruing from Darjeeling tea, we believe that the company’s efforts aimed at increasing its production would result in higher margins to 13.8% in FY11E and 13.9% in FY12E respectively. Exhibit 5: Exports and export realisation

4.5 5.8 5.8 6.4 6.8 7.22.2

115.0

89.4 83.8

112.8

135.0145.0 150.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0


2.5

3.5

4.5

5.5

6.5

7.5

Exports (in million kg) Realisations (Rs per kg)


Exhibit 6: Tea estates of JST as on 2009

Area (hectare) Yield per hectare Production (million kgsDarjeelingTukvar 436.0 0.6 259.4Risheehat 257.0 0.7 176.0Sungma 281.0 0.6 172.3North Tukvar 187.0 0.7 135.0Singbuli 303.0 0.6 181.8Balasun 600.0 0.6 360.0AssamTowkok 638.0 1.5 973.0Manjushree 616.0 1.9 1169.2Manglam 105.0 1.4 147.3Nahorhabi 684.0 1.7 1186.7Meleng 729.0 1.7 1259.7CacharDewan 726.0 2.5 1796.9Burtoli 686.0 2.2 1502.3Labac 503.0 2.5 1271.1Kalline 463.0 2.3 1064.0Jellalpore 366.0 2.1 752.9Dooars and teraiEastern Dooars 198.0 1.7 329.868AnnamalaiSholayar & kallyar 689.0 3.5 2377.05Total 8467.0 1.8 15114.4 Source: Company, ICICIdirect.com Research

Darjeeling tea, known for its high quality will help enhance margins.

3 3 | P a g e

Scouting for acquisitions to accelerate tea volumes JST has been able to increase its volume from 18.2 million kg in FY08 to 21.5 million kg in FY09 post the acquisition of Jayantika Tea in 2008 and through the production of bought leaf. This acquisition has augmented the company’s capacity by 1.1 million kg. The company is looking for acquisitions of tea gardens in Kenya and Uganda with an annual capacity of 15-20 million kg. With a debt to equity ratio of 0.8, we believe the company is comfortably leveraged to raise funds in order to undertake any acquisitions going forward. With firm tea prices currently prevailing, we believe that any further acquisitions would enable the company to boost volumes and improve margins in a positive pricing scenario. Sufficient investments to fund acquisitions JST’s quoted investment value is Rs 55.7 crore at current market price, which constitutes Rs 52.1 per share. In addition to this, the company has Rs 23.3 crore worth of unquoted investments and Rs 71.9 crore worth of mutual fund investments. These investments will be sufficient for the company to undertake any inorganic growth opportunities going forward. However, we have not included this in our valuation. Exhibit 7: Investment Value

No of shares Share price Value (Rs crore)Kesoram Industries 1059089 353 37.4Mangalam Cement 820500 146 12.0ECE Industries 198625 182.25 3.6Century Enka 100000 275.9 2.8

Quoted Investment 55.7Shares in Issue 1.07Value per Share 52.1 Source: Company, ICICIdirect.com Research

3 4 | P a g e

Financials Sales momentum to prevail Sales in FY09 grew by 37.31% to Rs 362.0 crore from Rs 264.0 crore in FY08 led by a rise in tea realisations which grew from Rs 86.5 per kg in FY08 to Rs 104 per kg in FY09. Buoyed by higher volumes and rising price realisations in tea and sulphuric acid, we expect net sales to grow at a CAGR of 11.3% over the FY09-12E period (from Rs 362 crore in FY09 to Rs 499.0 crore in FY12E). The company is scouting for acquisitions in the African region (predominantly Kenya and Uganda) which are known for their high yields and low costs. Any further acquisitions undertaken would help the company boost volume growth in the future.

Exhibit 8: Revenues (Rs crore)

221.4249.5

264.4

362.1377.7

457.0

499.3

200.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0


17.8% CAGR

11.3% CAGR


EBITDA margins to ascend The EBITDA margin improved from 5% in FY08 to 6.6% in FY09 mainly on account of higher realisations. Given the fixed cost structure of tea, any major spurt in tea prices would be clearly evident in EBITDA margins. A persistent global demand supply disparity, coupled with the lack of any new area additions is likely to keep tea prices firm. Going forward, we expect EBITDA margins to further improve to 13.8% in FY11E and 13.9% in FY12E. This will be on account of higher tea prices and increasing contributions from the exports of high quality Darjeeling tea. Exhibit 9: EBITDA margins (%)

-0.4 0.2

5.06.6

11.5

13.8 13.9

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0



3 5 | P a g e

Net profit to register a 42.1% CAGR growth The net profit has grown by 26.5% to Rs 12.8 crore in FY09 against Rs 10.1 crore in FY08 on the back of higher EBITDA margins and other income which includes a government rebate on fertilisers. Going forward, we expect the bottomline to grow at a CAGR of 42.1% over FY09-12E to Rs 36.6 crore in FY12E mainly backed by sustainable EBITDA margins, other income from export incentives and impending government rebates on fertilisers.

