In fiscal 2010, tea planter McLeod Russel India Ltd’s sales growth was largely due to an increase in prices and not driven by volumes. In the current fiscal, however, production will play a much bigger role compared with prices.

Expectations of higher production in key producing countries such as India, Kenya and Sri Lanka are expected to keep prices lower. As the margins of tea companies are sensitive to fluctuations in prices, they will get affected. But McLeod believes that domestic prices will not fall, contrary to what is expected in international markets.

Graphic: Yogesh Kumar/Mint

Volume growth was much better at around 17% but growth in price realizations was relatively lower at 14%, and as a result, net sales rose by 33%. Average price realizations in the March quarter were Rs125 a kg, much lower than the full-year level of Rs137 a kg.

Margins for the full year went up by 8 percentage points as realizations rose far ahead of costs, which rose only 15%. The margins for the last quarter are not really relevant, as production is seasonally low in these months.

Better profitability, higher other income, lower interest costs and foreign exchange related gains saw McLeod’s profits triple to Rs240 crore during fiscal 2010. Expecting a repeat of that performance in the current year would be unrealistic.

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Profitability may come under pressure due to higher wage costs, as it is a labour-intensive industry. McLeod’s staff costs to sales ratio is 33%. Effective January, wages have been revised, which will see costs increase in fiscal 2011. McLeod’s volumes will be higher during fiscal 2011 due to its Ugandan acquisition, which will add around 15 million kg in sales or around one-fifth of its current output. But the outlook on McLeod’s profitability is contingent on tea price trends.

McLeod expects global prices to remain stable in fiscal 2011, but it expects prices in India to rise, due to stagnant production and a shortage in carry-forward tea inventories. Flat prices in international markets, however, are likely to affect its exports, which accounted for around 37% of sales in volume terms.

Over the next few quarters, more clarity will emerge on domestic tea price trends, which will give a better indication of how McLeod will perform during the year. In the past one month, its stock price is down by 18%, perhaps due to investor reactions to the uncertain outlook.

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