Indian Tea Sector. Sector Report. Tea prices on the boil

December 18, 2009 Tea Sector Report Indian Tea Sector Tea prices on the boil With tea prices soaring due to torpid production over the past five years and sustainable consumption in the country, the fundamentals of the tea industry have improved significantly. Simultaneously, unfavourable weather conditions in major tea exporting countries have resulted in a considerable decline in global production in 2009. This has led to a surge in global tea prices. Given the negligible area addition under tea during the 2000-07 period, production would stagnate, going forward. This, in turn, would keep tea prices firm. We are initiating coverage on tea sector with a positive view on McLeod Russel, Jayshree Tea and Harrison Malayalam. Domestic demand-supply gap to tighten further The precipitous decline in tea auction prices during 2001-2005 had adversely affected tea plantation activity in India. As a result, tea production in India has been lagging behind consumption in the past few years resulting in a depletion of carry-over stocks. Conversely, demand for tea has been steadily growing at 2.9% per annum. In light of the relatively lengthy gestation period of a tea plant, which is typically around five years and the lack of area under plantation, the country is unlikely to register any significant growth in the near term, thereby tightening the deficit even further. Favourable global demand-supply dynamics Led by a protracted dry season, Kenya, the world s biggest exporter of black tea, has witnessed a 12.1% decline in production to around 209.5 kg in January-September 2009. Likewise, Sri Lankan tea output has also fallen by 16.8% to around 208.1 million kg in January-September 2009 as against 250.1 million kg in the corresponding period last year. This, coupled with negligible area additions under black tea, has exacerbated the deficit situation causing global tea prices to surge. Tea prices expected to remain firm Domestic tea prices have risen by almost 22% to Rs 135 per kg in 2009 due to the decline in tea production in India. Currently, domestic tea prices are the highest since the last nine years. Poor weather conditions in India have taken a toll on tea production and has resulted in a decline to 830.4 million kg in January-October 2009. This, coupled with high consumption levels, has led to the emergence of a tight demand-supply scenario. Moreover, a decline in the production of tea in key exporting countries has resulted in a surge in global tea prices. Kenyan tea prices hit a record high with the Broken Pekoe Ones (BP1s) average price touching $5.2 per kg. We believe global and domestic tea prices would remain firm on the back of negligible area addition under tea over the last four to five years. Valuation The Indian tea sector is going through a positive pricing scenario as production has remained stagnant over the past five years and consumption is growing steadily. We believe tea prices will remain firm due to lower production because of negligible area additions under tea. Given the fixed cost structure of the companies, high prices would result in a concomitant rise in the EBITDA margin. Our rating rationale is based on P/E and price to book value (BV).We prefer McLeod Russel (MRIL), Jayshree Tea (JST) and Harrison Malayalam (HML) in this order purely on the back of the large capacities of these companies. We believe MRL, with the largest capacity, would benefit from the rise in volumes and price realisations. We value MRIL, JST and HML at 13x, 12x and 11x its FY12E EPS respectively, which are 2.0x, 1.9x and 0.87x of their respective FY12E book values. Analysts Name Sanjay Manyal sanjay.manyal@icicisecurities.com Ritika Shewakramani ritika.shewakramani@icicisecurities.com Comparative return ratios Stock return 1M 3M 6M 12M McLeod 21.2 27.8 149.2 205.6 Jayshree 23.1 57.9 137.1 244.8 Harrison 23.8 22.3 51.7 93.3 McLeod Strong Buy CMP Rs 252 TP Rs 334 Upside % 32.5 Market Cap Cr 2845.9 FY10E FY11E FY12E Revenue Rs cr 1053.2 1282.1 1411.0 EBITDA Rs cr 289.4 360.6 405.3 EBITDAM % 27.5 28.1 28.7 PAT Rs cr 165.6 227.0 274.9 PATM % 15.7 17.7 19.5 EPS Rs 15.1 20.7 25.1 Jayshree Strong Buy CMP Rs 339 TP Rs 410 Upside % 20.9 Market Cap Cr 365.4 FY10E FY11EE FY12E Revenue Rs cr 377.7 457.0 499.3 EBITDA Rs cr 43.2 61.5 67.8 EBITDAM % 11.5 13.8 13.9 PAT Rs cr 28.8 32.1 36.6 PATM % 7.7 7.2 6.2 EPS Rs 25.8 28.7 32.8 Harrison Buy CMP Rs 131 TP Rs 149 Upside % 13.7 Market Cap Cr 208.4 FY10E FY11E FY12E Revenue Rs cr 309.8 353.1 384.4 EBITDA Rs cr 24.7 30.4 39.0 EBITDAM % 8.0 8.6 10.2 PAT Rs cr 12.0 18.8 25.1 PAT % 3.9 3.8 8.6 EPS Rs 6.5 10.2 13.6 1 Page

