Interview with Mr K Baheti CFO Mcleod Russel

July 2nd 2012

Interview with Mr Kamal Baheti CFO of Mcleod Russell to CNBC-TV18 .

Q: If you could tell us the immediate impact all of us has on prices of tea globally and the kind of impact it would have on average realizations for a company like McLeod Russel as well?

A: Till October last year, we had the record crop in India. At one point of time there was a talk of about crossing one billion kg of production and the shortfall in the month of November-December happened. Then we had an early winter, which affected the production. February-March-April got affected because of the drought.

So there was a five-six months of continuous crop loss and because of the shortfall in the inventories and further shortfalls in the production, the prices for the new season tea is opened at around Rs 25-30 higher and continues to be at that particular level.

We believe this production shortfall cannot be covered for the rest of the year and this price increase of Rs 25-30 will remain for the system for the full year. Internationally also there have been a loss of crop both in Kenya, Sri Lanka other places as well and the prices are higher by 15-20%. So believe around 15-20% increase in prices for the year is something which is likely. 

Q: What kind of immediate impact would that kind of price increase have both in terms of margins and then the flow through in the bottom line for a company like yours?

A: This had been the year where there had been wage revision in Assam and the cost increase has been substantially more than the last year. Around Rs 25-30 increase in tea prices will improve our margins from 25-26% to around 30%. This would reflect at the bottomline as well. We expect both topline and bottomline to increase by 15-20%.

Q: What kind of average realizations per kg can you clock in starting this quarter, you ended up the year with around Rs 140 per kg or so and also what kind of tea sales are you targeting for the second half of FY13 after what you have done in the first half?

A: Normally tea is very seasonal in nature and doesn’t reflect in one quarter to another quarter. This quarter will have a little bit of a loss of crop impact. The prices are higher by Rs 30 per kg and that will reflect in the first quarter. The average prices for the full year, last year it been around Rs 150 per kg for India.

We are currently averaging at around Rs 185-190. So, around Rs 30-35 higher than last years full year average and Rs 30 higher than the first quarter last year is what will be there in the first quarter. As far as the prices for the full year is concerned, we will have this kind of an increase in the prices for full year.

The crop loss which had been there in the initial period in Indian overseas market for us, we will try to recover it through buying more from small growth. So, our internal plan is to either make the similar kind of volumes or improve a little bit. We will not loose the volumes at the end of the year. We will improve on the prices and margins would be higher compared to previous year.

Q: Have you taken any price increases up until now and do you have any more that is lined up June onwards?

A: We are not in the retail segment and don’t take the price increase per se, but I think we operate out of auctions. Since there had been shortages the auction prices had been higher by Rs 25-30 and I think this trend will continue for the full year for the similar teas from period to period.

July, August, September, October is the peak production months for tea. We will see how the prices pan out. But with the kind of shortages both in India and overseas market there should be this kind of a price increase to be there for the full year.

Q: What’s the experience been in the expert market in terms of whether it’s been a similar price increase or even better because of the short fall as you indicated in countries such as Kenya?

A: In fact last two three weeks had seen a substantial increase in prices when the Mombasa auction where all the African teas are being traded. We had seen a 340 cents price for Kenyan tea against 280 cents last year. So there had been 25% increase in prices last couple of weeks. I don’t know how far it can really remain at that level.

But 30-35 cents higher than last year will be something which we will expect out of the international markets as well. Price increase has been across the board and this definitely brings in more demand for teas out of India. As a country I don’t know how much more we will be able to export because of this shortage of production in India.

But as a company we expect it to improve from 24 million kg last year and we expect it to be around 27-28 million kg this year. It would depend on prices both in the international and domestic markets and the kind of production we have for the rest of the year.

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