Exhibit 10: Net Profit (Rs crore)

11.7

5.7

10.112.8

28.832.1

36.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0



Return ratios to improve In FY09, JST’s ROCE and RONW increased to 2.0% and 7.9% respectively. We expect their increasing profitability led by remunerative tea prices, to result in a substantial improvement in return ratios going forward. We believe that steady cash flows generated by the company with a concurrent rise in tea price realisations and sustainable volumes, will enable the company to register a ROCE and RONW of 11.1% and 16.8% in FY12E respectively. Exhibit 11: Return Ratios (%)

3.3

-1.10.8

2.0

8.1 7.3

11.1

15.9

3.96.5

7.9

16.6 16.5 16.8

-5.0

0.0

5.0

10.0

15.0

20.0


RoCE(%) RoNW(%)


3 6 | P a g e

Valuations Historically, the stock has been trading at a range of 4-15x its one-year forward earnings. At current market price of Rs 339, JTS is trading at 11.8x its FY11E EPS of Rs 28.7 and 10.3x its FY12E EPS of Rs 32.8. On an EV/EBITDA basis, it is trading at 7.5x its FY11E and 6.4x its FY12E EBITDA. With tea prices set to climb on the back of higher domestic demand and a global supply crunch, we believe JST, being the second largest producer of tea in India is well placed to benefit from the rise in tea prices and the concurrent rise in margins. We value the stock at 12.5x its FY12E EPS with a target price of 410. We initiate coverage on the stock with a STRONG BUY rating.

Exhibit 12: P/E Band

0

50

100

150

200

250

300

350

400

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

15x

11x

7x

4x


Sensitivity to tea prices We believe tea prices would remain firm on the back of a noteworthy decline in global tea supply. We have assumed the company’s average realisation to be Rs 152.0 in FY11E and Rs 161.0 in FY12E respectively. A bullish scenario, Given that the production levels in key tea exporting countries are lower than estimated and tea prices witness a 10% rise from our assumed prices, a bullish scenario would result in a rise in EPS to Rs 47.6 in FY11E and Rs 52.5 in FY12E, respectively. A bearish scenario Conversely, higher than estimated production in Kenya and Sri Lanka would result in a 10% decline in tea prices and a bearish scenario would cause the FY10E EPS and FY12E EPS to decrease to Rs 9.8 in FY11E and Rs 13.0 in FY12E, respectively. Exhibit 13: EPS Sensitivity to Tea prices Variation in Tea Prices Base case

-10% -5% 0% 5% 10%FY11E EPS 9.8 19.2 28.7 38.2 47.6FY12E EPS 13.0 32.8 32.8 42.6 52.5

Bear case Bull Case


3 7 | P a g e

Profit & Loss Account Key Ratios




Staff cost 33.3 27.6 31.6 26.5 26.0


Effective tax rate -1.4 23.4 24.0 24.0 26.0


EBITDA Margin (%) 5.0 6.6 11.5 13.8 13.9

PAT Margin (%) 3.9 3.6 7.7 7.2 7.5

Adj, PAT Margin 3.9 3.6 7.7 7.2 7.5

Per share data (Rs)

