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Multi Baggers

Aashish Tater

5.30 AM Jan 1st 1970

Mcleod

BSE ID : 532654     NSE ID : MCLEODRUSS

RECOMMENDED PRICE 274.75

PEAK FROM RECO 324.75 18.20%

CURRENT PRICE 24.03 Resource id #17

McLeod is the largest player in the global scenario with production of approximate 100 million kilos of tea. We expect the stock to give reasonable returns from current levels with a target price of Rs 384.

Mcleod Russel (India)

"Stock has potential of being the United Spirits in the Tea space."

Important Triggers:

TEA as a commodity has seen a perception change from being a commodity play to getting re-rated as a FMCG play and thus the valuation looks attractive for a large player like MCLEOD which is trading at an average discount of 40-50% to global peers.

If Tea-market sources are to be believed there will be change of strategy by the company from being a commodity player to a branded player in some categories and this will provide a huge re-rating chance on the stock. Tea prices are stable to positive and expect further 8-10 Rs hike per kg. The hike will contribute substantially to the bottom line.

Fundamental Perspective:

McLeod is the largest player in the global scenario with production of approximate 100 million kilos of tea. The company is available at market cap to sales of 1.75 times estimated sales. This provides an interesting opportunity and a strong re-rating candidate as small players globally are trading at higher valuation.

The perception change of Tea as a FMCG play is based on the expectation the demand will grow at 2-3% vs. production growth of almost 0 over next two years owing to climatic conditions which will benefit the largest player like McLeod. If one carefully studies the pass-on of price hike to consumers, it has been a steady phase with global tea prices expected to rise by over 7-10% and domestic price to raise by 5%. The company offers insulated pricing tactics due to vertical integration and that's why has survived the toughest time in the industry. Now prices are expected to be on upswing over next two years. Tea Production will remain stagnant, a careful study of tea inventory reflects steady decline and we expect the trend to continue for next 12-15 months minimum. If so company will be clocking EPS in the range of 27.2-28.6 and 30.3-33.2 over next two years. This prepares case of attractive valuation and PE expansion to global average of 14-15 times will compensate for target of 384 and 450 over next 1 year and 2 year respectively.

The Valuation Expansion

Globally whenever inventories reaches alarming level price of commodity shoots up and it becomes Hot Commodity and stocks tend to run at a very fast pace. The trend is visible and perhaps if we learnt Tea and Coffee are complementary products Coffee Industry is trading at 18-20 times earning based on similar logic. Tea is trading at 14-15 times vs McLeod trading at 10 times historical average. The checklist which helps commodity traders to go overboard on a commodity:

1. Supply Constraints

2. Demand Upswing

3. Lower inventory Levels

4. Complement products seeing similar issues

This fits the tea industry in the current scenario. Also management has tea estates in Vietnam India Rwanda and is doing exceptionally well. If things stabilize we expect the company on sale of 1800-2000 crore will make PBT of appx. 500 crores, but due to operational issues profit is not getting reflected and we expect stability in operations in days to come. If small players are making this margin in current scenario we do not see any reason why McLeod cannot perform the same.

Given this scenario, we expect the stock to give reasonable returns from current levels with a target price of Rs 384. The stock is trading at 10 times forward. If market buzz of company focusing on branding and rebranding it will help in margin expansion further both domestically and in international operations.

Company has lot of untapped opportunities in the space. Right from branding of products to retail outlets and also tea estates owned by Industry players are used as tourism. The trend is set to follow and large players will opt for such opportunities. Only time can tell whether such initiatives will be taken by the management but since players in the industry have started en-cashing such opportunities this could be a new beginning for the commodity to be a concept stock + commodity play and FMCG company.

Disclaimer: Aashish Tater is an equity analyst and investment adviser registered with SEBI (Regn. no INA 300001206) based in Kolkata, INDIA. At the time of writing this article, he, his firm and dependent family members have no position in the stocks mentioned above. The author invites readers to send him email and welcomes comments, feedback & queries at query@fortunewizard.com. This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

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