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Mcleod Russel India – Cheapest Agri Stock

April 7, 2008

McLeod Russel is the largest bulk tea producer in the world. Tea prices are on an upward run and McLeod offers an excellent leverage given its scale and high fixed operating costs. McLeod’s EPS is expected to grow 5x over FY08-10 on surge in tea prices.

Tea prices likely to surge as supplies tighten. We expect tea prices to rise 24% over FY08-10 following a production slump in Kenya in Jan-March’08 and low pipeline stocks in India. Perhaps the best stock to play the tea price rise McLeod accounts for 8% of India’s tea production. It has among the best quality tea gardens in the world located in Assam – known for its high quality tea. It has very high operating leverage – a 1% change in tea price impacts FY09 EPS by 6.6%.

Tea prices, wage cost, stronger Re The stock is trading at an imputed PE of 6.4x FY09E and 4.3x FY10E adjusting for market value of treasury shares – 25% of shares capital. This is a substantial discount to global food commodity / plantation companies and Indian sugar stocks trading in the range of 10-15x 1-yr fwd PER Target Price of Rs 120 is based on 7.5x FY10E imputed PER adjusting for the market value of treasury stock.

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