EV / per share 453.7 478.7 436.0 415.0 390.1

Book Value 149.9 152.7 163.9 183.9 206.7

Cash per share 23.9 2.7 31.9 35.9 47.3

EPS 9.5 12.0 25.8 28.7 32.8

Cash EPS 16.3 18.3 31.2 33.4 38.2

DPS 2.5 3.1 6.7 7.5 8.5

Year End March 31 FY08 FY09 FY10 FY11E FY12E

Sales 264.4 362.1 377.7 457.0 499.3

Growth (%) 6.0 37.0 4.3 21.0 9.3





EBITDA 12.8 23.3 43.2 61.5 67.8

Growth (%) - 81.6 85.3 42.3 10.3

Other Income 11.9 10.5 13.2 0.0 0.0

Depreciation 7.3 6.8 6.0 5.3 6.0

EBIT 5.6 16.5 37.2 56.2 11.9

Interest 7.5 10.4 12.0 16.1 12.3


Growth (%) 85.5 67.5 130.3 4.5 23.4

Tax -0.1 3.9 9.6 8.0 12.9

Net Profit 10.1 12.8 28.8 32.1 36.6

Growth (%) 76.3 26.5 125.5 11.4 14.2


RoNW 6.5 7.9 16.6 16.5 16.8

RoCE 0.8 2.0 8.1 7.3 11.1


Operating CF (Rs cr) 8.1 21.7 64.9 28.2 44.0

FCFF (Rs cr) -5.9 8.9 44.5 23.2 29.0

Cap. Emp (Rs cr.) 222.9 222.4 218.3 236.6 252.1

Debt to Equity 0.9 0.9 0.8 0.6 0.5



Debt to EBITDA (x) 11.5 6.5 3.3 2.0 1.6


PAT/PBT 1.01 0.77 0.75 0.80 0.74

PBT/PBIT 4.14 2.65 1.45 1.67 1.33

PBIT/Sales 0.01 0.02 0.07 0.05 0.07

Sales/Assets 1.13 1.47 1.49 1.73 1.82

Assets/Net worth 1.47 1.51 1.38 1.28 1.18

Year End March FY08 FY09 FY10E FY11E FY12E

Equity Capital 10.7 10.7 11.2 11.2 11.2


Net Worth 159.9 163.1 183.1 205.5 230.9

Total Loans 148.0 152.0 144.0 125.0 110.0


Minority Interest 0.1 0.0 0.0 0.0 0.0

Sources of funds 312.9 323.9 327.2 330.5 341.0

Gross Block 234.6 245.6 253.6 263.6 273.6

Depreciation 82.5 85.8 91.8 97.1 103.1

Net Block 152.1 159.8 161.8 166.5 170.5

Capital Work in Progress 2.0 2.6 15.0 10.0 15.0

Investment 88.1 98.9 93.9 83.9 73.9

Inventories 37.7 50.9 20.9 24.7 27.2

Debtors 26.0 68.2 15.6 18.6 20.4

Cash 25.5 2.9 35.7 40.1 52.9




Creditors 25.6 69.3 83.4 99.0 108.7



Net Current Assets 70.8 62.5 56.5 70.1 81.6


3 8 | P a g e

Cash Flow Statement (Rs crore) Key Ratios



Depreciation 6.9 6.8 6.0 5.3 6.0

Other items -2.9 29.9 3.2 16.1 12.3

Direct taxes paid 2.9 -19.3 -21.6 -24.2 -25.2

Cash Flow before working capital 18.2 34.2 26.1 37.3 42.6

Inc/dec in debtors -10.9 -45.3 52.5 -2.9 -1.8

Inc/dec in trade receivable -2.4 0.0 -48.9 -15.6 -9.7

Inc/dec in inventory -0.3 -12.6 30.1 -3.9 -2.4

Inc/dec in current liability 3.5 45.4 5.1 13.2 15.3 Net cash from operating Activities 8.1 21.7 64.9 28.2 44.0

Purchase of fixed Assets 7.9 -26.6 -15.4 5.0 -5.0

Purchase/Sale of investment 21.2 -14.0 0.0 0.0 0.0

Interest and dividend received 7.5 4.1 0.0 0.0 0.0 Net cash used in investing activity 15.4 -22.5 -15.4 5.0 -5.0

Borrowings 0.5 -4.7 -8.0 -19.0 -15.0

Dividend paid -11.7 -17.6 -8.8 -9.8 -11.1 Net Cash used from Financing Activity -11.1 -22.3 -16.8 -28.8 -26.1

Net increase/decrease 12.4 -23.1 32.8 4.4 12.8

Op bal cash & cash equivalents 12.6 25.3 2.9 35.7 40.1

Closing cash/ cash equivalent 24.9 2.9 35.7 40.1 52.9

Working capital ratios FY08 FY09 FY10E FY11E FY12E

Woking cap. / sales 0.3 0.2 0.2 0.2 0.2


Current ratio 2.5 1.7 1.6 1.6 1.6

Quick ratio 1.7 1.1 1.4 1.4 1.4


WC(excl. cash)/sale 0.4 0.4 0.3 0.3 0.3


Net Sales 4.8 37.3 5.7 18.7 9.8

EBIDTA 2817.7 81.6 85.3 42.3 10.3

Adj Net Profit 76.3 26.5 125.5 11.4 14.2

EPS 76.4 26.4 115.5 11.4 14.2

Cash EPS 179.9 12.6 70.0 7.2 14.2

Net Worth 6.7 2.0 12.3 12.2 12.4


PE 35.9 28.4 13.2 11.8 10.3

EV/EBITDA 37.7 21.9 11.3 7.5 6.4

EV/Sales 1.9 1.4 1.3 1.0 0.9

Div Yield (%) 0.7 0.9 2.0 2.2 2.5

Price/BV 2.3 2.2 2.1 1.8 1.6

3 9 | P a g e

Analysts’ Name


Sales & EPS trend

195.4 287.3 309.8 353.1 384.4

4.3 3.5

6.5

10.2

13.6

0.0

5.0

10.0

15.0

FY08 FY09 FY10E FY11E FY12E0.0100.0200.0300.0

400.0500.0

Net Sales EPS (Rs.)

Stock Metrics

Bloomberg Code HRM IN

Reuters Code HRMA.BO

Face value (Rs) Rs 1

Promoters Holding 50.31%

Market Cap (Rs cr) 208.41

52 week H/L 123 / 30.1

Sensex 16863



McLeod 21.2 27.8 149.2 205.6

Jayshree 23.1 57.9 137.1 244.8


-101030507090

110130150170

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Absolute Buy

Absolute Sell

Target Price


Initiating Coverage

Harrison Malayalam (HARMAL)

