ICICI Securities Limited

Result Update
February 2, 2011
Rating matrix
Rating Target Target Period Potential Upside : : : : Buy | 244 12 months 18%

McLeod Russel (MCLRUS)

| 206
WHATS CHANGED
FY11E 1,182.1 362.0 265.3 24.2 FY12E 1,543.6 440.0 298.7 27.3

Key Financials (| crore)

| Crore Net Sales EBITDA Net Profit EPS (|) FY09 828.9 209.4 85.6 7.6 FY10 1,106.2 362.7 230.9 21.1

PRICE TARGET .................................................................. Changed from | 272 to | 244 EPS (FY11E) .................................................................................................. Unchanged EPS (FY12E) .................................................................................................. Unchanged RATING.......................................................................................................... Unchanged

Volumes from Uganda to aid topline growth

McLeod Russels results were inline with our expectation with sales growing by 9.2% to |366.7 crore from |335.8 crore in Q3FY10. Sales volume increased by 1.0 million kg (mkg) to 24.5 mkg (16 mkg in domestic markets and 8.8 mkg exported) and realisations improved by 4.8% to |149 per kg in Q3FY11. However, the production in Q3FY11 declined by 1.0 mkg to 21.8 mkg. The company is currently holding 15.3 mkg of inventory (Indian operations). EBITDA margins during the quarter declined by 400 bps to 40.3% due to increase in employee cost by ~8% (Revision in labour wages by |3.5 per kg from January,2010). Also, interest cost increased by 29.4% to | 6.0 crore in Q3FY11, thereby pulling down the net profit by 1.9% to | 135.3 crore. Operational Highlights McLeods total tea production in 2010 declined from 76.1 mkg to 72.4 mkg on the back of pest attack (in May-June) and lower rainfall (in August) in Assam. However, its Vietnam subsidiarys (Phu Ben) production improved from 4.3 mkg in 2009 to 4.6 mkg in 2010 with the average realization for the year being |77 per kg. Phu Bens sales for 2010 stood at |31.5 crore and EBITDA at |3.1 crore. Also, production from the Uganda subsidiary in 2010 increased to 16.8 mkg from 15.3 mkg in 2009 with the average realization being |84 per kg. The sales from Uganda stood at |135 crore and EBITDA at |49.5 crore in 2010.

Valuation summary
FY09 P/E Target P/E EV / EBITDA Price to Book Value RoNW(%) RoCE (%) 26.9 35.8 12.7 1.9 7.1 10.6 FY10 9.7 12.9 6.8 1.6 16.4 18.9 FY11E 8.5 11.3 6.5 1.4 16.1 17.7 FY12E 7.5 10.0 5.2 1.2 15.5 18.7

Stock data (| crore)

Market Capitalisation Debt (FY10) Cash (FY10) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) | 2249 crore | 442crore | 103.3 crore | 2587 crore 311.5 / 127.6 | 54.7 crore |. 5 7.8 28

Price movement
290 240 190 140 90 Mar-10 Dec-09 Sep-10 Jun-10 Dec-10 40 5600 4400 3200 2000

Valuation
At current market price of Rs 206, stock is trading at 8.5x and 7.5x its FY11E and FY12E estimated EPS of Rs 24.2 and Rs 27.3, respectively. With tea production expected to remain stagnant in India and concern about lower production in Kenya and Sri Lanka, we believe tea prices would be higher Q4FY11 (compared to Q4FY10). Also, with higher volumes being sold by McLeod led by its acquisitions in Vietnam and Uganda would lead to higher profitability in FY11. We maintain our earning estimates for FY11 and FY12, However due to current macro headwinds and market volatility, we are compressing PE multiple to 9x (earlier 10x) its FY12 EPS of 27.3 with target prices of | 244.
Exhibit 1: Financial Performance
Net Sales EBITDA margin (%) Depreciation Interest Other Income Reported PAT EPS (|) Q3FY11 366.7 40.3 7.0 6.0 0.6 135.3 12.4 Q3FY11E 358.2 40.0 10.4 12.1 5.2 126.0 11.5 Q3FY10 335.8 44.3 6.9 4.6 0.6 137.9 12.6 Q2FY11 361.2 58.2 7.0 4.7 2.3 201.0 17.6 YoY(%) 9.2 1.4 29.4 1.8 -1.9 -1.9 QoQ(%) 1.5 1.0 28.6 -74.7 -32.7 -29.6

McLeod

Nifty(R.H.S.)

