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Friday, May 27, 2016

McLeod Russel India Ltd: Buy
CMP: Rs.181.70
Target: Rs.205
Time: 60 days
The stock of Mcleod Russel India Ltd has not taken part in the current rally. Buy the share at the CMP of Rs.181.70, for a short term target of Rs.197. 

This Williamson Magor group-controlled company aims to scale up their packet tea business to become the third largest in India.

There were media reports last month that inclement weather is taking a toll on people across the country, especially the North-East where tea production might be impacted owing to difficult weather conditions. While Assam has witnessed heavy rains, Darjeeling has gone through a dry spell (though the company does not have much exposure here). Speaking to Bloomberg TV India, McLeod Russel CFO Kamal Baheti says while there could be some impact of April, FY17 looks brighter than last two years.

He said: "If you look at the full financial year, April produces 5 per cent of the overall production. So, the loss of crop in April may not really impact the annual production. But, it really depends on how the weather plays out. We hope that things will improve. It is normal in Assam to get rain continuously for 10-15 days. As I said, it’s too early to really make a call on this. But you know, if you really have to look at the structure of industry per se, it has been losing crop since last two years because of dry weather. This is the first time we’re getting enough rains in Assam. With a little bit increase in the overall temperature and rainfall, it may be a good year for production. And since the rate of production has been low in the last two years, we also expect the prices to be strong this year. Compared with the previous year, 2016-17 looks much better, both on the production as well as the price".

Earlier in an interview with CNBC TV18, on 22 March, 2016, Mr.Kamal Baheti, CFO said, "Considering supply shortages, good demand and firm closing prices during the last season (higher by Rs.20-25 per kg), tea prices are expected to be strong in the upcoming auction". 

He feels the tea prices are likely to increase by at least 15-20% in the new season from July to October.   

Baheti pointed out that a major chunk of the company’s profitability kicks in only during the third and fourth quarters as the new season begins.   Although overseas business of the company is also expected to perform better, the focus will be on the domestic market, he said.

Therefore, we can look for taking positions in the share of Mcleod Russel Ltd at the CMP of Rs.181.70, for target of Rs.193-197-205. The Company is coming up with Q4FY16 results, on 30 May, 2016. 
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