High realisations to impel growth… Harrison Malayalam (HML), the largest plantation company in South India, is set to reap the benefits of rising tea and rubber prices fuelled by sound demand supply dynamics. With tea realisations moving northwards and production of tea via bought leaf set to drive volumes, we expect net profit to grow at a CAGR of 57.8 % during FY09-12E to Rs 25.1 crore in FY12E. We initiate coverage on the stock with a BUY rating. • High tea realizations to drive growth With 23,417 hectare of area under plantation, HML is the largest plantationcompany in South India. The rise in tea prices led by a global supply shortfallalong with consistent efforts undertaken by the company to increase productionthrough bought leaf and re-plantation initiatives, we expect tea realisations toincrease by 29.8% to Rs 96.7 per kg in FY10E from Rs 74.6 per kg in FY09. • Rising crude prices to trigger a spurt in rubber prices A global shortfall in rubber production on the back of adverse weather conditions has led to a spurt in rubber prices above Rs 140 per kg from the lows of Rs 65 per kg in December 2008. With crude prices currently prevailing above $70 a barrel, we expect synthetic rubber prices to remain firm, which in turn would enhance realisations. • Forward integration to expand reach HML is focusing more on processing, packaging and marketing of its products. With the introduction of single estate brands, across Maharashtra, Goa, and Orrisa the company is aiming to gain a pan India identity going forward. This renewed focus on high quality branded tea would enable it to drive a 17.8%sales CAGR growth (FY09-FY12E) from the tea segment. Valuation Historically, the stock has traded in a range of 4-28x its one-year forward earnings. At the current market price of Rs 131, HML is trading at 12.9x its FY11E EPS of Rs 10.2 and 9.6x its FY12E EPS of Rs 13.6. On an EV/EBITDA basis the stock is trading at 10.5x its FY11E EBITDA and 7.7x its FY12E EBITDA. On a price to book value basis, the stock is trading at 0.8x its FY11E P/BV and 0.75x FY12E P/BV. The re-plantation initiatives undertaken by the company, coupled with the rise in tea and rubber prices, we believe the company is likely to see a significant rise in realisations and a noteworthy improvement in EBITDA margins over the next two years. We value the stock at 11.0x its FY12E EPS with the target price of 149.. We initiate coverage on the company with a BUY rating.

Current Price Rs. 131

Target Price Rs. 149



BUY

Exhibit 1: Key Financials (Rs crore) Year Ended March 31 FY08 FY09E FY10E FY11E FY12E



EPS (Rs) 4.3 3.5 6.5 10.2 13.6

Growth (%) -46.1 -19.9 87.3 57.0 33.7

P/E (x) 30.3 37.8 20.2 12.9 9.6

Price/Book (x) 0.89 0.87 0.84 0.81 0.77

EV/EBIDTA (x) 22.5 14.2 13.4 10.5 7.7

EBITDA Margin (%) 6.9 7.5 8.0 8.6 10.2

Net Profit Margin (%) 4.1 2.2 3.9 3.8 8.6 RoNW (%) 2.9 2.3 4.2 6.4 8.2

RoCE (%) -0.5 -0.8 0.8 3.4 6.1 Source: Company, ICICIdirect.com Research

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Background Harrisons Malayalam Ltd. (HML) is a South based integrated agricultural company with diversified interests in tea and rubber plantations, aqua and plant tissue culture, engineering, clearing and shipping and a wide variety of spices. Tea and rubber contribute 90% of the total revenue. HML has 23,417 hectare cultivation, of which 6,030 hectares is used for tea plantation, 7,366 hectares for rubber plantation while the remaining is used for fuel wood and other plantations. HML owns nine tea estates in Kerala and one in Tamil Nadu. The company produced 17.1 million kg of tea and 12.0 million kg of rubber in FY09. Apart from its primary business, HML also produces a variety of other horticultural crops such as Areca nut, Banana, Cardamom, Cocoa, Coffee, Coconut, Pepper, Vanilla, Organic tea and Spices. The company has operations spread over 20 estates along with blending and processing units based in Kerala, Tamil Nadu and Karnataka where the company enjoys a major market share with brands such as Harrison’s Gold and Spencer’s under its product portfolio. Apart from being a dominant player in South India, HML also exports tea and rubber in a number of export markets. Exhibit 2: Revenue mix(FY09)


Harrison Malayalam (Rs 283 crore)

Rubber (Rs 149.6 crore) Tea (Rs 131.7 crore)

Packet (7%) Bulk (22%) Auction (54%) Exports (17%)

Shareholding pattern (Q2FY10)

Shareholders % holding

Promoter 50.4

Institution 0.6

Individual 40.0

Other investor 9.0

Promoter & Institutional holding trend (%)

50.3 50.3 50.3 50.3

34.3 33.9 33.6 33.1

0102030405060


Promoter Individual

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INVESTMENT RATIONALE

Tea and rubber realizations to spur growth HML, the largest plantation company located in the South of India with 23417 hectare of area under plantation has witnessed a 25.3% sale CAGR from FY06-09 led by an 8.2% growth in volumes and a 17.1% rise in blended realisations. Rubber segment The company’s rubber business registered 38.5% sales CAGR during FY06-09 mainly led by 18.4% volume growth and 16.9% realization growth. HML sells a particular grade of rubber called Cenex, which commands a higher price than natural rubber (RSSIV). Although the company is likely to offset the decline in production by purchasing latex sheets, the lack of any new area additions and low yields, will enable the company to register subdued volumes and lower realizations vis-à-vis FY09. This would result in mere 3.3% CAGR revenue growth in the rubber segment from FY09-FY12E. Since rubber prices are directly correlated to crude oil prices, any significant rise in crude oil prices above $ 70 will boost rubber prices and enhance realisations. With crude having recovered from its previous low and unfavorable weather conditions having taken a toll on the supply of rubber, prices are likely to bounce back from their lows in December 2008. Consequently, we expect realisations to improve to Rs 125.0 per kg in FY11E and Rs 132.0 in FY12E. Exhibit 3: Rubber volumes and realizations

