See strong tea price trend in FY15: McLeod Russel
Kamal Baheti, chief financial officer, McLeod Russel says due to seasonal nature of the business, the Q4 is always going to be weak, as there is no tea production and Q2 of every year is likely to be the best quarter
This year is different from the last more so on the price front, because there are shortages and the demand has been very strong in the last couple of months.
After having posted a weak set of Q4 numbers, that widened its net loss to Rs 192 crore, Kamal Baheti, chief financial officer, McLeod Russel says weak Q4 EBITDA was expected due to seasonality.
Speaking to CNBC-TV18 on its Q4 numbers, Baheti says due to seasonal nature of the business, the Q4 is always going to be weak, as there is no tea production and Q2 of every year is likely to be the best quarter.
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The days ahead, however, are looking bright for the company. Baheti expects an increase to the tune of Rs 4-5 per kg due to wage revision. Apart from the Rs 15-20 increase in tea prices that has already taken place, Baheti expects a further Rs 15 per kg rise on account of crop shortage.
“If the prices increase even by Rs 20 per kg for the full year, we can expect 25-30 percent increase in EBITDA profits. We expect this trajectory to play out in the market,” adds Baheti.
On the topline forecast, Baheti expects the tea prices to rise to Rs 187-190 per kg that would result in a 15-20 percent topline increase.
Transcript to follow soon.
Sonia: Apart from the losses on the EBITDA front, you have made about Rs 192 crore of losses this time around. Do you expect this trajectory to continue? And could FY15 be as bad?
A: Quarter-on-quarter (QoQ) in a seasonal industry varies and we had around Rs 29-30 crore of additional profit for the first three quarters. The last quarter had been a little disappointing both-- on the prices as well as on the crop front. In fact, in the month of March, we made only 50 percent of the crop that we had made last year and the prices were lower by Rs 10 per kg or so.
The scenario looks very different in Q1 and in the new year. There has been shortages in the month of April and May because of a drought situation in Assam. Though the rain did come, prices are 5-10 percent higher and we expect another increase of Rs 15 to 20 in them. So, even though there is a little crop loss, the strong price trends will continue making this year different from the last.
Ekta: Considering that you have done an EBITDA loss of Rs 169 crore this quarter, what is your guidance for FY15? When do you expect to break into the black on this front?
A: The last quarter of every financial year will have a loss due to the business’s seasonal nature. We don’t produce anything in the last quarter. Q2 is the biggest quarter.
Going forward, we expect the profit to be higher than last year’s, in every quarter. Given the prices and last quarter’s loss, it should be lower in the next year. So, though we will see an improvement and profit in the first three quarters, there will always be a loss in the fourth one.
Ekta: What is the fiscal year looking like in terms of tea prices and how would that percolate onto your topline in FY15?
A: We are expecting an increase of Rs 4-5 in cost due to wage revision. However, the prices are already up by around Rs 15-20 per kg and we are looking at another increase of Rs 15 because of crop shortage in the month of April and May.
So, on an overall basis, if the prices are higher by around say Rs 20 per kg in the next year, around Rs 15 per kg percolates into the EBITDA levels causing a 25-30 percent increase in the EBITDA profit versus that of the previous year. We expect this trajectory to be present.
As far as the Indian prices and Indian profitability is concerned, this year is different from the last more so on the price front, because there are shortages and the demand has been very strong in the last couple of months.
Sonia: In effect, what kind of average revenue could McLeod Russel clock-in in FY15?
A: If you look at FY14, our average prices were Rs 167 against Rs 171. We were down by around Rs 4. We are expecting Rs 167 to go up to Rs 187-190 and that is where the 15-20 percent increase in the topline will come in. We hope to make 89 million kilograms of crop in India and 112 million overall, internationally; same as the previous year.
So, we are looking at a 15-20 percent increase in the topline and a 25-30 percent increase at the EBITDA level in our Indian operations; both owing to the prices. The prices are lower in the international market in the first three or four months. We hope that the trend there changes and we shall again be able to add Rs 50 crore to our EBITDA level.
Sonia: What kind of inventory position are you sitting on at this point of time?
A: We hardly have any inventory to sit on at the end of the year due to the seasonal nature. We produced around 112 million kilograms internationally and around 90 million kilograms in India. Our inventory is thus only 3 million kilograms.
As on March, it will be 3 million but October is the peak deficit as far as the working capital is concerned and 60 percent is produced between July and October. So, the cycle picks up in October and there is then, hardly any inventory left in the system.
The demand had been very strong albeit the prices were lower in the last quarter of the last financial year. The new season prices have opened Rs 15-20 higher due to very low level of inventories in the system.
With the shortage in the month of April due to dry weather condition in Assam and South India, we believe that this price trend will go up further and that the next couple of months will be when it becomes even stronger. Once we come to the peak season and if we can hold on to those kind of prices, this year will be very different from the last.