Any concerns on the outlook for India tea prices for FY14 on the back of trends in Kenya may be a kneejerk reaction, says Nomura Equity Research
McLeod Russel’s stock price decline of 15% over the past two trading sessions is an excessive reaction, According to Nomura Equity Research in its Quick Note, to the recent tea price trends in Kenya, the outlook for domestic demand and prices in India remains robust at this point. This was reinforced during the brokerage’s discussion with J Thomas, the world’s largest auctioneer of tea. They suggested that any concerns on the outlook for India tea prices for FY14 on the back of trends in Kenya may be a kneejerk reaction. Key takeaways from the discussion:
As per Nomura’s observations, two months of higher production in Kenya (Kenya has produced 83.9 million kg in Jan-Feb2013 versus 54.6 million kg last year, when the crop was impacted by weather) has meant that tea prices in Kenya in CY13 have gradually come down from $3.08 at the end of CY12 to $2.49 in the 13th auction (average prices in Kenya in CY13 are at $3.02 still higher than last year similar period average of $2.96). Part of this is due to recovery of lost production in Kenya, which produced 369.2 million kg in CY12 (versus 377 million kg in CY11 and 398.7 million kg in CY10).
Ex-Kenya production is only marginally up in Jan-Feb, as Sri Lanka has produced 48.5 million kg in Jan-Feb (versus 45.3 million kg last year) and India has produced 34.9 million kg in Jan-Feb (versus 33 million kg last year), while Malawi and Indonesia put together have produced 20.2 million kg in Jan-Feb versus 23.8 million kg last year. Empirically in CY11 Kenyan tea price was down from $2.98 at the starting of the calendar year to $2.69 in the 13th week, but McLeod Russel average exports realization for FY12 closed at $2.93 versus $2.86 in FY11.
Nomura had a discussion with the CFO of McLeod Russel on the company’s outlook for Indian tea prices in FY14, especially in the context of recent production and price trends in Kenya. He highlighted the following points:
According to Nomura, McLeod Russel currently trades at 5.3x FY14F EBITDA (3.9x adjusted for treasury shares) and 7.2x FY14F EPS (5.7x adjusted for treasury shares). If one assumes that realizations remain flat, on normalized production the brokerage expects FY14 consolidated EBITDA close to around Rs5,549 million and EPS of Rs37.6.
The brokerage further adds, so in a flat realization scenario for FY14, the stock trades at around 5.8x FY14F EBITDA (4.3x adjusted for treasury shares) and 7.9x FY14F EPS (5.9x adjusted for treasury shares). “This is still a very attractive valuation, in our view, especially in the context of a strong free cash flow yield of around 9.8%,” said Nomura.
The central bank must clarify whether we have the necessary technology and equipment to mint these polymer notes within the country and announce the timeframe within which these notes would be launched into the financial system
The Banking Ombudsman of Karnataka recently had organized a meeting in Mangalore. Reserve Bank of India (RBI) deputy governor, Dr KC Chakrabarty attended this Town Hall Meet, where, in reply to a question on plastic notes, he confirmed that these notes, in Rs10 denomination, “will be introduced on a trial basis”.
He stated that the average life of a paper currency note was about nine months, which got soiled and torn, whereas the plastic notes would last for several years. Besides, these notes will also prevent counterfeiting.
It may be recalled that Moneylife carried an article on the urgent need to introduce polymer currency notes (Polymer rupee notes: Slow or no progress? ) more than six months ago!
In fact, when that report appeared in Moneylife, the RBI had introduced polymer currency notes of Rs10 denomination in several selected cities, including Mysore in the south.
It is therefore surprising that KC Chakrabarty did not elaborate on this issue and say how this trial was received, not only in Mysore, but in other centres as well? Why he did not share the news of this introduction for market testing in the selected cities is a mystery!
It is well-known that Australia is the pioneer which introduced the polymer currency notes more than two decades ago and is one of the most successful exponents of this system.
While we appreciate that an attempt is being made in the right direction, we must not overlook that circulation of counterfeit currency has increased and the media reports appear, from time to time, that large quantities of supplies are coming through smugglers across the border. Arrests are also made and police reports indicate that distribution chains are well entrenched all over the country. These reports also show that supplies are emanating from Pakistan and smuggled via the land borders of Bangladesh and Nepal.
In any case, with elections around the corner, this influx of counterfeit notes is likely to increase and disrupt our democratic election process.
What we need to do, on a war footing, is to obtain supplies of polymer notes of Rs500 and Rs1,000 denominations and introduce them immediately. It is believed that the counterfeit notes are mostly in these denominations, and so, if the ultimate intention is to stop these coming into circulation, the RBI must go hammer and tongs at getting the polymer notes. Introducing polymer notes in Rs10 denomination would not be very useful.