7.5 9.1 10.2 12.1 12.1 12.4 12.5

74.7

101.0 102.6

124.1

110.0

125.0132.0

50.0

65.0

80.0

95.0

110.0

125.0

140.0


8.0

9.0

10.0

11.0

12.0

13.0

Sales Volume ('000 tonnes) Realisation (Rs per kg)


Exhibit 4: Own rubber and bought latex production (‘000 tonnes)

6.3 6.47.0

7.6 7.6

1.2

3.3

5.3 5.66.46.0 6.1

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY07 FY08 FY09 FY10E FY11E FY12E

Own Production Bought latex


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Tea segment The tea segment witnessed a CAGR growth of 19.1% during FY06-09 on the back of a 15.1% rise in realisations and 3.6% rise in volumes. With soaring tea prices on the back of a skewed demand supply scenario, we expect the tea segment to witness a 17.8% CAGR sales growth in FY09-FY12E coupled with a 14.5% CAGR growth in realisations. Although depleting yields have resulted in lower production, the loss in production has been offset by production through bought leaf. We believe that higher tea prices led by a persistent global demand supply mismatch and sustainable volumes on the back of increased production through bought leaf would fuel growth in the company’s tea segment going forward. Exhibit 5: Tea Volume and realisations

16 17 16 18 18 19 19

4958 58

75

97 101

112

40.050.060.070.080.090.0

100.0110.0120.0

FY06

FY07

FY08

FY09

FY10

E

FY11

E

FY12

E 131415161718192021

Sales Volume (million kg) Realization(Rs per kg)


Exhibit 6: Own and bought leaf production of tea (million kg)

13.5 13.7 13.2 12.1 12.6 13.1 13.9 14.5

1.0 2.3 3.82.8

4.5 5.36.5 6.5

1.0

4.0

7.0

10.0

13.0

16.0

19.0

22.0


Own Production Bought Leaf


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Replanting and modernization to enhance yields The lack of availability in area under tea and rubber along with the lengthy gestation lags makes it highly difficult to increase the production of these commodities. Moreover, the company’s tea production has declined substantially due to the old age of its tea bushes. In order to increase the yield per hectare, the company has started replanting tea bushes. By undergoing this process, the company is infilling high yielding plants thereby, increasing the bushes to 9000 per hectare as against 6700 per hectare earlier. This entails an investment of Rs 15 crore in three years. As a result of these initiatives, we expect a rise in the productivity of new bushes by more than 50% over the next three years, which in turn would enable yields to rise to 2.3 tonnes per hectare in FY11E and 2.4 in FY12E respectively. This would benefit the company in a rising tea price scenario. Exhibit 7: Tea production vis-à-vis yield

13.7 13.3 12.7 13.1 13.9 14.512.1

2.62.7

2.12.2

2.32.4

2.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0


1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

Acutal production owned ('000 tonnes) Yield (tonnes per hectare)


The company has also undertaken accelerated replanting and factory modernization planning at its Mooply Vally Group of Estates in Trissur district, Kerla with an investment of Rs 37.0 crore. The company would be phasing out old generation clones and poor yielding fields and replacing them with new clones, which include RRII 400 series released by the Rubber Institute of India. Exhibit 8: Rubber production vis-à-vis yield

7.5 8.9 6.0 7.0 7.6 7.66.4

1.0

1.2

0.9

1.6 1.71.7 1.8

5.05.56.06.57.07.58.08.59.09.5


0.8

1.0

1.2

1.4

1.6

1.8

2.0

Acutal production owned ('000 tonnes) Yield (tonnes per hectare)


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The modernization program has been implemented for almost 1600 hectare, which constitutes 35% of the total area under rubber plantation. The yield of rubber plants currently stands at 1.6 tonnes. Since the company engages in re-plantation we believe that an improvement in rubber yields to 1.7 tonnes per hectare in FY11E and 1.8 tonnes per hectare in FY12E is imminent, which in turn would increase production. Rising crude prices to trigger spurt in rubber prices The rise in crude oil prices has led to a simultaneous rise in the prices of synthetic and natural rubber. Despite the rise in imports, prices of natural rubber have remained buoyant throughout 2009 on the back of a shortfall in global production. This has led to a rise in natural rubber prices above Rs 100 per kg from Rs 65 per kg in December 2008. The company which derives more than 50% of its revenues from rubber is likely to benefit from the spurt in rubber prices which would enable the company to improve its margins. Going forward, we believe that the volatility exhibited in the prices of crude oil is likely to keep synthetic rubber prices firm, which in turn would increase the demand for natural rubber. We believe that rising volumes led by the purchase of latex sheets and replanting initiatives undertaken coupled with high rubber prices would result in robust revenue growth and higher margins from this segment. Exhibit 9: Crude and Rubber prices

