The three months to March is a weak quarter for tea companies. Production remains minimal due to the winter season and companies see limited activity in the domestic auction markets.
With fixed costs remaining static, most tea companies register losses for the period. McLeod Russel India Ltd is no different. About 85% of its revenue comes from its local tea estates.
On a stand-alone basis, the company’s fourth-quarter loss widened from Rs 122.9 crore in the year-ago period to Rs 157.4 crore. Sales grew by 13.6%.
Operating costs rose sharply. A mid-term revision of wages in Assam, increase in fuel costs and higher spending on irrigation and fertilizers led to a 23.7% jump in the company’s expenditure.
Employee benefit expenses rose 22.8% to Rs 92.8 crore. The company spent 41.6% more on spare parts, while interest costs increased by 22.7% to Rs 12.5 crore. The sharp rise in operating expenses negated the benefit of a 74.5% jump in other income.
The company expects the pressure on input costs to continue. The cost of producing 1kg of tea is estimated to increase by Rs 8. “Increase in wages due to revision as per the agreement and normal increase in other input cost and loss of crop during April will have its impact on costs,” McLeod Russel India said in a statement. “Costs per kg are expected to increase by Rs 8 on assumption of normal production during the rest of the year.”
Though costs are rising, the company might not see a sharp drop in realizations. Low inventory levels in India and production shortfall due to unfavourable weather conditions in large tea-producing countries are expected to lend support to high tea prices. According to the company, tea prices in India are already higher by Rs 30 per kg compared with last year.
Strong margins at overseas tea estates are expected to help the company earn a higher consolidated operating profit. The overseas units enjoy better profit margins due to lower costs.
In the previous fiscal year, the company’s Ugandan tea estates reported an Ebitda (earnings before interest, taxes, depreciation and amortization) margin of 38.5% and its Rwandan tea estates reported an operating profit margin of 50%. Ebitda is an indicator of a company’s profitability.
Margin at the stand-alone Indian unit stood at 24.6% during the last fiscal. Higher overseas margins helped the company report an 8% expansion in consolidated operating profit for the year. However, on a stand-alone level, operating profit contracted 2%.
Overall, even as the dry weather is not that conducive to tea production, firm prices and better margins at the overseas tea gardens are expected to help the company reduce the impact of rising input costs to some extent.
Against a gain of 15% the BSE Midcap index, the McLeod Russel India stock has rallied 48% since the beginning of this year. The gains, though, could peter out if tea prices do not hold up.
Graphic by Ahmed Raza Khan/Mint
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