RBI knows that Australia has the knowledge and expertise in polymer notes. It is not easy to counterfeit the polymer notes and our efforts should be to get the higher denominations in these notes rather than Rs10.
It is imperative that RBI must make a clear-cut statement on the progress made so far in the trial that was carried out in selected cities. The central bank must clarify whether we have secured the necessary technology and equipment to mint these polymer notes within the country and categorically announce the time-frame within which India will launch this into the financial system.
In the meantime, our security forces at the borders must be trained and intelligence system intensified to prevent large-scale smuggling of currency which goes undetected!
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
The massive money, which is raised surely shows somewhere on the balance sheet of the company, filed regularly with the MCA. The primary recipient of the information about these companies is the MCA, and surprisingly the MCA is the least proactive in the entire process of bringing these perpetrators to regulatory focus, sooner before tonnes of money vanish
As the bottom-of-the-pyramid population continues to fret about having lost one’s life savings in the West Bengal “chit funds”, it is interesting to find politicians promising new stringent laws against such funds. In fact, law-making is the least of the reasons for such schemes to have flourished in the state. However, as political connections of one of many that have gone bad are exposed, the easy face-wash for the politicians is in law-making, to cover-up what is quintessentially an implementation issue. The reality is that we are not short of such laws—in fact, we have a plenty of laws that prohibit such schemes and impose sternest penalties for the perpetrators of such scams. But if a Rs22,000-crore scheme questions the very institutions that define our system—Supreme Court, SEBI, or whoever else—there is little surprise that the only succour for political face-saving is in law-making. And this is what we have done over the decades—as the write up below shows.
This article gives a quick overview of the laws regarding “chit funds” or devices of sourcing public deposits.
First of all, the West Bengal “chit funds” are not chit funds at all. Chit funds are a different structure altogether. Chit funds are mutual credit groups where money circulates among the group members, and the monthly contributions of the chit members are received circularly by one of the members who bids for the same at the highest interest rate or lowest “net present value”. Chit funds are perfectly legal, if they are registered under the Chit Funds Act, 1982, and run under the provisions of the law. The several names that keep popping up in West Bengal are not chit funds—these are collective investment schemes or public deposit schemes which on the face of it do not fall under any law, as they are structured so as to be neither a “public deposit” nor a “collective investment scheme”. But that facial structure is so gullible that any regulatory investigation may easily expose that these schemes were effectively nothing but public deposit schemes.
The evolution of regulatory structure in India is a rare case of human learning—we have burnt our fingers every time to learn that the fire is too hot to handle. So, every scam brought a law; in essence, the law is the edifice built on scams and not on intuition.
So, with all these laws, how to scamsters still end up raising several thousands of crores? Obviously, so much money is neither raised overnight, nor raised silently enough, as there is a massive machinery of agents who raise the money from the very bottom of the population pyramid. Each scamster innovates an ingenious device, but none of these devices are not iron-clad to avoid regulatory action, provided there was a will power.
Here is an inclusive inventory of the schemes currently in use:
No matter what is the device used, the common thread in each of these schemes is that the flow of new ‘depositors’ must keep coming in, because the only source from which maturing deposits could be serviced is by inflows from new depositors. Money is initially raised at hefty interest rates, and with attractive periodic prizes, gifts, gala parties, and so on. The agents who mobilise the deposits are given hefty commissions, because the structure essentially relies on a highly incentivised structure of brokers or agents, who reach right to the doors of the depositors to collect deposits. The cost of interest, plus the agency commissions, the luxurious spendings on so-called depositor prizes, and add to all this the lavish remunerations of the promoters themselves—all adds to a huge cost of interest, say, about 25% to 30%, which no lawful business may produce. It is not that these promoters are blue-eyed investors who know tricks of investing—so, they end up investing money in illiquid properties, resorts or hotels.
Now, the only way to keep servicing investors is that new depositors must flow in, so that old depositors can be repaid. That is, the base of the depositor pyramid has to continue to expand so that those up in pyramid can be paid—this is what Ponzi schemes are all about. This is what we call “tiger riding”.
Soon, the ride comes to and, and guess what happens at the end of any tiger ride! In the process, thousands of gullible investors have lost their life savings.
As hundreds of crores are raised though tens of thousands of agents, surely enough the exercise is not invisible to the regulatory eye. The massive money which is raised, irrespective of the label, surely shows somewhere on the balance sheet of the company, which is filed regularly with the MCA (ministry of corporate affairs). The primary recipient of the information about these companies is the MCA, and surprisingly, it is the MCA which is the least proactive in the entire process of bringing these perpetrators to regulatory focus, sooner before tonnes of money vanish.
No, it certainly is not the lack of laws that allows these scamsters to rob people of hard-earned money. It is clearly an implementation issue.