30.0

50.0

70.0

90.0

110.0

130.0

150.0

3-Se

p-07

26-N

ov-

07

18-F

eb-0

8

12-M

ay-

08

4-Au

g-08

27-O

ct-0

8

19-J

an-0

9

13-A

pr-0

9

6-Ju

l-09

28-S

ep-0

9

020406080100120140160

Rubber Prices (Rs per kg) Crude($ per barrel)


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Forward integration to expand the reach HML is focusing more on processing, packaging and marketing of its products. At present some of its brands like Gold and Surya tea are only confined to southern states like Kerala, Karnataka and Tamil Nadu. With the introduction of single tea estate brands, the company has expanded its reach to Maharashtra, Goa, and Orrisa and would gain a pan India presence going forward. We believe the company’s increased focus on high quality branded tea would enable it to expand margins and revenues from the tea segment. Exhibit 10: Revenues from the tea segment (Rs crore)

98.5 90.6131.7

176.8 193.3 215.0

0

50

100

150

200

250


Tea Sales (Rs crore)


Exhibit 11: Brands of HML

Super Preimium Tea

SurianalleSingle estate CTCteas with a

LockhartSingle estate premium

Touramulla certified .

Premium Tea

Harrison Golden Leaf Teas.Packing in

Harrison Gold dust Teas.Packing in

Popular Teas

Tea 20 brewing tea.

Surya Tea Strong Dust Tea

Mid Popular Tea

Mountain Mist tea.

Tea Bags

Strong Desi Regular Tea Bags

English Breakfast Regular Tea Bags

Organic Tea Bag Organic Tea Bags

Gift pack bag packets of

Branded Conumer Pack

Surya Tea (Polly pillow pack)


Revenues from tea to grow at a CAGR of 17.8%

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Financials Higher volumes and realizations to drive topline growth Sales in FY09 grew by 46.9% to Rs 287.3 crore from Rs 195.4 crore in FY08. The tea segment and the rubber segment contributed 45.8% and 52.1% to revenues respectively. Whilst tea realizations witnessed a 26.5% growth, rubber realizations witnessed a 21.0% growth respectively. Going forward, we expect net sales to grow at a CAGR of 10.2% over FY09-12E from Rs 287.3 crore in FY09 to Rs 384.4 crore in FY12E. In light of HML’s consistent efforts to engage in re-plantation of area under tea, we expect the company to register higher volumes going forward. With the decline in the production of tea, and rubber aggravating a disparity in the demand supply dynamics and a concomitant rise in prices, the company is likely to benefit from higher tea and rubber price realizations.

Exhibit 12: Revenue (Rs crore)

142.5192.6

287.3 309.8353.1 384.4

195.4

50.0100.0

150.0200.0250.0

300.0350.0

400.0450.0


CAGR of 17.5% over FY08-12E


EBITDA margins to expand The EBITDA margin improved from 6.9% in FY08 to 7.5% in FY09 mainly on account of a 26.5% increase in tea realizations and a 21.0% increase in rubber realizations respectively. Going forward, we expect the EBITDA margins to improve to 8.6% in FY11E and 10.2% in FY12E. This would be on account of rising tea prices and higher contributions from the exports of tea. We believe that high crude oil prices would also result in firm natural rubber prices, which in turn would improve margins from the rubber business.

Exhibit 13: EBITDA Margins (%)

8.4

6.97.5

8.08.6

10.2

13.2

5.06.07.08.09.0

10.011.012.013.014.0



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Net profit to gain momentum The net profit has declined by 19.9% from Rs 8.0 crore in FY08 to Rs 6.4 crore in FY09 on account of a decline in other income from Rs 8.9 crore in FY08 to Rs 6.4 crore in FY09 and a rise in the depreciation and taxation provisioning. Going forward, we expect the bottomline to grow at a CAGR of 57.8% over FY98-12E from Rs 6.4 crore in FY09 to Rs 25.1 crore in FY12E led by higher prices of tea and natural rubber and the resultant expansion in margins.

Exhibit 14: Net Profit (Rs crore)

14.8

8.06.4

12.0

18.8

25.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0



Room for leverage With a debt to equity ratio of 0.33 in FY09, the company is moderately leveraged and can comfortably undertake further acquisitions from internal accruals. Additionally, Steady cash flows on the back of high tea prices would strengthen the balance sheet. Exhibit 15: Debt to equity ratio

0.37

0.28

0.30

0.330.34

0.29

0.24

0.200.220.240.260.280.300.320.340.360.38



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Valuations Historically, the stock has traded in a range of 4-28x its one-year forward earnings. At the current market price of Rs 131, HML is trading at 12.9x its FY11E EPS of Rs 10.2 and 9.6x its FY12E EPS of Rs 13.6. On an EV/EBITDA basis the stock is trading at 10.5x its FY11E EBITDA and 7.7x its FY12E EBITDA. On a price to book value basis, the stock is trading at 0.8x its FY11E P/BV and 0.75x FY12E P/BV. The re-plantation initiatives undertaken by the company, coupled with the rise in tea and rubber prices, we believe the company is likely to see a significant rise in realisations and a noteworthy improvement in EBITDA margins over the next two years. We value the stock at 11.0x its FY12E EPS with the target price of 149.. We initiate coverage on the company with a BUY rating.

