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Raising a Toast

Mcleod Russel is the world’s largest tea plantation & is slated to benefit from the rise in tea consumption globally…

The largest tea plantation in the world has tea estates located in Assam, West Bengal, Rwanda, Uganda and Vietnam. About 82 per cent of Mcleod's annual tea production is grown locally while the remaining comes from its estates abroad.

Outlook and valuations
Tea is a long-term story. Global consumption is slated to rise by 2-3 per cent annually. Production depends on age of the tea bushes of India. Around 38 per cent of bushes in India are estimated to be over 50 years old. In Darjeeling, that proportion goes higher at 75 per cent (over 50 years). With output in the second-largest tea producing country in the world (after China) not expected to improve meaningfully going ahead, tea prices in India will continue to trend higher (especially when global natural adversities hit production). Given the circumstances and Mcleod's dominant position, the company should continue to gain from higher realisations. It trades at 14.6 times its TTM earnings.

How they did it
• For a couple of years now, supply shortages have led to rising tea prices and last year was no different
• The impact was eveident by November when winter starts setting in and demand picks up and maximum tea is consumed
• Adverse weather conditions thus led to tea prices spiking from Rs 135.6 per kg prevalent in the previous year (Nov 2011) to Rs 145.6 per kg (Nov 2012)