Independent Equity Research

Enhancing investment decisions

Business Prospects Financial Performance Management Evaluation Corporate Governance

In-depth analysis of the fundamentals and valuation

Harrisons Malayalam Limited

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)

FundamentalGrade
CRISILs Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following: Business Prospects: Business prospects factors in Industry prospects and companys future financial performance Management Evaluation: Factors such as track record of the management, strategy are taken into consideration Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) CRISILFundamentalGrade 5/5 4/5 3/5 2/5 1/5 Assessment Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

ValuationGrade
CRISILs Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a 12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISILValuationGrade 5/5 4/5 3/5 2/5 1/5 Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

Assessment Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

Independent Research Report Harrisons Malayalam Ltd

Riding on rubber, yet to taste success with tea Industry Date Food products November 04, 2010

Harrisons Malayalam Ltd (Harrisons), a Cochin-based RPG Group company, is the largest rubber cultivator in India (49% of FY10 revenues); it has 11 rubber plantations spread over 7,338 hectares in Kerala. It also cultivates tea (46% of revenues) and other crops. We assign Harrisons a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India. Largest domestic cultivator of rubber well placed to ride on higher prices Average natural rubber prices are expected to rise by 30% in FY11 and remain firm over the medium term. With its superior quality rubber, which commands a premium over tyregrade rubber, Harrisons is well placed to ride on higher rubber prices despite a drop in output due to replanting of older trees. Sales from the rubber segment are expected to grow at a CAGR of 3.5% over FY10-13 to Rs 1,776 mn. Since most of the realisation gains are expected to flow into profits, PBT from rubber is expected to grow at 35.6% CAGR to Rs 292 mn. Higher focus on tea segment expected to turn it around beyond FY14 Harrisons tea plantations are about 80-90 years old and are facing a structural decline in production. The declining yields have been insufficient to absorb the high costs of cultivation in South India, rendering the segment unprofitable over the past few years. Further, tea from South India typically enjoys lower realisations compared to tea from North India, which has led to losses in the tea segment. In FY10, the tea segment recorded profits mainly because of higher tea prices. With the management increasing its focus on the long-term viability of the tea segment, we expect a turnaround post FY14. Wage hike is a key monitorable Harrisons plantations are located primarily in Kerala, where labour laws for plantation workers are subject to frequent state intervention and wages are revised upwards every three to three-and-a-half years. Although we believe higher rubber prices will mitigate the impact of a wage revision for the rubber segment, the profitability of the tea segment remains particularly vulnerable to wage hikes until improved productivity and higher volumes are able to absorb higher costs. Revenues to grow We expect top line to log a CAGR of 11.5% over FY10-13 driven by higher traded volumes and supported by income from non-core businesses such as construction. Adjusted PAT is expected to increase at a CAGR of 34.9% over the same period. Valuations Current market price has strong upside We value Harrisons based on the discounted cash flow method to arrive at a fair value of Rs 113 per share. We initiate coverage on Harrisons with a valuation grade of 5/5, indicating that the market price of Rs 83 (as on November 03, 2010) has a strong upside from the current levels. Key forecast (Standalone) (Rs mn) Operating income EBITDA Adj Net income EPS-Rs EPS growth (%) PE (x) P/BV (x) RoCE(%) RoE(%) EV/EBITDA (x) n.m.: not meaningful Sou rce: Co mpany, CRI SI L Eq uit ies FY09 2,920 249 60 3.3 n.m. 12.6 0.5 8.4 3.6 6.4 FY10 3,314 268 74 4.0 64.1 33.7 1.5 8.5 4.4 12.9 FY11E 4,013 384 165 8.9 66.4 9.3 0.9 12.5 9.8 5.7 FY12E 4,189 526 273 14.8 65.5 5.6 0.8 16.8 14.8 3.9 FY13E 4,589 467 181 9.8 (33.8) 8.5 0.7 14.0 9.0 4.2

CFV matrix
Excellent Fundamentals

Fundamental Grade

5 4 3 2 1

Poor Fundamentals

Strong Downside

Valuation Grade
Strong Upside

Fundamental grade of '3/5' indicates good fundamentals Valuation grade of '5/5' indicates strong upside

Key stock statistics

BSE/NSE Ticker Fair Value (Rs per share) Current market price (Rs per share)* Shares outstanding (Mn) Market cap (Rs Mn) Enterprise value (Rs Mn) 52-week range (Rs) (H/L) P/E on EPS estimate (FY11E) Free float (%) Average daily volumes * as on 03 November, 2010 HARRMAL/ HARRMALAYA 113 83 18 1,532 2,502 120/76 9.3 49.7 69,024

Share price movement

150

100

50

5-Mar-10

25-Mar-10

4-May-10

3-Jul-10

11-Oct-10

14-Apr-10

24-May-10

24-Jan-10

13-Feb-10

13-Jun-10

12-Aug-10

Harrisons

S&P CNX NIFTY

-Indexed to 100

Analytical contact
Sudhir Nair (Head, Equities) Niyati Dave Arun Vasu Email: clientservicing@crisil.com +91 22 3342 3526 +91 22 3342 3569 +91 22 3342 3529 +91 22 3342 3561

