At a time when mid-caps are being buffeted by market uncertainties, the Rs 1,400-crore McLeod Russel is witnessing consistent FII buying. With a debt-equity ratio of 0.15:1 and Rs 750 crore in free reserves, the world’s largest tea producer is now looking forward to more acquisitions overseas. The company is also aiming to take consolidated production to 150 million kg from a little over 100 million kg, in the next three to four years. In an interview to Business Line, Kamal Kishore Baheti, CFO, elaborates on McLeod’s acquisition plans in Africa and Vietnam, and capacity expansion plan in India. Excerpts:

Contrary to the market trend, FII holding in McLeod has been constantly increasing — from 32.90 per cent in June 2012 to 35.96 per cent as on June 2013. What is the reason?

I think it is mainly because of consistency in performance and the kind of dividend we are paying. This year, on a standalone profit basis, we have distributed 40 per cent of our profits. It helps build confidence. Also, I think they understand that investment decisions in the tea industry should be taken on a long-term basis.

The promoters’ stake is 45.71 per cent. Do you think there is a case to enhance it?

It is a good level. If you take the liquidity out of the system then the interest of investors becomes that much lower. I do not think promoters are looking at increasing their stake in the near future.

The promoters’ stake include nearly 25 per cent treasury stocks held by Boreli Tea, UK. Will the promoters buy it back? What is the time frame to offload the treasury stock?

They intend to take a call on it. I do not think anything is being planned in the immediate future. But, whenever it is done, it will happen at a proper valuation and in a transparent manner.

Why has your EBITDA margin been going down since 2009-10?

For two years, the price increase was not good enough to take care of cost increases. In 2012-13, prices did go up but we lost crop. Secondly, the mix of production is changing as we are supplementing our own production with increased sourcing from small farmers. The margin on second segment is lower than our own production. If you see the mix, then the margins are lower but since the volume is growing, overall profitability is better. In a tea company, one should look at the margin per kg and not as a percentage of sales.

What is the outlook on Indian operations in 2013-14?

Current weather conditions are conducive. So, we should be able to recover the crop we lost last year. This means, per kg cost remaining similar to last year, our own tea (grown in McLeod’s estates) production should increase by 4-5 million kg. Total production (including small growers’ contribution), should move up by nearly 9-10 million kg to 87-88 million kg. Prices were lower during the first quarter, but have started firming up in last three-to-four weeks. We expect quality tea prices to be higher by Rs 5-10 a kg, this year. So, on higher volume and higher prices, the profitability for the current year looks better.

You have plans to shore up Indian production to 100 million kg in next 3-4 years. Will you go for acquisition of more estates?

We are not interested in buying estates in India due to high valuations. Also, concentrating the entire plantation in one area is risky due to weather related uncertainties. To mitigate the weather risk we have gone overseas. In India, we will grow our volumes through small growers. We will look at M&A opportunities overseas.

What is the total tea production plan of the company and how much of it should come from overseas?

We are targeting 140-150 million kg of consolidated production in the next 3-4 years. Of the total, nearly 40-45 million kg should come from overseas. Currently, we produce 25-26 million kg of tea in plantations abroad.

Which are focus countries for acquisition?

We are looking at acquiring plantations in Africa and Vietnam, whenever the opportunity comes. There is nothing on the anvil as of today. Higher overseas production should help us cater the growing tea markets in West Asia and Russia.

You had some quality issues in Vietnam.

There was some initial problem with regard to pesticides, and chemical residues. But we have put things in place. Now, part of our output in Vietnam comprises EU-compliant teas.

Are you looking to diversify into other commodities?

We had diversified into Jatropha 2-3 years back. We ended up losing Rs 25 crore. We understand tea and we will stick to it. I do not think we any have plans to look at any other area.

pratim.bose@thehindu.co.in

shobha.roy@thehindu.co.in

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