FY09 was a good year for McLeod, with
average tea realizations jumping by
27% to Rs111 per kg.
But FY10 will see realizations trend higher,
as poor weather has affected output
in major tea producing countries
Mark to Market | Ravi Ananthanarayanan
its wings in key tea-growing regions.
Last year, it acquired Phu Ben Tea Co. Ltd,
a Vietnamese tea producer.
Vietnam is the fourth largest producer
of black tea in the world while India holds first position.
It has now acquired a stake in a tea plantation
in Rwanda, in East Africa. Rwanda's tea production
of about 20 million kg comes nowhere close
to its neighbour Kenya's production of
346 million kg or Vietnam's 140 million kg.
But its tea fetches good prices in
the Mombasa market,
a little below what Kenyan tea of similar quality gets.
McLeod gets a foothold in the African
tea market through this acquisition.
It is paying $2.75 million (Rs13.42 crore)
to acquire a 75% stake in Olyana
Olyana had recently acquired
a 60% stake in Gisovu Tea Co. for $2.4 million.
The government retains a 30% stake in
Gisovu, held by the Rwanda Tea Authority,
while local farmers will own 10%.
Thus, the indirect stake of McLeod
in Gisovu will be 42%.
Olyana will invest to improve the quality and
output from these estates.
It also proposes to negotiate with
the government for other tea plantations too.
While McLeod will get to participate
in these projects, it may be required
to increase its investments also.
Gisovu produces about 1.7 million kg of tea,
while McLeod had produced
74.8 million kg in India and
4.5 million kg in Vietnam.
The environment is right for fresh investments.
Bank of America Merrill Lynch estimates that
McLeod's average realizations will rise by
13% during FY10.
Higher realizations will ensure a much
better performance from the tea gardens
it has acquired.
It will also generate more cash, which it
can use to repay debt and invest further
in Vietnam and Rwanda.
No wonder the stock price is up
34% from its level a month ago.
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