CRISIL Equities

21-Sep-10

31-Oct-10

4-Jan-10

23-Jul-10

1-Sep-10

Harrisons Malayalam Limited

Table: 1 Harrisons: Business environment

Parameter Revenue contribution (FY10) Product / service offering Unbranded bulk tea sold mainly through auctions in South India Superior quality centrifuge latex Used in the manufacturing of dipped goods such as examination gloves, contraceptives, elastic threads, etc. Inter-crop cultivation of pineapple, banana, coffee, cocoa, etc. to augment revenues during rubber replanting phase Turnkey construction projects the only significant project is a mall-cum- bus terminal project in Bangalore (order size Rs 460 mn - expected completion in FY11) Geographic presence Plantations are located mainly in Kerala and some in Tamil Nadu Tea 46% Rubber 49% Others 5%

Revenue drivers

Higher trading volumes in order to offset lower production Expected rise in tea prices in the medium term, and higher realizations due to higher direct exports and non-auction sales Improved productivity over the longer term

Higher trading volumes in order to offset lower production Expected rise in rubber prices over the medium term Improved productivity over the longer term

Inter-crop cultivation to increase with larger area being replanted

Margin drivers

Tea segment has historically been unprofitable (except FY10) High cost base and low realisation expected to constrain profitability till FY14

Higher realisations to lead to margin expansion in FY11 and FY12 Post FY13, margins to be tempered due to expected rise in wages

Sales growth (FY07FY10 3-yr CAGR) Sales forecast (FY10FY13 3-yr CAGR) Key monitorables

14.6% 9.3% Tea prices, wage hike

18.7% 3.5% Rubber prices, wage hike

5.4% -

Sou rce: Co mpany, CRI SI L Eq uit ies

Figure 1: Harrisons plantations are located mainly in Kerala

Table 2: Rubber ready reckoner - Indiaistheworldsfourthlargestproducerofnaturalrubber - Globallyproductionisconcentratedinthehandsofafewcountries includingThailand,Indonesia,Malaysia,India,VietnamandChina - InIndia,productionofrubberisconcentratedinKerala,which accountsfornearly92%oftherubberproduced.Thisisbecause o KeralaenjoystwomonsoonsunlikeanyotherstateinIndia o Theregionhasasuitableterrain,conduciveforeconomicrubber cultivation - 8889%ofrubberoutputinIndiacomesfromtheunorganisedsector, comprising1mncultivatorsandaveragelandholdingaslowas0.5ha - OtherorganizedplayersincludePlantationCorporationofKerala, (5000haundercultivation),StateFarmingCorporationofKeralaLtd (2361ha)andAVThomasGroup.

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: CR ISI L Eq uit i es

CRISIL Equities

Harrisons Malayalam Limited

Grading Rationale
Higher rubber prices to drive revenue growth over the medium term
Rubber prices expected to remain firm due to favourable demand-supply situation

Harrisons, Indias largest rubber cultivator, is well placed to ride on higher rubber prices. Rubber prices touched an all-time high of Rs 180 per kg in August 2010 after consistently rising since October 2009. This was because domestic production of natural rubber was 8.2 mn tonnes during 2009-10, while consumption was higher at 9.3 mn tonnes. In H2FY10, consumption further increased by 11.5% due to higher offtake from the automobile sector.
Figure 2: Rubber prices have been moving up
Rs/kg 200 180 160 140 120 100 80 60 40 20 0 30 32 39 50 56 67 92 91 101 115 164 160 171 183 180

May-10

Apr-10

Jul-10

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Sou rce: I nd ustry

Average natural rubber prices are expected to rise by 30% in FY11 and remain firm in FY12 due to: Buoyant demand: Demand from China, India and Malaysia, which consume over 45% of total global production, is expected to remain strong over the medium term. Supply constraints: Weak international supply on account of severe drought in major producing countries like Thailand Substantial shrinkage in the yield area due to old age of existing trees Very low rate of replanting in 2003 and 2004, resulting in lesser trees available for tapping in 2009 and 2010 Hence, we expect Harrisons rubber segment to sustain growth levels, despite a replantation-led drop in production.

Superior quality rubber ensures higher realisations

About 77% of Harrisons rubber output comprises higher-grade centrifuge latex, which is used as a raw material in the manufacturing of dipped goods such as examination gloves, contraceptives, elastic threads, etc. Because of its superior quality, it typically commands a premium of Rs 8-13 per kg over RSS4 rubber used in tyres.

CRISIL Equities

2009-10

Aug-10

Jun-10

Harrisons Malayalam Limited

Figure 3: Harrisons latex enjoys a premium price over tyre-grade rubber

Rs per kg 200 180 160 140 120 100 80 60 40 20 0 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06
RSS4

Jul-07

Feb-08 Sep-08
Centrifuge latex

Apr-09 Nov-09 Jun-10

Sou rce: I nd ustry

Natural rubber is collected post-tapping (tapping refers to cutting the surface of the tree
Integrated operations quick offtake ensure

bark to let the rubber flow out) and processed into sheets which can be stored for up to a year. Unlike smaller growers who have limited access to processing facilities, Harrisons has seven rubber factories capable of processing up to 15,000 tonnes of rubber. The company is, therefore, able to sell most of its rubber in the domestic market on cash and carry basis directly to its customers, including corporate buyers such as Hindustan Latex and Indus Medicare (for medical purpose), Radhu Product (for rubber thread) and Harpex (for cycle tyres).

