McLeod Russel Equity Research

Date of Research – 22 January 2016

Price – Rs. 146.30

About the Company

McLeod Russel India Limited (“McLeod Russel” or the “Company”) is the world’s largest tea plantation company engaged in the cultivation, processing and sale of tea. The Company primarily produces Crushed, Torn and Curled (CTC) tea and the orthodox black tea. CTC teas account for nearly 90 % of its production, the rest being the Assam orthodox variety. McLeod Russel along with its subsidiaries, manufacture approximately 100 million kilograms of high quality tea every year from its tea estates in Assam and West Bengal (India), Vietnam, Uganda and Rwanda.

The Company has 63 tea estates in India (48 in Assam, 5 in West Bengal), 3 in Vietnam, 6 in Uganda and 1 in Rwanda, 62 factories, with a total area of 38,758 hectares under cultivation globally. McLeod Russel’s tea is exported to 23 countries. The Company (including subsidiaries) produced 102 million kgs of tea in 2012-13 making it one of the largest global black tea exporters. The Company’s tea is marketed under the registered Elephant trade mark.

Over the past decade, McLeod Russel has been growing both organically and by aquiring other companies and tea gardens.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Total Income from Operations1,668.551,788.761,645.95  1,926.32 1,870.82
Expenses1,287.331,436.151,516.74  1,759.71 1,760.38  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)381.22352.61129.21  166.61 110.44
Depreciation39.2037.7176.75  82.20 103.53  
Finance Costs51.0559.8071.90  109.81 135.89  
Other income34.4244.3644.71  90.16 183.51  
Exceptional items0.312.160.56  2.13 – 
PBT325.08297.3024.71  62.63 54.53  
Tax42.9734.86(9.33)  18.04 (9.92) 
PAT (before Minority Interest and share of Associates)282.11262.4434.04  44.59 64.45  
Profit/ (loss) attributable to Minority Interest6.164.092.04  7.02 – 
Share of profit / (loss) of Associates2.021.200.83  0.27 – 
Consolidated Profit / (Loss) for the year273.93257.1531.17  37.3064.45  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Operating Profit Margin Ratio22.8519.717.85  8.65 5.90 
Net Profit Margin Ratio16.9114.672.07  2.31 3.45 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015 FY 2016
Share Capital54.7354.7354.7354.73  54.73 
Reserves & Surplus1,691.921,896.202,102.032,036.74  2,040.11 
Net worth (shareholders funds)1,746.651,950.932,156.762,091.47  2,094.83 
Minority Interest11.7415.3218.3824.05  18.17 
Long term borrowings93.9725.8382.62263.31  325.98 
Current liabilities460.06530.07524.72639.00  853.93 
Other long term liabilities and provisions71.8872.5530.6733.62  29.89 
Deferred Tax Liabilities76.9282.3374.4437.11  30.66 
Total Liabilities2,461.222,677.032,887.603,088.56  3,353.46 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015 FY 2016
Fixed Assets1,895.341,968.022,125.112,228.22  2,262.11 
Noncurrent Investments18.9716.6513.2911.90  9.50 
Current assets357.48454.48502.52683.54  953.47 
Long term advances and other noncurrent assets189.44237.87246.67164.90  128.39 
Total assets2,461.222,677.032,887.603,088.56  3,353.46 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015 FY 2016
ROCE21.0219.1415.625.43  6.83 
ROE / RONW18.1614.0411.921.49  2.13 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Total Income from Operations (Rs. Cr.)1,668.551,788.761,645.95  1,926.32 1,870.82 
Growth (%)15.45 %7.20 %(7.98 %)  17.03 % (2.88 %) 
PAT (Rs. Cr.)273.93257.1534.04  44.59 64.45  
Growth (%)(8.66 %)(6.13 %)(87.03 %)  30.99 % 44.54 % 
Earnings Per Share – Basic (Rs. )25.0323.492.85 3.41 7.11 
Earning Per Share – Diluted (Rs. )25.0323.492.85 3.41 7.11 
Price to Earnings13.9711.6261.05  54.43 24.68 

Dividend History

The Company has maintained an average dividend yield of 1.99 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. McLeod Russel’s average current ratio over the last 4 financial years has been 0.76 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

McLeod Russel’s average long term debt to equity ratio over the last 4 financial years has been 0.05 which indicate that the Company is operating with a low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

McLeod Russel’s average interest coverage ratio over the last 4 financial years has been 7.52 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, McLeod Russel reported a promoter holding of 49.89 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 39.63 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.