Tea stocks like McLeod Russell have run up 3-4X since and the logic still stands true
I think this is one commodity we can trust
It would be interesting if we can follow names like Jayshree Tea, Goodricke and Mcleod here
Tea Plantations
Tea is one of the few agriculture commodities, which has not moved since theBull Runin commodities started some 6 years back, itas high time that the cycle turns in favor of producers the same fundamentals (inflations cost escalation of all input variables have gone up across the spectrum)
Tea Sector (sp. Indian plantations**)**has been in doldrums since last 7-8 years, even though some leaders in the sector have been making reasonable amount of money, sector at large has been an underperformer.
Some companies which a think are screaming buys:Mcleod Russel, Jayshree Tea and Dhunseri Tea.
Being a cyclical sector, I believe we could soon be witnessing an up move in the tea price.
Here I present SWOT analysis for the sector.
Strengths:
Tea can be considered as a health drink (known of its antioxidant properties) as opposed to more favored coffee, which also has a lot of negative effects on health.
Demand for tea has been growing at some 2% per annum and should accelerate further as the demographics of the tea consuming nations is favorable (all former British colonies a most of developing Asia, Africa andMiddle East)
Demand and Supply mismatch, which we would observe in coming years because of underinvestment in the production activities worldwide. Furthermore, it takes 5 years to reap the first tea crop from the time of plantation and no capacity has been added in last 4-5 years.
Huge land holdings of tea estates could be used for farming of alternative crops alternative (with massive investments proposed for farm and farm related supply chain, in next few years we could see companies like Reliance retail acquiring tea estates for growing fruits and vegetables)
Tea is one of the few agriculture commodities, which has not moved since theBull Runin commodities started some 6 years back, itas high time that the cycle turns in favor of producers the same fundamentals (inflations cost escalation of all input variables have gone up across the spectrum)
Highly fragmented industry and consolidation could help price rationalization.
Weakness:
The Indian labor laws are draconian and do more harm to industry and labor than help.
labor intensive industry and therefore comes with all problems and constrains which are attached to such industries (labor unions, politics and low productivity)
Scalability is limited; itas a US $ 5 billion market globally and is growing at a very slow pace.
Supply from more efficient players likeKenya,VietnamandSri Lanka.
Climate change may do more harm to tea growing region, hence escalating prices but also resulting hampering the capacity.
The downward trend might continue for some more time.
Opportunities:
The trend towards the health drink is quite visible; it is up to the tea industry to make the consuming population at large to make aware of the facts.
Tea has a distinct advantage over more popular beverage a coffee
To make tea more acceptable and fashionable like coffee
To come up with new flavors/formulation of the tea
Threats:
1). To retain the young population of the tea consuming countries mostly developing countries, from being lured by multination to aerated and flavored drinks.
Well, tea indeed is a decent commodity for investment. The thing is, it requires a consolidation. With wages raised so steeply after the wage agreement, some inefficient gardens are bound to get closed or taken over. What that will do, is reduce the supply of low quality teas and more importantly, would enable the good quality teas to fetch better and remunerative prices. Already, in this year North Indian auctions, prices are ruling higher by about 20 rupees a kg for CTC/dust. darjeeling and orthdox are likely to fetch better prices than last year. This firming up of prices would accelerate all the more when the supply pressures would emerge.
Coming to companies, I have placed my bet on Goodricke as its almost debt-free, produces good quality teas which fetch quite high prices in the auctions.
Jayshree has promoter related issue as well. While it may claim to be a professionally managed company, the fact remains that its still run in a babu-style. Its nice to be diversified, but you dont diversify through increasing leverage. Diversification suits companies which can afford to lose, something like an ITC, which generates tonnes of profits every quarter so it can afford to take on well-entrenched players and make them lose sleep. So, when you diversify using leverage what happens is that the strong divisions have to give more support than what they can afford to, thereby losing their own strength. At the end of the day, companies should be financially strong. Inorganic growth is alright, but if it comes at the expense of financial strength, then its not desirable at all.
Businesses need to run professionally and not whimsically. Where owners are not passionate and yet they interfere in day to day management, performance becomes a casualty.
Anyone tracking Rossell India Ltd., having Five tea estates in Assam in an area of 4000 hectares. In addition to the conventional Tea business company having two more divisions i.e., Aerospace/defense , and Hospitality.
Is McLeod Russel a buy at this price? Profit margins have historically been 15-20% and assuming them to revert to mean on sales of Rs 1850 crore in FY16, the company should generate a net profit of Rs 200 crore plus. Current market cap is about Rs 1900 crore.
Tea prices in India are expected to rise by 15%. Volumes saw a decline in FY15 but that should pick up in FY16, especially exports.
The question is what PE should the stock be trading at?
I recently read in a newspaper report that tea production has declines marginally compared to last year. However, exports are up. Additionally, I checked the auction prices for Team in various districts of Assam (50% of India’s tea production). Through the year till November 2015, they have declined month on month by about 0-10% differing from state to state. The decline appears to be slowing down as we step in November 2015 (details for December and January not available). More details may be found by clinking on the following link
I have been tracking a company called Dhunseri Tea which has estates in various parts of Assam. Inspite of declining tea prices, it has performed resiliently. Tea companies in general have performed decently especially considering falling auction prices as well as rising labour costs. I believe that going forward prices should remain strong and probably rise stepping into 2017 and thus there is a case to invest in these tea companies. This is also corroborated from some new articles that confirm that tea prices in December 2015 are holding steady.
Request anyone with a different hypothesis to get in touch - additionally looking for some guidance from boarders who know more about the tea industry
Anyone on the forum checking out the recent decline in McLeod Russel ?
The stock has been drifting down over the past few sessions as the company delayed results and hasn’t booked the exact amount it received after asset sale.
I think it can be an opportunity to buy this stock at good valuation. However, I would like to hear viewpoint of others who have been tracking tea companies.
The chariman of the group BMKhaitan passed away recently. The uncertainty over board reshuffle may be a reason.
Also, watch S Naren’s interview with Ramesh Damani where he says that tea stocks are a great proxy to a real estate play. I dont have the link, you can check on Youtube