Accelerated replanting to boost future growth

The useful life of a rubber tree is 24 years. From a high of ~9,000 tonnes in FY04, output of rubber has been declining. Despite a large number of aging trees, no major replanting was carried out till FY08, causing a fall in output. Despite this, a secular uptrend in natural rubber prices and trading of rubber led to the rubber segment logging sales CAGR of 26.0% over the past five years.
Figure 4: Production of rubber has declined due to aging fields, traded rubber props volumes
Tonnes 14000 12000 10000 8000 6000 4000 2000 0 FY05 FY06 FY07 Owned rubber FY08 Bought rubber FY09 FY10 1000000 500000 0 FY06 Mature trees FY07 FY08 FY09 Immature trees FY10

Figure 5: Proportion of immature rubber trees is on the rise

nos 3000000 2500000 2000000 1500000

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

CRISIL Equities

Harrisons Malayalam Limited

The company has strategically undertaken an accelerated replantation programme to aggressively reduce the number of aging and dead trees, starting FY09, which will lead to a further drop in output over the next three years, before replanted rubber from
Replantation short-term pain, long-term gain

earlier years comes into bearing. Under the replantation programme, older trees are replaced with various high-yielding, disease-resistant newer clones made available by the Rubber Research Institute of India. Some of these new clones are expected to yield 35-40% higher output per tree. By FY13, the replanting is likely to be completed and by this time the trees replanted in FY08 would begin to yield. During this low-production phase, higher rubber prices will ensure revenue growth.

Rubber trading to augment revenues till higher output from replantation kicks in
While the replanted trees are immature, in order to utilise the processing capacity of ~15,000 tonnes of rubber, the company purchases rubber from smaller cultivators and farmer societies for processing and selling. Although this helps in sustaining volumes, it yields extremely low contribution of Rs 2.3 per kg as opposed to Rs 40.3 per kg for self-owned rubber. The company has indicated that it will continue to trade rubber till the replanted rubber trees come into bearing, causing a spurt in volumes by FY17 (six years post replanting).
Figure 6: Revenue growth to be led by higher realisations and traded rubber
(Rs mn) 2,000

Figure 7: Contribution from owned rubber will drive overall profits from the segment
(Rs mn) 500 450

1,750

400 350 300

17

19

20

1,500

250 200 24

15 354 344 308

1,250

150 100 50 177 208

1,000 FY09 FY10 FY11E Rubber sales FY12E FY13E

0 FY09 FY10 FY11E FY12E FY13E

Contribution - Bought Rubber Contribution - Owned Rubber

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

Wage hike could play spoilsport

The Kerala state government had last revised the wages for rubber plantation workers
Plantation workers wages in Kerala are subject to state intervention

by 40% and for tea plantation workers by 20% in FY08. Another wage revision is expected in FY13, which is likely to have an impact on profitability of both segments. However, rubber prices are expected to be high enough to cover incremental costs, and PBT from rubber is expected to grow at a CAGR of 35.6% till FY13.

CRISIL Equities

Harrisons Malayalam Limited

Figure 8: PBT for rubber to rise sharply in FY11 due to higher prices
(Rs mn) 500 450 400 350 300 250 200 150 100 50 0 FY09 FY10 FY11E Rubber PBT FY12E FY13E

Figure 9: PBT margin to be tempered by wage revision in FY13

25.0% Sharp rise inrubberprices to offset decline in 19.3% volumes 15.2% 15.0% 10.6% 10.0% 7.3% Wage increase and lower volumes to cause margin pressure 16.5%

20.0%

5.0%

0.0% FY09 FY10 FY11E

PBT Margin - Rubber

FY12E

FY13E

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

Tea segment has historically been a drag on profitability

The tea segment has historically been unable to record profits (with the exception of
Despite higher tea prices, profits remain vulnerable to wage hikes

FY10 when tea prices in southern India were higher by 13% y-o-y). Since the tea segment is more capital intensive than the rubber segment, higher fixed costs, high wages and sub-optimal cultivation techniques render this segment unprofitable. In FY10, wage costs accounted for 47% of the cost of production of tea. With an expected hike in wage costs in FY13, profits are expected to continue to be under pressure over the medium term.

Old bushes and low realisations lead to uneconomic cultivation

The productive life of a tea bush is around 60 years. Some of Harrisons tea bushes have been yielding tea for as long as 100 years. As a result, productivity of fields has been on a decline. Further, the number of bushes cultivated per hectare is low - over two-thirds of the companys current area under cultivation has potential for infilling. Infilling refers to increasing the number of bushes per hectare by planting new bushes between existing ones this is expected to increase the bush population per hectare from the current 6,500 bushes to an estimated 8,500. Besides, the inferior quality of southern teas leads to lower realisation than northern teas, further pressurizing profitability. (Since 2006, average realisation for southern tea has been lower by Rs 17.9 than the all-India average).

