Annual Result Analysis - 28th May 2012

The final quarter and annual results announced on 28th May, 2012 for the year is on the expected lines as discussed in this page earlier. We expected the revenue to grow by 10% to 15% in this year compared to last year and it did grow on the same range. Below is the summary of result.

The annual revenue growth is at 12.42% which is what we projected. Our projection was flat net profit which is very close to te actual result. The EPS and net profit both went down by 5% in FY2012 compared to FY2011. On quarterly result, the income came down by 35.6% compared to last quarter while it went up by 14% compared to the same quarter of last year.

The result is certainly disappointing. The major reason for bad 4th quarter performance is because of expenses associated with inventories and stock-in-trade valuation. While it helped the company show a god result in FY2011, it turned the profit into losses for the year FY2012 in 4th quarter.

Initial Analysis - 28 Feb, 2012

Summary of Analysis

McLeod Russel is a big company in tea sector with footprints across the world. Its growth has been impressive from 2007 to 2010. It faced hurdle in 2011 but seems to recover in FY2012. Our analysis is that the company should do well in FY2012 and beyond. Its risk mitigation strategy and its venture into African countries to tap the business potential of tea estates will keep it in good health. McLeod Russel is available at the PE (TTM) of 9.8. The PEG ratio at 0.63 shows good scope for appreciation. We expect the forward PE to hover around 10-14 in the long run. The price of McLeod Russel may touch 300 in a year, essentially rising 30%.

*This site doesn’t give any suggestion on buy and sell. Investors are requested to go by their own judgment.

Stock Summary:

The Firm & Its Business 

• McLeod Russel is the world’s largest tea producer. It is also largest Indian tea exporter with clientele across Europe, Middle East, and North America.
• They have operations in India, Vietnam, Uganda, and Rwanda. The company is on a strong platform with 90,000 people working across the globe and tea estates across many continents.
• The business is dominated by few large players with huge market power and innumerable smaller players. Export business is dominated by few large players and McLeod is one of the biggest players in the segment.

The Sector

McLeod Russel is in beverages sector focusing on tea. It is the largest tea producer in the world.

Tea and Coffee sector is doing well over couple of years and will continue to do so. After all, there is no substitute for tea and coffee. Talking about Indian scenario, the consumption of tea is going up. In fact this has impacted our overall export which is going down because of huge consumption at home.

The humble "cutting chai" should not only freshen up your mind but provide a good return to the investors too.

Financials of last 5 years: 

Commentary on financials: 

• The financial year 2010-2011 saw no growth in revenue and almost flat growth in net profit. The revenue was up by 2% while the net profit was down by 3%.
• The reason is higher cost. Almost all the expenses were up whether it is employee cost, raw material cost, or any other. Every cost item became expensive by 1%-3% which impacted the bottom line.
• This is because of slightly lower production of tea which happened as a result of unfavourable weather and pest attach in few tea estates.
• The EPS for the year FY2011 is Rs 21.22 compared to Rs 21.96 last year. This is expected as the profit went marginally down.
• The dividend has gone up in FY2011 to Rs 5 per share while it was Rs 4 a share in FY2010.
• Debt in FY2011 is at 200 crore, 30% down from FY2010.
• The trend in revenue and net profit has shown good growth in last 5 years for. Revenue and has grown at a CAGR of 15.51% over last 5 years. The net profit has shown even better growth of 48% CAGR over the same period. While revenue growth is less than impressive, the company has been able to increase its profit margin. The revenue growth was largely impacted by flat growth in the year 2011.
• The company has paid dividend consistently over last 5 years. The dividend per share has also shown improvement every year.
• ROE has been bad in the year 2007, 2008, and 2009. It showed good improvement in 2010 and 2011 though. The ROE at 15% in FY2011 is still less than the expectation.
• Promoters stake at 45.71% given enough confidence in the company.
• Debt equity ratio has gone down consistently and has shown major improvement. As a result the interest cost is much lower. While day’s sales in inventory remained almost constant over last 5 years, the account receivable has shown impressive improvement. The collection period has come down from 13 days to 4 days in last 5 years.

Financials for recent quarters 

The growth in Dec quarter is -2.64% QoQ. However YoY growth was positive at 7%, not a good growth by any standard. However, its growth in Sep quarter was excellent (more than 150% QoQ). 

The net profit margin for Dec quarter stands at 24%. 

Risk

Sectoral risk in tea and coffee sector is minimal. Moreover, McLeod Russel has started tea plantation in various countries across the world. It has covered its risk by investing in African nations which are pretty stable now after undergoing a violent internal strife.

McLeod also has market power that gives it a competitive edge against other players.

The only risk is Iranian bomb. Iran imports about 65 million kgs of Indian tea (directly and indirectly) out of 190 million kgs that India exports annually. Any sanction on Iran will impact tea business. Hopefully India will not be budged by these sanctions and will continue to trade with Iran.

However, at the same time, Pakistan is emerging as a major importer of Indian tea. This can fend off the losses because of sanction.

Short term view

The revenue growth for FY2012 should be around 10%-15%. McLeod Russell has done very god in last 3 quarters and if they are any indication, it will have a good year ahead unlike 2011 where it saw no improvement in revenue.

In the short term, the stock will see fluctuations. McLeod Russel is available at the PE (TTM) of 9.8. This shows under-pricing of the stock. The industry PE is in the range of 15-17. PEG ratio at 0.63 shows good scope for appreciation. We expect the forward PE to hover around 10-14 in the long run.

Long Term View

McLeod Russel has the best net profit margin among beverages companies that operate in Tea/Coffee segment. Its margin has been improving for last couple for years and we expect the same improvement to continue. The net profit margin should be about 20%-25% in FY2012. With such a good margin, the company will add immense value to investors in the long run.

Tea/Coffee business is dependent on weather and hence there will be fluctuation in the earnings of the company. However, on longer horizon, these fluctuations cancel out and present a good opportunity for investors.