Content Page No. Global demand-supply dynamics Production shortfall in key exporting countries 3 Negligible area additions under black tea 3-4 Global black tea demand outpacing supply 5 Decline in global tea production to benefit Indian exports 6 Domestic demand-supply scenario likely to remain tight 7 Poor weather conditions result in production shortfall 8 Re-plantation to result in a loss of production in short-term 9 Paradigm shift from CTC to Orthodox 10 Consumption steadily rising 10 Tea prices to remain firm 11 Risks to our call 12 Valuation 13-15 Initiating Coverage McLeod Russel 16-27 Volume growth, high price realisation to boost sales Highest EBITDA margin in the industry Rising exports to enhance margins Jayshree Tea 28-37 Price realisation led revenue growth Export of high quality Darjeeling tea to enhance margin Scouting for acquisitions to increase volumes Harrison Malayalam 38-50 High tea realizations to drive growth Rising crude prices to trigger spurt in rubber prices Forward integration to expand reach Annexures 51-52 2 Page

Global demand-supply dynamics to exert upward pressure on prices After a prolonged spell of excess production, the demand-supply dynamics of the global tea industry have been radically altered. Unremittingly adverse weather conditions have led to a major shortfall in production of tea to around 89 million kg in major black tea producing countries from January to September 2009. This includes India, Sri Lanka and Kenya (which account for around 80% of the global production of 2000 million kg of black tea). This led to a decline in total global output by 6.5%, compared to the same period last year (January- September 2009). This has led to a rise in global tea prices by around Rs 130-150 per kg. However, given the currently dry weather conditions, the decline is expected to be about 140 million kg (7% decline) by the end of 2009. We believe that global tea prices would further go up due to the lack of area addition in major tea exporting countries. However, any unprecedented increase in production would not result in a major correction in tea prices due to lower inventories and a sustainable rise in global tea consumption. We believe that firm tea prices would result in sustainable margins and improvement in earnings for major tea producing companies. Exhibit 1: Global tea prices ($ per kg) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 With the global shortfall of tea estimated to be around 140 million kg, tea prices are on an uptrend. Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Sri Lankan Prices ($ Per kg) Indian Auction Prices ($ per kg) Kenya Tea Prices ($ per kg) Source: Tea board of Kenya, India and Sri Lanka, ICICIdirect.com Research Production shortfall in key exporting countries India, Kenya and Sri Lanka together account for more than 50% of global tea exports. Kenya is the world s biggest exporter of black tea and produces approximately 350-360 million kg of tea. Led by a prolonged dry season, Kenya has witnessed a 12.1% decline in production to around 209.5 million kg during the January-September 2009 period. Similarly, Sri Lanka has also witnessed a drop in tea output by 16.8% to around 208.1 million kg during the January-September 2009 period as against 250.1 million kg in the corresponding period last year. 3 Page

