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| Summary of Contents | STOCK UPDATE Mcleod Russel India
Recommendation: Hold
Price target: Rs340
Current market price: Rs317 Uncertainties remain but upsurge in prices provides relief Key points - Tea prices firm up; production likely to be lower this year: In the past seven to eight weeks, the north-Indian raw tea prices have started moving upward due to lower tea production. The months of April and May (though a lean season) saw tea production declining by 30-40% year on year in north-east India which led to a surge of Rs10-12 per kg in the tea prices. The early industry reports indicate that the tea production in India could be lower by at least 25-30 million kg at around 1,170 million kg in FY2015 as against 1,200 million kg in FY2014. The production in June-September (the peak season) would be critical and watched keenly by the markets.
- Global production also weak; better realisation to boost margins: Black tea production globally (including in India) was down by 5% till May 2014 (in the last few months). Sri Lanka's crop witnessed the highest drop of 11.46 million kg while Tanzania and Kenya witnessed a drop of 5 million kg and 3.5 million kg respectively in the same period. Thus, the tea prices are likely to firm up further. In case of McLeod Russel India Ltd (MRIL), we expect the average realisation to be higher by 12-16% this year (as compared with FY2014). With no major increase in the operating cost, the operating profit margin is expected to be higher by 100-150 basis points in FY2015.
- Expect strong Q2/Q3 after a weak Q1: Given the lower production volumes in Q1FY2015, we expect MRIL to disappoint with its Q1 performance. However, the financial performance is likely to improve considerably in Q2 and Q3 on the back of margin expansion driven by a better realisation (and a potential improvement in tea production domestically in the coming months).
- Recent appreciation factors in positives: The recent run-up in MRIL's stock price largely factors in the benefits of the better realisation. This leaves little scope for appreciation from the current level to our revised price target of Rs340 (10x FY2016E earnings) Thus, we maintain our Hold call on the stock.
- Risk to our call: The realisation trend and production data for the coming months are the key monitorables. The Street is factoring in a 15% better realisation with an improving production output in a peak season would limit the fall in the production volumes. Further, a drop in tea production in north-east India or any significant increase in the cost element would act as a key risk to our earnings estimates and the call on the stock.
VIEWPOINT Suprajit Engineering
Current market price: Rs106 Sharp appreciation; book profits Key points - Though we continue to believe in the long-term secular growth story of Suprajit Engineering due to its strong positioning and dominant leadership in the auto cable space, but the sharp run-up of close to 45% in the stock price (the stock was recommended by Sharekhan at Rs73 on April 9, 2014) in less than three months leaves little scope for any material re-rating of multiples from here. Thus, it is advisable to take home profits.
- Fundamentally, the company posted a robust earnings growth of 21.2% in FY2014 in spite of tough market conditions. The company is gaining market share with India's fastest growing two-wheeler manufacturer, Honda Motorcycle & Scooter India, and increasing after-market sales to sustain a healthy growth trend. It will be investing about Rs60 crore to increase its consolidated capacity to 225 million cables per annum.
- At a valuation multiple of 13.6x FY2016E earnings, the stock is trading at a 50-55% premium to its historical average valuation and is largely discounting the near-term positives. However, any serious investor should keep the stock on his radar (in order to enter at a better price point) as it is one of the finest stocks in the auto ancillary sector.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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