Exhibit 16: P/E band

10.0

60.0

110.0

160.0

210.0

260.0

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

28x

20x

12x

6x


Sensitivity to tea prices We believe tea prices would remain firm on the back of a significant decline in global tea production. We have assumed the company’s average realisation to be Rs 100.7 per kg in FY11E and Rs 112.0 per kg in FY12E. A bullish scenario, Given that the production levels in key tea exporting countries are lower than estimated and tea prices register a 10% rise from our assumed prices, a bullish scenario would result in a rise in EPS to Rs 16.1 in FY11E and Rs 20.1in FY12E respectively. A bearish scenario Alternatively, higher than estimated production in Kenya and Sri Lanka would result in a 10% decline in tea prices and a bearish scenario would cause the FY11E EPS and FY12E EPS to decline to Rs 4.2 and Rs 7.1 respectively.

Exhibit 17: Sensitivity to EPS Variation in Tea Prices Base case

-10% -5% 0% 5% 10%FY11E EPS 4.2 7.2 10.2 13.2 16.1FY112E EPS 7.1 10.4 13.6 16.9 20.1

Bear case Bull Case


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P&L Statement (Rs crore) Key Ratios


Year End March 31 FY08 FY09 FY10 FY11E FY12E

Sales 195.4 287.3 309.8 353.1 384.4

Growth (%) 1.5 47.0 7.8 14.0 8.9





EBITDA 13.5 21.6 24.7 30.4 39.0

Growth (%) 59.5 59.5 14.3 23.4 28.2

Other Income 8.9 1.5 4.8 8.4 8.5

Depreciation 3.01 3.42 3.59 3.68 3.77

EBIT 10.5 18.2 21.1 26.7 35.2

Interest 10.5 11.3 11.3 11.0 10.7


Growth (%) -5.3 73.3 66.0 37.2

Tax 0.9 2.0 2.6 5.3 7.9

Net Profit 8.0 6.4 12.0 18.8 25.1

Growth (%) -19.9 87.3 57.0 33.7



Staff cost 35.8 32.9 38.3 36.5 33.6


Effective tax rate 9.9 23.7 25.0 22.0 24.0


EBITDA Margin (%) 6.9 7.5 8.0 8.6 10.2

PAT Margin (%) 4.1 2.2 3.9 5.3 6.5

Adj, PAT Margin 4.1 2.2 3.9 5.3 6.5

Per share data (Rs)

EV / per share 165.2 166.2 179.3 172.4 162.6

Book Value 147.6 151.1 155.3 161.9 170.8

Cash per share 10.8 14.7 4.3 5.7 10.2

EPS 4.3 3.5 6.5 10.2 13.6

Cash EPS 6.0 5.3 8.4 12.2 15.7

DPS 1.5 1.2 2.3 3.6 4.8


Equity Capital 18.5 18.5 18.5 18.5 18.5


Net Worth 272.4 278.8 286.6 298.8 315.2

Total Loans 83.0 92.0 97.0 87.0 77.0


Sources of funds 355.5 370.9 383.6 385.9 392.2

Gross Block 249.7 259.7 266.7 271.7 276.7

Depreciation 68.8 72.2 75.8 79.5 83.2

Net Block 181.0 187.6 191.0 192.3 193.5

Capital Work in Progress 0.8 5.0 5.0 5.0 5.0

Investment 189.6 180.0 185.0 179.0 176.0

Inventories 10.8 14.4 24.1 27.5 29.9

Debtors 14.9 19.9 25.8 34.3 37.4

Cash 20.0 27.1 7.9 10.6 18.8




Creditors 53.8 79.8 77.4 88.3 96.1



Net Current Assets -15.9 -1.7 2.7 9.6 17.7



RoNW 2.9 2.3 4.2 6.4 8.2

RoCE -0.5 -0.8 0.8 3.4 6.1


Operating CF (Rs cr) 6.3 2.7 -8.0 18.3 29.0

FCFF (Rs cr) 4.4 -11.6 -15.0 13.3 24.0

Cap. Emp (Rs cr.) 165.1 185.9 193.6 201.9 211.2

Debt to Equity 0.3 0.3 0.3 0.3 0.2



Debt to EBITDA (x) 6.1 4.2 3.7 2.7 1.8


PAT/PBT 0.9 0.8 0.8 0.8 0.8

PBT/PBIT -5.3 -2.9 4.5 1.8 1.4

PBIT/Sales 0.0 0.0 0.0 0.0 0.1

Sales/Assets 0.8 1.1 1.2 1.3 1.4

Assets/Net worth 0.9 0.9 0.9 0.9 0.9

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Cash flow statement (Rs crore) Key Ratios



Depreciation 3.0 3.4 3.6 3.7 3.8

Other items 10.3 11.3 11.3 11.0 10.7

Direct taxes paid -14.9 -7.1 -23.6 -4.2 0.1

Cash Flow before working capital -1.0 -13.3 -13.9 -16.3 -18.6

Inc/dec in debtors 6.3 2.7 -8.0 18.3 29.0

Inc/dec in trade receivable -0.4 -14.2 -7.0 -5.0 -5.0

Inc/dec in inventory 5.0 9.6 -5.0 6.0 3.0

Inc/dec in current liability 1.3 0.0 0.0 0.0 0.0 Net cash from operating Activities 6.0 -4.6 -12.0 1.0 -2.0

