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Sunday, May 08, 2005

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Harrisons Malayalam: Buy

Alagappan Arunachalam

Firm tea prices to aid turnaround.

AN INVESTMENT can be considered in the Harrisons Malayalam stock, which quotes at about 10 times its 2004-05 earnings adjusted for extraordinary items. Rubber prices are ruling high, on robust demand from the tyre industry, thanks to the expansion of the transport sector. The prospects for the tea business also seem to be improving.

The 2004-05 earnings indicate that Harrisons Malayalam operates at a margin of about 15 per cent, close to the 1998 levels. Lower interest burden is expected to further boost its net earnings.

Part of the RPG group, Harrisons Malayalam is the largest producer of natural rubber in the country and derives about 45 per cent of its revenues from this segment. It makes and sells tea and derives close to 46 per cent from this division; engineering and tissue culture divisions account for the balance.

Tyre and footwear are the major rubber-consuming industries; tyre manufacturers account for about 50 per cent of the demand for natural rubber. Rubber prices had reached their peak last July, but firm trends in prices appear likely to sustain into the near term.

The prices have shot up on demand from the tyre industry, which is driven by the growth in the automobile sector.

Tyre export is also growing. With a tyre manufacturer, Ceat, also under the RPG fold, Harrisons Malayalam is assured of good demand for its rubber products. PepsiCo has approached Harrisons Malayalam to undertake intercropping of pineapple in its rubber plantations; this should serve up additional revenues.

Harrisons Malayalam's tea division made a loss in 2003-04, which was offset by the rubber division's profits. In the past, lower tea prices took a toll on profits. But prospects for this business seem to be looking up, with the overall output expected to fall this year.

Social costs push up the cost of producing tea in India compared to other countries. While FMCG companies have in the recent past divested their tea plantations, Harrisons Malayalam would not be able to do so on account of its low market share in the branded tea business. The company owns four tea brands, which straddle the mid- and lower-price segments.

However, with a sharp fall in the tea output and improving export prospects, the performance of the tea business could look up this fiscal.

In the first quarter of 2004-05, Harrisons Malayalam sold one of its rubber plantations, and the proceeds were used to settle its outstanding term loans. The company wiped out losses this year, aided by higher prices of rubber and tea.

Harrisons Malayalam proposes to provide security to a consortium of banks up to Rs 200 crore by mortgaging its estates on behalf of Ceat.

This move could have adverse implications for Harrisons Malayalam if Ceat is unable to meet its obligations.

But with the improvement in tyre demand, this appears unlikely, especially if Ceat's financials stage a recovery.

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