ET NowIn a chat with ET Now, Kamal Baheti, CFO, McLeod Russel, shares his business outlook. Excerpts:
ET Now: How are you reacting to the news of setting up of storage for small tea growers in the state budget 2015-2016?
Kamal Baheti: More than the storage space, it is the quality upgradation which has been one of the contentions for the entire industry in Assam. If there are steps which are being taken to really improve the quality from the small growers, this is not only a good news for the industry as a whole but definitely for the company also.
ET Now: How do you see your domestic operation shaping up in light of this and can we expect major investments and capex lined up?
Kamal Baheti: There are a lot of investments which have already happened by the small growers as far as the plantation is concerned. If there can be a quality upgradation, the company like ours will invest more in increasing their capacity to take more leaf from the small growers because this will improve the quality of the tea and if we can really put some other norms in place, we will be able to export these teas. So these had been the issues which will help us.
As far as industry is concerned, it will depend more on the overall weather conditions. Hopefully, the overall monsoon will be better than last year. Last year was not very good and we can recover the crop with the shortage already there in the system. It will be well for the industry with higher quality and some quantity recovery.
ET Now: What exactly you have lined up in term of your capex plans? What is the current capacity, and what you are targeting as well for the entire year?
Kamal Baheti: As far as this year is concerned, major works normally happen during the winter months when the season is off. So this has already happened. We are currently doing around 23 million kg of tea from the small growers. Our target is to do 40 million kg in the next three years by increasing the capacities. It will mean another 50 to 60 crore of capex every year for the next three years. With this kind of a step and as we are already there in the small growers segment, it will help the company and this will help in increasing or improving the overall quality from the small growers.
ET Now: You have mentioned that you expect higher prices when you open the new season. So what can we expect in terms of prices?
Kamal Baheti: We have to really go up by what the overall stock situation is. We all know that there had been a substantial loss of crop in Assam last year. Fortunately there had not been much of teas and the opening prices are likely to be very strong. The overall market will definitely depend on what will be the total overall production for the year and I hope there will be recovery. Another positive for the industry has been the crisis in the African market.
There had been loss of crop in Africa because there is a dry period and the prices have gone up by 25% to 30%. That means we will be able to export much more quantity at a higher value in the next year and that will increase the prices in the domestic market overall. We saw two major problems last year -- loss of crop and the price being much lower in Africa. Both should really reverse and both should become positive for the company and the industry over the next year. We hope that we will be getting back to our normal operations in 2015-2016.
ET Now: So tell us how you expect Q4 to shape up given that Q3 was rather sluggish on the earnings front? What can we see in terms of your margins as well?
Kamal Baheti: As far as this year is concerned, including quarter 4, there will not be any recovery as you know this is an off-season for us. This year the margin will be substantially lower both on the crop loss even if the prices are higher, but that is not good enough to take care of the crop loss. We should be able to get back to our 25-26% of operating margin into the next year if there is some recovery of the crop, which we hope will happen, and the prices will definitely be higher looking at the overall production scenario which is there in Africa and the carry forward trade which is there in India.
ET Now: How are you reacting to the news of setting up of storage for small tea growers in the state budget 2015-2016?
Kamal Baheti: More than the storage space, it is the quality upgradation which has been one of the contentions for the entire industry in Assam. If there are steps which are being taken to really improve the quality from the small growers, this is not only a good news for the industry as a whole but definitely for the company also.
ET Now: How do you see your domestic operation shaping up in light of this and can we expect major investments and capex lined up?
Kamal Baheti: There are a lot of investments which have already happened by the small growers as far as the plantation is concerned. If there can be a quality upgradation, the company like ours will invest more in increasing their capacity to take more leaf from the small growers because this will improve the quality of the tea and if we can really put some other norms in place, we will be able to export these teas. So these had been the issues which will help us.
As far as industry is concerned, it will depend more on the overall weather conditions. Hopefully, the overall monsoon will be better than last year. Last year was not very good and we can recover the crop with the shortage already there in the system. It will be well for the industry with higher quality and some quantity recovery.
ET Now: What exactly you have lined up in term of your capex plans? What is the current capacity, and what you are targeting as well for the entire year?
Kamal Baheti: As far as this year is concerned, major works normally happen during the winter months when the season is off. So this has already happened. We are currently doing around 23 million kg of tea from the small growers. Our target is to do 40 million kg in the next three years by increasing the capacities. It will mean another 50 to 60 crore of capex every year for the next three years. With this kind of a step and as we are already there in the small growers segment, it will help the company and this will help in increasing or improving the overall quality from the small growers.
ET Now: You have mentioned that you expect higher prices when you open the new season. So what can we expect in terms of prices?
Kamal Baheti: We have to really go up by what the overall stock situation is. We all know that there had been a substantial loss of crop in Assam last year. Fortunately there had not been much of teas and the opening prices are likely to be very strong. The overall market will definitely depend on what will be the total overall production for the year and I hope there will be recovery. Another positive for the industry has been the crisis in the African market.
There had been loss of crop in Africa because there is a dry period and the prices have gone up by 25% to 30%. That means we will be able to export much more quantity at a higher value in the next year and that will increase the prices in the domestic market overall. We saw two major problems last year -- loss of crop and the price being much lower in Africa. Both should really reverse and both should become positive for the company and the industry over the next year. We hope that we will be getting back to our normal operations in 2015-2016.
ET Now: So tell us how you expect Q4 to shape up given that Q3 was rather sluggish on the earnings front? What can we see in terms of your margins as well?
Kamal Baheti: As far as this year is concerned, including quarter 4, there will not be any recovery as you know this is an off-season for us. This year the margin will be substantially lower both on the crop loss even if the prices are higher, but that is not good enough to take care of the crop loss. We should be able to get back to our 25-26% of operating margin into the next year if there is some recovery of the crop, which we hope will happen, and the prices will definitely be higher looking at the overall production scenario which is there in Africa and the carry forward trade which is there in India.
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