McLeod Russel – the world’s largest tea company with Huge Business Increase

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Moroccan tea being served. It is poured from a distance to produce a foam on the tea.
Moroccan tea being served. It is poured from a distance to produce a foam on the tea. | Source

McLeod Russel, world's largest tea company

Q1 results not good

McLeod Russel has not produced good results for the Q1 ended 30.06.11 compared to Q4 results ended 31.03.11. Revenue has plunged from Rs.378 crore to Rs.150 crore. Net profit has plummeted from Rs.135.31 crore to Rs.37.33 crore. Operating profit margin has come down from 39.18% to 32.79%. Net profit margin has come down from 35.74% to 24.84%. The shares of McLeod Russel are traded in the stock markets at Rs.237.70 now.

Net profit doubles compared to Q1 of last year

McLeod Russel is world’s largest tea planter. India is the largest tea producing country in the world. These two facts add strength to the company’s operations in the tea gardens of India. The company fetched an average premium in Q1 amounting to Rs.12.59 a kg over the average price of the corresponding period of the previous year. The company’s production of tea increased in Q1 by 45 lakh kg to 222 lakh kg from 177 lakh kg in the corresponding period of the previous year. The average selling price of tea in Q1 was Rs.152.56 a kg. When compared to the corresponding period of the previous year, the company has done well in Q1. Its net profit almost doubled to Rs.37.33 crore from Rs.18.85 crore in the corresponding period of the previous year. Quality tea commanded a premium of Rs.10 – Rs.15. Due to fall in production of tea in Kenya and other African countries, McLeod Russel will be benefited in the remaining period of the current financial year. The company exported 1.5 million kg of tea in Q1. The company produces its own tea from its tea gardens as well as purchases tea from other gardens and sells it. Production from its own tea gardens increased by 33 lakh kg in Q1, due to improved weather. In 2010-11, the company suffered crop losses and as a result, its production decreased to 749 lakh kg from the previous year’s figure of 772 lakh kg.

Overseas subsidiaries

McLeod Russel is a B M Khaitan group company. The company’s average realisation at Rs.145.11 a kg is higher than the North Indian average of Rs.124.18 a kg. In 2010-11, the company exported 210 lakh kg of tea. The company’s average yield per hectare in its tea gardens is higher than the industry average. McLeod Russel has a subsidiary in Vietnam called Phu Ben Tea Company. Its total production increased in the six months period ended 30.06.11 to 1.44 million kg from 1.42 million kg in the corresponding period of the previous year. McLeod Russel has another subsidiary in Uganda called McLeod Russel Uganda Ltd. This company’s production for the half year ended 30.06.11 decreased to 7.3 million kg from 8.7 million kg in the corresponding period of the previous year. It is a plantation company.

Production will cross 100 million kg

For the first time, the company’s production is set to cross the coveted 100 million kg mark this year. The company hopes to achieve a production of 104 million kg this year, which will be close to its capacity. Aditya Khaitan is the Managing Director of the company. Last year the company produced around 96 million kg of tea. The only thing that can spoil the company’s plan is the unfavourable weather in Uganda. But the loss from its Ugandan subsidiary is expected to be small. The Ugandan garden will be producing 15.5 million kg as against 16.5 million kg last year. But this loss of production in Uganda will be compensated by the production of its Rwanda garden, which will be about 2 million kg. From the Vietnam garden, an additional 4.5 million kg will be available. Domestic production in India will account for the remaining majority. The company has its tea garden spread in Assam and West Bengal. It is headquartered in Kolkata. The company is confident not only of its production, but also increased realisation this year which will boost its turnover and profits. Because of the crop loss in Kenya, the company’s exports will also increase this year. The shortfall from Kenyan gardens is expected to be around 55 million kg this year. The average auction price at Mombassa has increased by 50-70 cents/kg so far as compared the corresponding period of the previous year.

Fresh acquisitions of tea gardens planned

This year, there has been the right amount of rainfall in February and March in Assam and Dooars. Last year, there was excess rainfall that spoiled the crop in Assam. Pest attack also contributed to the production loss. This happened in May and June, the months of quality tea production in India. Sri Lankan production is also reported to be low this year. The world requires 55 to 60 million kg of black tea every year to keep up normal consumption growth. McLeod Russel plans to strengthen its international presence through fresh tea garden acquisitions in Africa. The company has a debt burden of Rs.358 crore. If it does not acquire any gardens this year, it will be reducing this debt sizeably.

Dubai operations

McLeod Russel’s UK based arm Borelli Tea Holdings has got permission to launch operations in Dubai. It has set up a wholly owned subsidiary in Dubai called McLeod Russel Middle East DMCC which has been granted licence to do tea blending and trading. The subsidiary will capture growing tea business in West Asia.

Shares can be purchased at around Rs.200

The company’s shares were trading at a high of Rs.289 in July. Now at the current price of Rs.237, one can acquire the company’s shares for medium to long term holding. Tea business will never die. World over, people are habituated to drinking tea. Quality tea has its own demand. McLeod Russel has a bright future. It will be ideal to acquire the company’s shares at around Rs.200 if it further declines.

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