CRISIL Equities

Harrisons Malayalam Limited

Figure 10: Tea output has been on a decline

Tonnes 15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 FY04 FY05 FY06 Tea Crop FY07 FY08 FY09 FY10 Yield Per Ha (RHS) kg/ha 2900 2700 2500 2300 2100 1900 1700 1500

Figure 11: South Indian teas have lower realisations

(Rs/kg) 140 120 100 80 60 40 20 0

May-09

Mar-10

Nov-06

Dec-08

Apr-07

Jul-08

Jan-06

Jun-06

Feb-08

Sep-07

Oct-09

South india

All India

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

Table 3: Operational comparison of tea players

JSTL Mar-10 Sales Sales value Realisations PBIT margin (tea) RoCE(tea) Million kg Rs million Rs per kg Per cent Per cent 29.8 3590 120.1 20.0 39.3 MCRL Mar-10 78.2 10741 137.2 Segment NA Segment NA GGL Dec-09 26.1 3629 138.6 14.4 45.9 WTL Mar-10 14.1 1987 140.3 Segment NA Segment NA Harrisons Mar-10 18.4 1510 85.0 5.1 2.3

Note: JSTL: Jay Shree Tea Ltd; WTL: Warren Tea Ltd; GGL: Goodricke Group Ltd.; MCRL: Mcleod Russel (India) Ltd Sou rce: CR ISI L Eq uit i es

Tea segment to turn around only post FY14

Profits remain wage hikes vulnerable to

Given the segments vulnerability to cost increases, a turnaround in the segment is likely only after additional volumes from infilling come in post FY14 and tea prices remain high. Over the past two-three years, the management has increased its focus on cost reduction and yield improvement. Accordingly, infilling was introduced in FY09 (2.2 mn plants were infilled last year, 2.5 mn in FY10. This roughly translates into about 400 tonnes of production when the bush begins to yield, three-four years later). Other

Continuous management focus and higher tea prices will be the key to turn the segment around

productivity improvement techniques such as early pruning of bushes and contour planting were also introduced. On the marketing side, efforts are being made to improve non-auction sales and direct exports where realisations are higher. Since it will take at least three-four years for infilled bushes to start contributing to production, profitability is expected to continue to be constrained over the next three-four years. At the same time, higher tea prices will be essential to ensure profitability.

CRISIL Equities

Aug-10

Harrisons Malayalam Limited

Figure 12: Traded tea to augment top line till additional volumes come in
(tonnes)

Figure 13: PBT from tea segment likely to witness a structural turnaround only after FY14
(Rs mn) 50 Rise in tea prices 33.4

20000

FY09 (50) (56.3) FY10 FY11E Cost increase insufficiently covered by higher prices FY12E FY13E (75.2) (68.6) Full impact of wage increase

15000

10000 (100) 5000 (150) 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Bought tea Produced tea (200)

(158.2)

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

Harrisons is mulling acquisition of tea plantations in Africa

Tea players in the country are increasingly scouting for tea estates abroad to tap overseas demand and increase their global presence. Mcleod Russel acquired one tea estate in Rwanda in mid-2009 and six in Uganda in January 2010, while Jay Shree Tea acquired one tea estate in Uganda and two in Rwanda in April 2010.

Why Africa?
African soil and climate are conducive for producing CTC variety of tea, similar to Indian tea. Also, plantations are available at reasonable prices in Africa,
Africa - Attractive valuations, younger plantations and low cost of production

compared to India. Based on our interactions with the industry, tea estates in Africa are available at 1.1 - 1.2 times sales as against 2 times sales in India. Tea bushes in Africa are about 20-30 years old, signifying higher productivity (of about 3,700 kg/hectare), unlike India where the average age of tea bushes is about 40 years with productivity of 1,800 kg per hectare. This makes Africa a highly attractive proposition for Harrisons. Indian tea plantation owners have to incur social costs (for labour) of about Rs 20-30 per worker per day, (significantly higher in Harrisons case) which is absent in Africa. The management has indicated that they are looking at acquiring plantations in Ethiopia, but we have not considered the impact of such an acquisition in our forecast.

Profitability hinges on rubber over the next three-four years

Although sales will be higher for both tea and rubber due to sale of bought products, Harrisons profitability hinges on the rubber segment and higher prices of rubber since the tea segment is unlikely to turn profitable till FY15.