Purchase of fixed Assets 7.4 9.0 5.0 -10.0 -10.0

Purchase/Sale of investment -14.1 -18.2 -4.2 -6.6 -8.8

Interest and dividend received -10.8 9.0 0.8 -16.6 -18.8 Net cash used in investing activity 1.4 7.1 -19.2 2.7 8.2

Borrowings 3.1 20.0 27.1 7.9 10.6

Dividend paid 4.5 27.1 7.9 10.6 18.8 Net Cash used from Financing Activity 8.9 8.4 14.5 24.1 33.1

Net increase/decrease 3.0 3.4 3.6 3.7 3.8

Op bal cash & cash equivalents 10.3 11.3 11.3 11.0 10.7

Closing cash/ cash equivalent -14.9 -7.1 -23.6 -4.2 0.1

Working capital ratios FY08 FY09 FY10E FY11E FY12E

Working cap. / sales -0.08 -0.01 0.01 0.03 0.05


Current ratio 0.8 1.0 1.0 1.1 1.2

Quick ratio 0.6 0.8 0.7 0.8 0.9


WC(excl. cash)/sale 0.2 0.2 0.2 0.2 0.2


Net Sales 1.5 47.0 7.8 14.0 8.9

EBIDTA -46.8 59.5 14.3 23.4 28.2

Adj Net Profit -46.1 -19.9 87.3 57.0 33.7

EPS -46.1 -19.9 87.3 57.0 33.7

Cash EPS -38.2 -10.7 58.6 44.5 28.6

Net Worth -1.9 2.3 2.8 4.3 5.5


PE 30.3 37.8 20.2 12.9 9.6

EV/EBITDA 22.5 14.2 13.4 10.5 7.7

EV/Sales 1.6 1.1 1.1 0.9 0.8

Div Yield (%) 2.1 1.7 3.2 5.0 6.7

Price/BV 0.9 0.9 0.8 0.8 0.8

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Annexure Black tea Black tea is a variety of tea that is more oxidized than the oolong, green and white varieties. All four varieties are made from leaves of Camellia sinensis. Black tea is generally stronger in flavor and contains more caffeine than the less oxidized teas. Black teas are processed in either of two ways, namely crush, tear, curl or orthodox. Crush Tear and Curl (CTC) processing Crush, Tear, and Curl, also known as Cut, Twist, Curl, is a method of processing tea. The process follows that of orthodox tea manufacture, but instead of the leaves being rolled, they are passed through a series of cylindrical rollers with hundreds of small sharp "teeth" that Crush, Tear, and Curl. Orthodox processing This is done either by machines or by hand. Hand processing is used for high quality teas. While the methods employed in orthodox processing differ by tea type, this style of processing results in the high quality loose tea sought by many connoisseurs. Assam tea This type of tea is manufactured specifically from the plant Camellia sinensis var assamica This tea, most of which is grown at or near sea level, is known for its body, briskness, malty flavor, and strong, bright color. Assam teas, or blends containing are often sold as "breakfast" teas. Darjeeling tea Tea from the Darjeeling region in West Bengal, India, when properly brewed it yields a thin-bodied, light-colored liquor with a floral aroma. The flavor also displays a tinge of astringent tannic characteristics, and a musky spiciness often referred to by tea connoisseurs as "muscatel." Bought leaf tea factories They do not possess tea estate operations but produce saleable tea from green leaf purchases. Exhibit 24: Tea production (million kgs) Year India Kenya Sri Lanka1991 720.3 203.6 240.71992 754.2 188.1 178.91993 703.9 211.2 231.91994 753.0 209.4 242.21995 753.9 244.5 246.01996 756.0 257.2 258.41997 780.0 220.7 276.91998 810.0 294.2 280.11999 874.0 248.7 283.82000 826.0 236.3 305.82001 847.0 294.6 295.12002 854.0 287.0 310.02003 838.0 293.7 303.22004 878.0 324.6 308.12005 893.0 328.5 317.22006 928.0 310.6 310.82007 949.2 369.6 305.2


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Change in consumption pattern The international tea consumption is increasing due to health consciousness and also due to partial shift from soft drinks to tea and coffee. The growth is estimated at 1.5 - 2.0% annually. Tea -still the cheapest beverage In spite of all these price increases, tea still remains the cheapest beverage for common man. Assuming tea price of Rs. 300 per kg., one needs 2gms of tea for one cup, which costs 60 paise, sugar costs 20 paise & milk costs Re.1. Thus, total cost of one cup of tea works out to Rs.1.80 only.

Balrampur Chini (BALCHI)

ICICIdirect.com | Equity Research

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 [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai – 400 093

[email protected] ANALYST CERTIFICATION We /I, Sanjay Manyal MBA (FINANCE) Ritika Shewakramani PGDBM MBA-CM 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.

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