Analysts name
Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com

Source: Company, ICICIdirect.com Research

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Exhibit 2: Domestic and Export Sales Volume (million kg)
Export demand in Q3FY11 improved over Q2FY11, however, the higher prices in 2010 led to shrinkage in the demand over Q3FY10. Domestic demand however maintained its momentum in spite of higher prices.
60% 40% 20% 0% Q1FY10 Q2FY10 Q3FY10 Q4FY10 Domestc Q1FY11 Q2FY11 Q3FY11 6.7 7.5 15.7 13.2 14.5 18.3 100% 1.9 80% 8.5 10.3 7.5 1.2

5.7

8.8

16.0

Exports

Source: Company, ICICIdirect.com Research

Exhibit 3: Domestic and Exports Realisations(| per kg)

170 153.7 156.4 163.2 155.0 151.0 150.8 137.0 149.0 149.4

Domestic

realisations

rose

due

to

lower

155 140 125 110 95 80 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 111.0 136.0 134.6 133.0 126.0

production in India, However export prices declined due to increase in production in Sri Lanka and Kenya

Q2FY11

Q3FY11

Domestic (| per kg)

Exports (| per kg)

Source: Company, ICICIdirect.com Research

Exhibit 4: EBITDA and PAT Margins(%)

80 60.4 35.5 44.3 55.9 41.1 25.8 Q1FY10 Q2FY10 Q3FY10 -12.0 Q4FY10 14.8 15.4 Q1FY11 Q2FY11 Q3FY11 55.6 36.9 58.2 40.3

Wages increased by ~| 3.5 per kg, resulted in lower EBITDA margins

60 40 20 0 -20 -40 -60

-42.6 EBITDA Margins (%) PAT Margins(%)

Source: Company, ICICIdirect.com Research

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Exhibit 5: North India Tea Production (in million kgs)
140 120

North India Production declined by ~2%, resulted in higher domestic prices

100 80 60 40 20 0 -20 Jan Feb Mar Apr May Jun 2010 Jul 2009 Aug Sep Oct Nov

Source: Company, ICICIdirect.com Research

Exhibit 6: North India Tea Prices (| per kg)

140.0

North India tea prices have increased by ~| 4 per kg

130.0 120.0 110.0 100.0 90.0 80.0 70.0 Sep-09 Sep-10

Oct Nov

Jul-09

Jul-10

Nov-09

May-09

Source: Company, ICICIdirect.com Research

Exhibit 7: Tea Production in Kenya (in million kgs)

Tea Production in Kenya rose resulted in softing of tea prices earlier in 2010. However production would not remain at the same level in 2011.
45 40 35 30 25 20 15 10 5 0 Jan Feb Mar Apr May Jun 2009 Jul 2010 Aug Sep Dec

Source: Company, ICICIdirect.com Research

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May-10

Mar-09

Mar-10

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Nov-10

Jan-09

Jan-10

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ICICIdirect.com Universe (Tea)
McLeod Russel Idirect Code MCap Jayshree Tea Idirect Code MCap Harrison Malayalam Idirect Code MCap MCLRUL CMP Target 2249.3 Upside 206 FY10 244 FY11E 18.4 FY12E Sales (| crore) 1106.2 1182.1 1543.6 Sales (| crore) JAYTEA CMP Target 362 Upside 154 FY10 193 FY11E 25.3 FY12E 406.0 447.4 562.6 Sales (| crore) 326.4 339.4 363.7 EPS (|) 21.1 24.2 27.3 EPS (|) 27.6 32.3 34.7 EPS (|) 6.3 1.5 5.3 PE (x) 9.7 8.5 7.5 PE (x) 5.6 4.8 4.4 PE (x) 12.9 54.0 15.3 EV/E (x) 6.8 6.5 5.2 EV/E (x) 3.7 5.1 2.9 EV/E (x) 8.2 16.6 11.8 RoNW (%) 16.4 16.1 15.5 RoNW (%) 33.4 32.6 28.4 RoNW (%) 4.1 1.0 3.4 RoCE (%) 18.9 17.7 18.7 RoCE (%) 22.7 24.5 30.3 RoCE (%) 7.0 4.6 6.3

HARMAL CMP Target 150.0 Upside

81.0 FY10 86.0 FY11E 6.2 FY12E

Source: Company, ICICIdirect.com Research

Recommended History
300 260 220 180 140 100 Rating:Strong Buy TP: | 273 Rating: Buy TP: | 244 Rating:Strong Buy TP: | 273 Rating:Buy TP: | 273

Feb-10

Apr-10

Aug-10

Dec-09

Sep-10

Jan-10

Oct-10

May-10

Mar-10

Source: Company, ICICIdirect.com Research

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Nov-10

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Dec-10

Jun-10

Jul-10

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Sanjay Manyal MBA (FINANCE) Parineeta Poddar MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

pankaj.pandey@icicisecurities.com

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. 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Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. 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