Tea Rally Revives Profit at World’s Top Grower: Corporate India

Jul 10, 2014 6:30 am ET

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July 10 (Bloomberg) -- McLeod Russel India Ltd., the world’s biggest tea grower, forecasts its profit will climb for the first time in three years as prices rally on prospects of dry weather shrinking the crop in the main growing regions.

Net income at the Kolkata-based company may increase as much as 15 percent in the 12 months through March 31, 2015 from 2.61 billion rupees ($43.7 million) a year earlier, Chief Financial Officer Kamal Baheti said in a phone interview. Prices may advance an average 15-20 rupees a kilogram from 128.46 rupees in 2013, he said.

The weakest start to India’s monsoon season since 2009 even as local consumption jumps may shrink the crop surplus, according to Baheti. Surging prices may increase costs for retailers including Tata Global Beverages Ltd., owner of the Tetley brand, and Hindustan Unilever Ltd., which sells the beverage under Lipton brand.

“Prices have already started rising and will remain high throughout the year,” Baheti, 51, said on July 3. “The industry must have lost 30-35 million kilograms by June. I don’t think this can be recovered.”

The company traces its origin to a partnership formed by two Englishmen in 1869 in the city formerly known as Calcutta.

Output in the Assam Valley, which produces about 50 percent of India’s total, slumped to 59 million kilograms between April and May from 82.4 million a year earlier, the Indian Tea Association said June 5. Prices at auctions jumped 35 percent to 129.12 rupees in May from 95.63 rupees in March, the lowest price in at least 26 months, the Tea Board of India estimates.

‘Key Beneficiary’

“McLeod would be one of the key beneficiaries of increasing prices due to this tightening supply-demand scenario in the country,” analysts Sanjay Manyal and Parineeta Rajgarhia of ICICI Securities Ltd. wrote in a report on June 27. “With constantly increasing volume of the company and support from prices, McLeod’s earnings growth would remain healthy” at 8.8 percent through fiscal year 2015-2016, they wrote. The brokerage has a target price of 326 rupees in the next 12 to 15 months and a “hold” rating on the stock.

Group profit at McLeod may climb about 20 percent to 3.13 billion rupees in the year ending March 31, according to the median estimate of five analysts compiled by Bloomberg. That would be the first gain in net income since 2011-2012.

Rwanda, Uganda

The company’s shares, down 4.9 percent this year, closed 1.5 percent higher at 305.90 rupees in Mumbai, the biggest gain since June 27. Jayshree Tea & Industries Ltd., another producer, ended little changed at 94.80 rupees, while Harrisons Malayalam Ltd. dropped 0.2 percent to 61.70 rupees. The benchmark S&P BSE Sensex Index, which has climbed 20 percent this year, settled 0.3 percent lower at 25,372.75.

McLeod, which owns 39,542 hectares (97,710 acres) of tea plantations in India, Vietnam, Rwanda, and Uganda, expects its output to decline about 3 percent to 109 million kilograms this year, Baheti said. The company lost 3 million kilograms to 3.5 million kilograms in the last three months because of the dry weather, he said.

“If we don’t lose any more crop, and we get those kind of prices, then we should be doing better than last year,” Baheti said. “Africa will be a different story as prices are subdued.”

A decline in black tea output from Kenya to Sri Lanka may augur well for prices, according to Indian brokerage Sharekhan Ltd. Average prices for tea sold by McLeod may rise between 12 percent to 16 percent this year, and with no major increase in the cost, the operating profit margin may rise by 100-150 basis points, it said in a research report on June 27.

El Nino Threat

Crop prospects in India are threatened by a 42 percent deficit in monsoon rainfall this year. The chances of a drought have increased to 60 percent from about 25 percent in April amid forecasts for El Nino, Skymet Weather Services., a New Delhi- based private forecaster, said last week. An El Nino will reduce monsoon rain and may hurt crops from cotton to sugar and rice, Newedge LLC said in a report dated June 5.

“The second flush since June is also showing a downward trend,” Sujit Patra, additional secretary at the Indian Tea Association, said by phone from Kolkata, referring to the second picking of the tea crop. “Globally also, there has been a loss in crop everywhere.”

Sri Lankan output dropped 4 percent to 141.5 million kilograms in the five months through May from 147.6 million kilograms a year earlier, according to the country’s Tea Board. The crop in Kenya, the world’s biggest exporter of black tea, fell to 192.9 million kilograms in the first five months from 194.9 million a year earlier, according the nation’s Tea Board.

Indian Harvest

The Indian harvest rose to a record 1.21 billion kilograms in the year ended March 31 from 1.14 billion kilograms a year earlier, according to Tea Board data. Exports climbed 5 percent to 225.8 million kilograms, it said.

“Looking at the overall export market, prices in the overseas market and strong consumption in India, exports may be little lower” this year, Baheti said. Shipments may drop to 200 million kilograms, he said.

Domestic consumption is estimated to rise by 3.5 percent this year, he said. India is the world’s second-largest consumer of tea after China, and demand totaled 911 million kilograms in 2013-2014, according to the Tea Board.