CRISIL Equities

Harrisons Malayalam Limited

Figure 14: Profit from rubber to be the key driver of overall profits
(Rs mn) 500 85 400 109 76

300

200 333 100 159 -56 FY09 -23 117 33 FY10 -53 PBT - Tea FY11E -158 PBT - Rubber FY12E -69 PBT - Others FY13E -75 255 292

-100

Source: CRISIL Equities

Hiving off of subsidiary, a positive move for investors

Till FY10, Harrisons had four subsidiaries: Harrisons Agro Products Ltd, Sentinel Tea
Harrisons holding in other RPG group companies is being hived off and listed separately

and Exports Ltd, Harrisons Malayalam Financial Services Ltd and Harrisons Rubber Products Ltd. The investments held by Harrisons in RPG group companies were parked in Harrisons Malayalam Financial Services. In March FY10, these investments were transferred to Sentinel Tea and Exports Ltd and this company is going to be listed as a separate company by November. The existing shareholders of Harrisons have already been issued one share of Rs 10 each in the new entity. The reduction in investments in Harrisons books has been compensated for by a commensurate revaluation of the companys assets, mainly comprising land. The other three companies were not actively engaged in any business and have been merged with Harrisons. While these investments were earlier a drag on the companys balance sheet, the hiving off provides investors with an option to liquidate non-core investments, which we believe is a positive move for investors.

CRISIL Equities

Harrisons Malayalam Limited

Financial outlook
Figure 15: Except for FY11, split between tea and rubber sales to remain almost equal
(Rs mn) 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Tea sales Rubber sales Other sales Completion of construction project in FY11 added to sales (Rs mn) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY07 -2.2 FY08 FY09 FY10 FY11E FY12E FY13E 4.4 13.5 9.5 21.1 38.0 42.1 % 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0

Figure 16: Operating income to grow

Operating income

Sales growth (%)

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

Figure 17: EBITDA to grow due to high rubber prices; to be tempered in FY13 due to expected wage hike
(Rs mn) 600 500 400 300 200 100 0 FY08 FY09 EBITDA FY10 FY11 E FY12 E FY13E 8.7% 8.5% 8.1% 12.5% 10.2% 9.6% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Figure 18: PAT and RoE trend

(Rs mn) 350 300 250 200 150 100 50 0 FY08 FY09 FY10 PAT FY11 E FY12 E FY13E 3.6% 2.0% Higher rubber prices are expected to cause a sharp rise in profits in FY11 Wage impact to moderate PAT 14.8% growth in FY13

16.0% 14.0%

9.8%

12.0% 9.0% 10.0% 8.0%

4.4%

6.0% 4.0% 2.0% 0.0%

EBITDA margin (%)

RoE (%)

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

Figure 19: EPS growth hinges on rubber prices remaining strong over the medium term
(Rs/share ) 16 14 12 10 8 6 4 2 0 FY08 FY09 FY10 EPS FY11 E FY12 E FY13E 3.3 1.9 4.0 8.9 14.8

Figure 20: Gearing to improve led by higher revenues and absence of significant capex
0.60 0.49 9.8 0.36 0.40 0.38 0.28 0.20

FY07

FY08

FY09

FY10

FY11 E

FY12 E

FY13 E

Gearing (Net debt/Equity)

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

CRISIL Equities

10

Harrisons Malayalam Limited

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.

Experienced management
Harrisons has successfully retained most of the key personnel

Chairman Mr Sanjiv Goenka relies on professionals to run the business such as Mr Pankaj Kapoor, who has been managing director of the company since April 2008. Mr Vinayaraghavan, vice president rubber has been associated with the company for the past 30 years. Mr V Balaraman, vice president - commercial has been associated with the tea industry for the past 30 years. Both of them possess an in-depth understanding of their respective segments. Mr. K.N. Mathew is the Vice-President Finance and has been with the company for the past 28 years.

Higher focus on the tea segment to aid long-term growth

While the profit-making rubber segment has seen the accelerated replanting drive to further boost production, a similar thrust is now being made to ensure long-term viability of the tea segment. While infilling and cost reduction are the requisite steps in this direction, a turnaround will require sustained efforts at increasing production over the next few years.

Adept at handling labour related issues

The management has been successful in settling labour issues, quite prevalent in Kerala quite amicably and has received the FICCI award thrice for corporate initiatives in family welfare for its labour welfare scheme.

Second line of management

Most of the companys operational heads and plantation managers have begun their careers with the company and possess a keen understanding of the plantations business.

CRISIL Equities

11

Harrisons Malayalam Limited

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Equities analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance.
Corporate practices at good governance Harrisons are

Overall, corporate governance at Harrisons is good supported by reasonably good board practices and an independent board.

Board composition
Harrisons board comprises seven members, three of whom are independent directors, which is in line with the requirements under Clause 49 of Sebis listing guidelines. The directors have strong industry experience and most of the directors have been associated with the company for a fairly long time. Given the background of directors, we believe the board is fairly experienced. The independent directors have a fairly good understanding of the companys business and its processes.

Boards processes
The companys quality of disclosure can be considered good judged by the level of information and details furnished in the annual report, websites and other publicly available data. The company has all the necessary committees audit, remuneration and investor grievance - in place to support corporate governance practices. The audit committee is chaired by an independent director, Mr Haigreve Khaitan, a practising advocate. The other two independent directors, Mr Umang Kanoria and Mr G. Momen, have been closely associated with the tea industry in India.

CRISIL Equities

12

Harrisons Malayalam Limited

Valuation

Grade: 5/5

We have used the discounted cash flow (DCF) method to value Harrisons and arrived at a fair value of Rs 113 per share. At this fair value, the implied P/E is 12.6x FY11E and 8.9x FY12E EPS. Consequently, we initiate coverage on Harrisons with a valuation grade of 5/5, indicating that the market price of Rs 83 has a strong upside.

