SECTOR: TEA
Mcleod Russel India Ltd
STOCK INFO.
BLOOMBERG
BSE Sensex :16,900
S&P CNX : 5,191
(Consolidated)
Y/E MARCH
MCLR@IN
REUTERS CODE
28 October 2011
Initiating Coverage
(Rs CRORES)
BUY
Rs251
MCLE.BO
FY11A
FY12E
FY13E
We recommend to BUY Mcleod Russel India Ltd with one year
price target of
Rs
320(11xFY12E).
INVESTMENT ARGUMENT:
Total Income (RsCr)
EBITDA (Rs Cr)
PAT (RsCr)
BV/Share (Rs)
EPS (Rs)
EPS growth (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div yld (%)
ROE (%)
1,299
390
249
87
22.39
6
11.2
2.9
7.7
2
28
1,505
460
305
108
27.87
24
9.0
2.3
6.5
4
29
1,552
469
325
127
29.68
6
8.5
2.0
6.4
4
25
KEY FINANCIALS
Shares Outstanding (cr)
Market Cap. (Rs cr)
Market Cap. (US$ m)
Sales CAGR 3 Yrs to FY11 (%)
PAT CAGR 3 Yrs to FY11 (%)
10.9
2,747
549
22
74
STOCK DATA
52-W High/Low Range (Rs)
Major Shareholders (as of March 2010)
Promoter
Domestic Inst & Govt.
Foreign
Public & Others
Average Daily Turnover(6 months)
Volume
Value (RsCr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
295/191
46
7
31
16
305,452
8
-6/2/16
-8/-13/-3
Maximum Buy Price :
Rs
Rs258
World's Largest Producer of Black Tea:
MRIL is the world's
largest producer of black tea (96m kg in FY11), accounting for ~8%
of India's and 2.5% of the world's total black tea production. The area
under its cultivation exceeds 38,000 hectares, spread across India
(Assam and West Bengal), Vietnam, Rwanda and Uganda.
Growing domestic consumption; high entry barriers:
India's tea
consumption has grown at CAGR of 2.5% whereas production has
grown at 1.8% over FY02-11E. Export surplus has continuously declined
since 2002 (-2% CAGR), leading to 9% CAGR in tea prices. Availability
of cultivable land for tea is very limited, which acts as a huge entry
barrier. During YTD 2011, India's total production has increased
marginally and prices have moved up by 10% YoY. Even a little supply
disruption leads to high price increases.
(See exhibits 1 and 2 on
page 2)
High operating leverage:
Tea production has high operating leverage,
which ensures disproportionate profits in case of increase in prices.
MRIL's production cost/kg and operating profits have grown at a
CAGR of 7% and 65%, respectively since 2006, while prices have
increased at a pace of 13%. We expect production cost and prices to
grow 6% and 9%, respectively in FY12.
Payouts likely to increase:
MRIL has used the surge in its net profit
to deleverage itself. It has reduced debt-equity from 54% in FY06 to
17% in FY11, resulting in a 6x improvement in return ratios and 5x
increase in dividends during the period. We expect payouts to increase
further, as the company will become debt-free in FY12.
Upside from treasury stock:
MRIL has 2.7 crore treasury shares
(market value: ~Rs675 crore), held in a trust controlled by the CFO,
which is shown as part of promoter shareholding. We are neither
factoring in any cash from this share sale nor any valuation upside due
to this.
Valuations and View:
MRIL is available at 11x/9x of FY11/FY12E
EPS and at an EV of ~Rs300/kg, which is attractive since the global
benchmark for such assets is ~Rs400/kg. We believe that the downside
to the stock is limited, given the company's low leverage and firm tea
prices.
We recommend Buy, with a 12-month price target of
Rs
320
(11x FY12E EPS).
Rakesh Tarway
(rakesh.tarway@motilaloswal.com); Tel:+912230896679

Mcleod Russel India Ltd
About the company
MRIL has been cultivating tea since 1869 and is a part of the BM Khaitan Group. It demerged from
Eveready in CY04. In CY05, MRIL purchased Borelli Tea Holdings Limited (Borelli) and 17 estates
in Assam, India. MRIL further acquired 100% stake in Phu Ben Tea Company Limited, Vietnam in
CY09 and the Rwenzori Tea Investments Limited, Uganda in CY10 through Borelli. Borelli purchased
60% controlling stake in Gisovu Tea Company Limited, Rwanda during FY11.
CONCERNS
Labor intensive business:
The tea industry is labor intensive - labor constitutes 50% of total
production cost. Disruption in labor activities can lead to an abrupt fall in production.
Volatile tea prices:
Unusual fall in tea prices will lead to lower than expected sales and profits. Tea
prices are a function of demand and supply in the global as well as domestic markets. Tea production
is subject to the vagaries of weather.
Increasing prices of Tea (Exhibit)
India
IN MN KG
PRODUCTION
CONSUMPTION
SURPLUS
PRICE
Rs/KG
MRIL
PRODUCTION
PRICE
Rs/KG
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
838
878
893
946
982
986
981
979
966
985
693
714
735
757
771
786
802
822
843
864
145
164
158
189
211
200
179
157
124
121
56
56
65
58
66
67
87
106
104
118
-
-
-
40
65
70
74
75
77
96
-
-
-
80
80
86
87
111
137
129
Increasing prices of Tea (Chart)
All India Tea Trends in Mn Kg
250
200
100
150
100
50
0
2002 2003 20 04 2005 2006 2007 2008 200 9 2010E 2011E
Expo rt Surplus Mn Kg
Price Rs/Kg (RHS)
140
120
80
60
40
20
0
Exhibit 3: Organisation Structure
28 October 2011
2

