CRISIL Equity Researchinitiated coverage on Harrisons Malayalam with a valuation grade ofâ5/5â,indicating that the market price of Rs 83 (as on November 03, 2010) has aâstrongupsideâfrom the current levels.CMP 88 on Nov 8.
Harrisons Malayalam Ltd (Harrisons), a Cochin-based RPG Group company, is the largest rubber cultivator in India (49% of FY10 revenues); it has 11 rubber plantations spread over 7,338 hectares in Kerala. It also cultivates tea (46% of revenues) and other crops. We assign Harrisons a fundamental grade ofâ3/5â,indicating that its fundamentals areâgoodârelative to other listed securities in India.
Largest domestic cultivator of rubber well placed to ride on higher prices
Average natural rubber prices are expected to rise by 30% in FY11 and remain firm over the medium term. With its superior quality rubber, which commands a premium over tyre-grade rubber, Harrisons is well placed to ride on higher rubber prices despite a drop in output due to replanting of older trees. Sales from the rubber segment are expected to grow at a CAGR of 3.5% over FY10-13 to Rs 1,776 mn. Since most of the realisation gains are expected to flow into profits, PBT from rubber is expected to grow at 35.6% CAGR to Rs 292 mn.
Higher focus on tea segment expected to turn it around beyond FY14
Harrisonsâ tea plantations are about 80-90 years old and are facing a structural decline in production. The declining yields have been insufficient to absorb the high costs of cultivation in South India, rendering the segment unprofitable over the past few years. Further, tea from South India typically enjoys lower realisations compared to tea from North India, which has led to losses in the tea segment. In FY10, the tea segment recorded profits mainly because of higher tea prices. With the management increasing its focus on the long-term viability of the tea segment, we expect a turnaround post FY14.
Wage hike is a key monitorable
Harrisonsâ plantations are located primarily in Kerala, where labour laws for plantation workers are subject to frequent state intervention and wages are revised upwards every three to three-and-a-half years. Although we believe higher rubber prices will mitigate the impact of a wage revision for the rubber segment, the profitability of the tea segment remains particularly vulnerable to wage hikes until improved productivity and higher volumes are able to absorb higher costs.
Revenues to grow
We expect top line to log a CAGR of 11.5% over FY10-13 driven by higher traded volumes and supported by income from non-core businesses such as construction. Adjusted PAT is expected to increase at a CAGR of 34.9% over the same period.
Valuations â Current market price has strong upside
We value Harrisons based on the discounted cash flow method to arrive at a fair value of Rs 113 per share. We initiate coverage on Harrisons with a valuation grade ofâ5/5â,indicating that the market price of Rs 83 (as on November 03, 2010) has aâstrongupsideâfrom the current levels.