Key components of our valuations

CRISIL Equities fair value estimate is Rs 113 per share

We have considered the discounted value of the firms estimated free cash flow from FY12 to FY17 We have assumed cost of equity at 16% Terminal growth rate of 3%.

Based on the above, we have arrived at a fair value of Rs 113.

Table 4: Sensitivity of Fair Value
WACC 1.0% 11.4% 12.4% 13.4% 14.4% 15.4% 121 108 97 88 80 Terminal growth rate 2.0% 132 116 104 94 85 3.0% 146 127 113 101 91 4.0% 164 141 123 109 97 5.0% 187 158 136 119 105

Source: CRISIL Equities

CRISIL Equities

13

Harrisons Malayalam Limited

Company Overview
Harrisons was formed as a merger between Malayalam Plantations and Harrisons and Crossfield

The company's Indian operations began in 1907. At the time, two companies Harrisons & Crossfield (India) Ltd and Malayalam Plantations (India) Ltd - commenced tea and rubber cultivation in Kerala. These were subsequently merged into one company in 1984 to form Harrisons Malayalam Ltd. The company was part of Harrisons & Crossfield, UK till 1988, post which HML became a widely held public sector company and an RPG enterprise. Mr Sanjiv Goenka is the chairman and Mr Pankaj Kapoor is the managing director of the company. HMLs operations are spread over 24 estates, seven rubber factories and 12 tea factories along with a blending and processing unit in Coimbatore, Tamil Nadu. The company cultivates 13,389 ha of land.

Table 5: Tea plantations

Tea Location Estates Achoor Touramulla Wynad (North Kerala, Tamil Nadu) Chundale Arrapetta Sentinel Rock Wentworth Mayfield Vandiperiyar (Eastern Kerala) Munnar (High Range) Total Sou rce: Co mpany Wallardie Moongalar Pattumalay Upper Surianalle Lockhart Panniar 13 1 CTC 4 Orthodox 1 CTC/Orthodox 2 CTC 1 Orthodox 12 Factories 1 CTC 4 Orthodox 1 CTC/Orthodox Factories

Table 6: Rubber plantations

Rubber Location Mooply Valley (North Kerala) Estates Mooply Palapilly Kundai Kaliyar Koney Ranni Valley (Central Kerala) Kumbaza Lahai Mundakayam Nagamallay Venture Valley Total Sou rce: Co mpany Isfield Venture 11 PLC/Sole Crepe 7 Factories 3 Factories Cenex,ISNR & Skim Grades 3 Factories Cenex,Indian Standard Natural Rubber (ISNR)and Skim Grades Factories

CRISIL Equities

14

Harrisons Malayalam Limited

Annexure: Financials
Income Statement (Rs Mn) Net sales Operating Income EBITDA Depreciation Interest Other Income PBT Adj PAT No. of shares Earnings per share (EPS) Balance Sheet (Rs Mn) Equity capital (FV - Rs 10) Reserves and surplus Debt Current Liabilities and Provisions Capital Employed Net Fixed Assets Capital WIP Investments Loans and advances Inventory Receivables Cash & Bank Balance Applications of Funds The decline in receivables is on account of demerger Sou rce: Co mpany, CRI SI L Eq uit ies FY08 185 1,475 855 733 3,246 410 8 121 137 108 2,264 199 3,246 FY09 185 1,503 920 551 3,159 403 34 121 152 130 2,229 90 3,159 FY10 185 1,437 1,043 774 3,438 2,634 36 0 223 339 134 73 3,438 FY11E 185 1,561 1,033 922 3,700 2,671 36 0 270 184 173 366 3,700 FY12E 185 1,765 994 930 3,874 2,710 36 0 282 198 192 456 3,874 FY13E 185 1,901 967 1,037 4,090 2,749 36 0 309 223 223 550 4,090 FY08 1,950 2,054 178 30 133 28 43 35 18 1.9 FY09 2,670 2,920 249 34 127 (8) 80 60 18 3.3 FY10 3,061 3,314 268 44 127 1 98 74 18 4.0 FY11E 3,822 4,013 384 45 135 2 206 165 18 8.9 FY12E 3,990 4,189 526 46 132 2 349 273 18 14.8 FY13E 4,370 4,589 467 47 128 2 294 181 18 9.8

Note Increase in Net Block in FY10 is on account of revaluation of assets as part of demerger