Mcleod Russel India Ltd
IVRCL: Financials and Valuation
Mcleod Russel India Ltd - Financials & Valuation
INCOME STATEMENT (Consolidated)
Y/E MARCH
2009A
2010A
(Rs CRORES)
Rs
2011A 2012E
2013E
RATIOS
Y/E MARCH
2009A
2010A 2011A
2012E 2013E
Net Sales
Change(% )
Stock Adjustments
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing Exp.
Miscellaneous Expenses
Operating Profit
% of Net Sales
Other Income
Interest
Depreciation
PBT
Tax
Rate(%)
827
27
-5
43
89
322
86
17
183
22
34
83
33
101
16
15
1,106
34
2
89
95
366
95
101
26
332
30
41
36
32
305
71
23
(3)
(1)
232
1,241 1,456
12
-10
114
112
425
129
115
24
333
27
57
39
38
313
64
20
(3)
1
245
17
0
117
123
509
143
127
26
411
28
49
31
43
385
77
20
(3)
-
305
1,500
3
0
121
123
541
145
128
26
416
28
53
13
46
410
82
20
(3)
-
325
8
Growth(%)
311
Cash EPS
5
Book Value (Adj for Reval Res) 57
DPS
2
Payout (incl. Div. Tax.)(%)
30%
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Return Ratios (%)
RoE (Adj for Reval Res)
OPM
NPM
EPS (Rs)
Rs
21
175
18
73
4
22%
22
6
19
87
5
29%
28
30
24
6
24
25
108 127
10
10
40% 40%
Selling and Administration Exp.91
-
-
-
-
-
-
14
22
10
-
-
-
-
-
-
33
30
20
11
13
8
2
3
2
28
27
19
9
10
7
2
2
4
29
28
20
8
10
6
2
2
4
25
28
21
Minorities & Ass. Profit/Loss (2)
Extraordinaries Income/(Expense) (1)
Adjusted PAT
84
CASH FLOW STATEMENT (Consolidated)
Y/E MARCH
2009A
2010A 2011A
(Rs CRORES)
Rs
2012E 2013E
Op Profit Before WC Changes
Working Capital Changes:
Inventories
Debtors
Current Liab & Provi
Total working capital changes
Direct Taxes Paid
Cash from Operations
(Inc)/Dec in FA
Other Miscellaneous Items
Cash from Investments
Equity Issuance/Repayment
Debt Issuance/Repayment
Dividend Paid
Interest Paid
Cash from Financing
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
206
(20)
7
21
8
(12)
203
368
6
(32)
(2)
(28)
(53)
287
372
(17)
(64)
3
(78)
(77)
217
(59)
(0)
(59)
0
(60)
(37)
(21)
53
31
460
1
(46)
62
17
(77)
400
(75)
0
(75)
0
469
(8)
(38)
21
(25)
(82)
362
(80)
0
(80)
0
BALANCE SHEET (Consolidated)
Y/E MARCH
2009A
2010A 2011A
(
Rs
CRORES)
2012E 2013E
Share Capital
Total Reserves (A)
Revaluation Res (out of A)
Net Worth
Loans
SOURCES OF FUNDS
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Curr. Assets
55
55
55
55
55
1,142 1,315 1,462 1,694 1,896
573
568
564
564
564
1,197 1,370 1,516 1,749 1,951
417
402
316
166
66
(52) (197)
(13)
(40)
(65) (237)
0
(56)
(8)
(54)
(118)
19
20
39
0
22
(16)
(42)
14
39
53
1,614 1,772 1,833 1,915 2,017
2,058 2,271 2,285 2,380 2,460
416
17
295
508
17
396
539
20
457
582
-
571
628
-
659
1,642 1,763 1,746 1,799 1,833
(83) (153) (103)
(72) (123)
(31)
68
31
99
(13)
43
99
142
(36) (180) (257) (239)
Inventories
69
80
97
96
104
Debtors
26
27
22
27
30
Cash & Investments
59
88
65
133
176
Loans & Advances
141
201
274
315
350
Liabilities and Provision
287
333
319
382
403
Net Current Assets
8
64
138
189
257
Net Deferred Tax Assets
-53
-72
-72
-72
-72
APPLICATION OF FUNDS 1,614 1,772 1,833 1,915 2,017
28 October 2011
3

Mcleod Russel India Ltd
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Mcleod Russel India Ltd
No
Yes
No
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