Monday, December 26, 2011

Acquisition is the way to grow, says McLeod Russel CFO

December 26, 2011(Tehelkanews)

Nothing outside its multi-storeyed façade betrays the history that is enveloped within its 115-year-old precincts. For McLeod Russel India Ltd (MRIL), the journey from 1869 to 2011, from a partnership firm owned by Britishers to a listed-Indian company, has been as eventful as it has been colourful, what with an east India merchant Brij Mohan Khaitan, a supplier of tea chests and fertilizers, being invited to join MRIL as a director and then eventually taking over the reins.



With his rise, the company too morphed through sell-outs and change of hand to emerge in its present form. With 47 tea estates in the Assam valley, six in West Bengal and estates and factories in Vietnam, Uganda and Rwanda, it is now the world\'s largest producer of black tea. K. K. Baheti, whole-time director and CFO, McLeod Russel, shares his views with Indrani Dutta about the tea industry and the company in particular. Excerpts:



How have the trends been so far this year?



For our company, the year has been very good so far. We expect to cross the 100 million kg mark for the first time this year.



Our production has been higher by 6.5 million kg and we expect to get a production of 80 million kg against 74 million kg last year. Additionally, we get 23 million kg from our three overseas estates in Vietnam, Uganda and Rwanda.



Despite the situation of good supplies in the first-half of the year, prices have held firm.



Our exports too are expected to be higher this year.



As for the industry, belying initial optimism, the industry will miss the 1,000-million kg mark in production which would, nevertheless, be higher than last year. But prices are stable.



In many ways, we feel that this year would be marked as a fundamentally defining one for the Indian tea industry.



Why do you say that?



See, North India reaped its highest crop in the last decade between January and September when some of the best teas are made. Exports have been low due to the payment problem with Iran, so supply was at its peak. Consumption is growing at around 3 per cent annually. Yet, there were no correction in prices. The industry has found its level. This is the base-price level for the Indian industry.



We expect prices to remain firm as crop will be around these levels barring any major factors affecting production, as land for tea cultivation is likely to remain static.



Over a four-year period since 2007, tea prices have increased by 70 per cent and we feel further upward movements are likely.



At MRIL, which produces good quality teas which are majorly of the CTC variety, we are expecting to close the year with an average price of Rs.150 against Rs.145 a kg last year. Our export prices too have been better this year.



What is the share of bought-leaf in your total production?



The share of bought-leaf in our total production basket is set to increase this year from 10.56 million kg to 13 million kg. This share is on the rise as it is not possible to get increased production through higher acreage in India. Moreover, we are increasing the capacity of all our factories keeping in view our targeted increase of 5 million kg annually in India and abroad. Any major increase in our own production can be brought about only through acquisition.



For us, acquisition is the way to grow and it is likely to be mostly overseas since no one is selling in India as they expect the sector to do well. We are definitely looking at overseas acquisition. Overseas operations are providing the thrust to the company now.



So new buys are being negotiated?



New buys are a function of opportunities that we get. But in Rwanda two more gardens are now opening up for bidding following their privatisation. We will put in a bid if our board okays the proposal. Other than Rwanda, we are interested in other African countries such as Malawi and Burundi. At present, as you know we have properties in Vietnam, Uganda and of course Rwanda.



What will their contribution be to your overall earnings this fiscal?



We expect that this year around Rs.60 crore out of the Rs.400 crore consolidated earnings that the company hopes to achieve would come from its overseas operations. Uganda has given us a very pleasant surprise. When we took over in January 2010, its operational profit was $7 per million kg of tea, today it is expected to touch $11.



How do you plan to fund your acquisitions — what is your debt position like?



New acquisitions, if any, would be funded through a mix of debt and our own internal accruals.



Our reserve positions are good (at around Rs.900 crore) and tea prices as we have discussed, are also higher this year for MRIL.



Our debt is expected to be around Rs.260 crore this year, down from Rs.316 crore, and we are expecting a decent growth in both our top line (Rs.1,274 crore consolidated, last fiscal) and the bottom-line this year (Rs.246 crore fiscal 2011).


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