CRISIL Equities

15

Harrisons Malayalam Limited

Cash Flow (Rs Mn) Pre-tax profit Total tax paid Depreciation Change in working capital Cash flow from operating activities Capital expenditure Investments and others Cash flow from investing activities Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Cash flow from financing activities Change in cash position Opening Cash Closing Cash Ratios FY08 Growth ratios Sales growth (%) EBITDA growth (%) EPS growth (%) Profitability Ratios EBITDA Margin (%) PAT Margin (%) Return on Capital Employed (RoCE) (%) Return on equity (RoE) (%) Dividend and Earnings Dividend per share (Rs) Dividend payout ratio (%) Dividend yield (%) Earnings Per Share (Rs) Efficiency ratios Asset Turnover (Sales/GFA) Asset Turnover (Sales/NFA) Sales/Working Capital Financial stability Net Debt-equity Interest Coverage Current Ratio Valuation Multiples Price-earnings Price-book EV/EBITDA n. m. n ot mean in gfu l Sou rce: Co mpany, CRI SI L Eq uit ies 33.7x 0.7x 10.3x 12.6x 0.5x 6.4x 33.7x 1.5x 12.9x 9.3x 0.9x 5.7x 5.6x 0.8x 3.9x 8.5x 0.7x 4.2x 0.4 1.1 3.7 0.5 1.7 4.7 0.6 1.8 1.0 0.4 2.5 1.1 0.3 3.6 1.2 0.2 3.3 1.3 1.9x 4.9x 1.1x 2.7x 7.2x 1.6x 1.5x 2.2x 3.5x 1.2x 1.5x -21.5x 1.2x 1.6x -15.2x 1.3x 1.7x -17.0x 1.8 n.m. 2.8 1.9 1.8 53.6 4.3 3.3 2.3 43.6 1.7 4.0 1.9 21.4 2.3 8.9 3.2 21.4 3.8 14.8 2.1 21.4 2.5 9.8 8.7 1.7 5.9 2.0 8.5 2.1 8.4 3.6 8.1 2.2 8.5 4.4 9.6 4.1 12.5 9.8 12.5 6.5 16.8 14.8 10.2 3.9 14.0 9.0 (2.2) (40.0) n.m. 42.1 39.9 n.m. 13.5 7.5 64.1 21.1 43.6 66.4 4.4 36.7 65.5 9.5 (11.2) (33.8) FY09 FY10 FY11E FY12E FY13E FY08 43 (8) 30 22 87 (19) 0 (19) 98 (32) (73) (7) 61 138 199 FY09 80 (20) 34 (183) (89) (54) 0 (54) 66 (32) (0) 33 (109) 199 90 FY10 98 (25) 44 2,038 2,155 (2,276) 121 (2,155) 122 (43) (96) (17) (17) 90 73 FY11E 206 (41) 45 217 427 (83) (83) (10) (41) (51) 293 73 366 FY12E 349 (76) 46 (37) 282 (85) (85) (39) (68) (107) 90 366 456 FY13E 294 (113) 47 24 252 (87) (87) (27) (45) (72) 94 456 550

CRISIL Equities

16

Harrisons Malayalam Limited

Quarterly results
Harrisons (Rs mn) Net sales Raw materials cost Raw materials cost (% of net sales) Employees cost Other expenses EBITDA EBITDA margin Depreciation EBIT Interest and finance charges Operating PBT Other Income Extraordinary Income/(expense) PBT Tax PAT Adj PAT Adj PAT margin No of equity shares (Mn) Adj EPS (Rs) S o u r c e : NS E Q2FY11 860 320 37.2% 328 223 (12) -1.4% 16 (27.5) 36 (64) 4 (60) (60) (60) -7.0% 18 (3.3) Q1FY11 747 219 29.3% 289 237 1.5 0.2% 14 (12.3) 30 (43) 4 (39) (39) (39) -5.2% 18 (2.1) Q2FY10 886 340 38.3% 279 194 73 8.2% 8 64.8 31 34 4 37 5 32 32 3.6% 18 1.7 q-o-q (%) 15.1 45.8 785 bps 13.5 (5.8) n.m. (159) bps 12.3 n.m. 19.1 n.m. n.m. n.m. n.m. (175) bps n.m. y-o-y (%) (3.0) (5.8) (113) bps 17.6 15.0 n.m. (962) bps 91.4 n.m. 15.7 n.m. n.m. n.m. n.m. n.m. n.m. n.m. H1FY11 1,607 539 33.6% 617 460 (10) -0.6% 29 (39.4) 67 (106) 7 (99) (99) (99) -6.2% 18 (5.4) H1FY10 1,644 600 36.5% 539 361 144 8.8% 19 125.2 61 64 6 70 9 61 61 3.7% 18 3.3 y-o-y (%) (2.2) (10.1) (292) bps 14.5 27.7 n.m. n.m. 55.9 n.m. 8.6 n.m. 11.1 n.m. n.m. n.m. n.m. n.m.

CRISIL Equities

17

Harrisons Malayalam Limited

Focus Charts
Harrisons CMP has a strong upside
200 900,000 800,000 150 700,000 600,000 100 500,000 400,000 300,000 50 200,000 100,000 0 -

Operating income to grow

(Rs mn) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY07 -2.2 FY08 FY09 FY10 FY11E FY12E FY13E 4.4 13.5 9.5 21.1 38.0 42.1 % 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0

5-May-10

6-Mar-10

20-May-10

4-Jul-10

3-Aug-10

2-Sep-10

2-Oct-10

19-Feb-10

21-Mar-10

19-Jul-10

18-Aug-10

17-Sep-10

20-Apr-10

Total traded quantity (RHS)

Share price

17-Oct-10

19-Jun-10

Fair Value

1-Nov-10

5-Apr-10

4-Jun-10

Operating income

Sales growth (%)

Source: BSE, CRISIL Equities

Source: Company, CRISIL Equities

PAT and RoE trend

(Rs mn) 350 300 250 200 150 100 50 0 FY08 FY09 FY10 PAT FY11 E FY12 E FY13E 3.6% 2.0% Higher rubber prices are expected to cause a sharp rise in profits in FY11 Wage impact to moderate PAT 14.8% growth in FY13

EPS growth hinges on rubber prices remaining strong over the medium term
(Rs/share ) 16.0% 14.0% 9.8% 12.0% 9.0% 10.0% 8.0% 4.4% 6.0% 4.0% 2.0% 0.0% 16 14 12 10 8 6 4 2 0 FY08 FY09 FY10 EPS FY11 E FY12 E FY13E 3.3 1.9 4.0 8.9 9.8 14.8

RoE (%)

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

FY11 earnings sensitivity

Shareholding pattern
100% 90% 80% 70% 50.3% 50.3% 50.3% 50.3% 0.5% 0.6% 0.6% 0.6%

Realisation from rubber (Rs/kg) 180 Total operating income PAT EPS Rs mn Rs mn Rs/share 4234 247 13.4 4124 206 11.6 4013 165 8.9 3903 124 6.7 3793 83 4.5 170 160 150 140

60% 50% 40% 30% 20% 10% 0% Jun-10 Mar-10 Individuals Promoter Dec-09 DII Sep-09 49.2% 49.1% 49.1% 49.1%

Sou rce: Co mpany, CRI SI L Eq uit ies

S o u r c e : BS E

CRISIL Equities

18

CRISIL Independent Equity Research Team

Mukesh Agarwal Director Tarun Bhatia Director- Capital Markets Analytical Contacts Chetan Majithia Sudhir Nair Sector Contacts Nagarajan Narasimhan Ajay D'Souza Manoj Mohta Sachin Mathur Sridhar C Business Development Contacts Vinaya Dongre Sagar Sawarkar vdongre@crisil.com ssawarkar@crisil.com +91 99 202 25174 +91 98 216 38322 nnarasimhan@crisil.com adsouza@crisil.com mmohta@crisil.com smathur@crisil.com sridharc@crisil.com +91 (22) 3342 3536 +91 (22) 3342 3567 +91 (22) 3342 3554 +91 (22) 3342 3541 +91 (22) 3342 3546 chetanmajithia@crisil.com snair@crisil.com +91 (22) 3342 4148 +91 (22) 3342 3526 magarwal@crisil.com tbhatia@crisil.com +91 (22) 3342 3035 +91 (22) 3342 3226

CRISILs Equity Offerings

TheEquityGroupatCRISILResearchprovidesawiderangeofservicesincluding: Independent Equity Research IPO Grading White Labelled Research Valuation on companies for use of Institutional Investors, Asset Managers, Corporate

OtherServicesbytheResearchgroupinclude CRISINFAC Industry research on over 60 industries and Economic Analysis Customised Research on Market sizing, Demand modelling and Entry strategies Customised research content for Information Memorandum and Offer documents

AboutCRISILLimited
CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company

AboutCRISILResearch
CRISIL Research is India's largest independent, integrated research house. We leverage our unique, integrated research platform and capabilities spanning the entire economy-industry-company spectrum to deliver superior perspectives and insights to over 600 domestic and global clients, through a range of subscription products and customised solutions.

Mumbai
CRISIL House Central Avenue Hiranandani Business Park Powai, Mumbai - 400 076, India. Phone +91 (22) 3342 8026/29/35 Fax +91 (22) 3342 8088

NewDelhi
The Mira G-1 (FF),1st Floor, Plot No. 1&2 Ishwar Nagar, Near Okhla Crossing New Delhi -110 065, India. Phone +91 (11) 4250 5100, 2693 0117-21 Fax +91 (11) 2684 2212/ 13

Bengaluru
W-101, Sunrise Chambers 22, Ulsoor Road Bengaluru - 560 042, India. Phone +91 (80) 4117 0622 Fax +91 (80) 2559 4801

Kolkata
Horizon, Block B, 4th floor 57 Chowringhee Road Kolkata - 700 071, India. Phone +91 (33) 2283 0595 Fax +91 (33) 2283 0597

Chennai
Mezzanine Floor, Thappar House 43 / 44, Montieth Road Egmore Chennai - 600 008, India. Phone +91 (44) 2854 6205/06, 2854 6093 Fax +91 (44) 2854 7531

Hyderabad
3rd Floor, Uma Chambers Plot No. 9&10, Nagarjuna Hills, (Near Punjagutta Cross Road) Hyderabad - 500 482 Phone : 91-40-2335 8103 - 05 Fax : 91-40-2335 7507 For further details or more information, please contact: Client Servicing CRISIL Research CRISIL House Central Avenue Hiranandani Business Park Powai, Mumbai - 400 076, India. Phone +91 (22) 3342 3561/ 62 Fax +91 (22) 3342 3501 E-mail: clientservicing@crisil.com E-mail: research@crisil.com www.ier.co.in