Exhibit 2: Key exporting countries (million kgs) 1400 1200 1000 800 600 400 200 0 102.3 95.3 83.7 95.0 87.9 105.1 115.0 110.9 199.1 218.7 203.1 178.8 56.2 286.6 286.6 289.4 296.9 150.0 298.8 314.9 294.3 298.8 233.8 213.6 348.3 312.2 343.7 383.4 260.9 FY05 FY06 FY07 FY08 FY09* Prolonged drought conditions in key exporting countries has led to a shortage Kenya Sri Lanka China India Vietnam Indonetia Source: Tea board of India, ICICIdirect.com Research * From January to September 2009 Exhibit 3: Tea production in key tea exporting countries (million kgs) 900 800 700 600 500 400 300 200 100 0-0.26 India -12.06 Kenya -16.80 Sri Lanka 0.24 Indonesia 19.08 Malawi 3.21 Tanzania -8.20 Zimbambwe -1.76 Bangladesh 2.40 Uganda 25 20 15 10 5 0-5 -10-15 -20 2008 2009(E) % decline in production Source: Tea board of India,,ICICIdirect.com Research Negligible area additions under black tea Negligible additions to area under black tea across key tea exporting countries coupled with the relatively long gestation period of a tea plant are unlikely to lead to a rise in tea production globally, going forward. This would tighten the global supply deficit thereby exerting an upward pressure on tea prices. Exhibit 4: Area addition under black tea across key exporting countries (million hectare) Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 India 0.49 0.50 0.51 0.52 0.52 0.52 0.56 0.57 0.57 Sri Lanka 0.20 0.19 0.19 0.19 0.19 0.19 0.19 0.19 0.19 Kenya 0.12 0.13 0.13 0.14 0.13 0.13 0.14 0.15 0.15 Others 0.35 0.77 0.67 0.73 0.67 0.69 0.75 0.74 0.75 Total 1.16 1.59 1.50 1.58 1.51 1.53 1.63 1.65 1.66 Source: Tea board of India, ICICIdirect.com Research 4 Page

Global black tea demand outpacing supply India, Sri Lanka and Kenya are the largest producers and exporters of black tea. Over the past five years, the demand for black tea (exports and domestic consumption) in these countries has surpassed production, thus bringing down their stock levels. This has led to a rise in black tea prices. We believe tea prices are expected to remain firm as supply would not improve in the future due to the negligible area addition under tea. Exhibit 5: Black tea demand and production in Sri Lanka (million kgs) 350 340 330 320 310 300 290 280 338 332 328 316 315 311 307 307 308 308 303 305 2003 2004 2005 2006 2007 2008 Demand Production Source: Crisil, ICICIdirect.com Research Exhibit 6: Black tea demand and production in Kenya (million kgs) 450 400 350 300 250 200 150 100 50 400 350 356 361 370 331 345 325 328 311 285 294 2003 2004 2005 2006 2007 2008 Demand Production Source: Crisil, ICICIdirect.com Research 5 Page

Exhibit 7: Black tea demand and production in India (in million kg) 1050 1000 950 933 946 927 999 956 982 945 1023 981 900 888 878 893 850 800 2003 2004 2005 2006 2007 2008 Demand Production Source: Crisil, ICICIdirect.com Research Decline in global tea production to benefit Indian exports Being the second largest producer of tea, India accounts for approximately 14% of world exports. India exports both crush tear curl (CTC) and orthodox tea (estimated to account for 30-45% of export volumes) to Russia, Middle East and Iran, which mainly consume orthodox tea. Orthodox tea fetches higher realisations (almost Rs 15-20 per kg) higher than that of CTC tea. Since domestic consumption of orthodox tea is minimal, over three-fourths of the domestic orthodox tea production is exported. With key tea exporting countries (Kenya and Sri Lanka) witnessing a shortfall in production, the demand for Indian tea has been looking up. Additionally, the surge in domestic tea prices has also resulted in a firming up of export realisation prices to Rs 142 per kg in 2009 as compared with Rs 102 per kg last year. This will positively impact margins given the fixed cost structure of the tea industry. Moreover, given that India exports a significant proportion of orthodox tea, which commands higher realisations than that of CTC tea, we expect margins of tea exporting companies to further improve. Exhibit 8: Indian exports (million kg) 250.0 200.0 150.0 100.0 207.0 183.0 201.0 174.0 197.6 199.1 218.7 178.8 203.1 150.0 With auction tea prices in Kenya, Sri Lanka, Bangladesh and Indonesia up by 12-22% during October 2009 vis-à-vis 2008, export realisations are maintaining their upward trend. 50.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* Source: Tea board of India, ICICIdirect.com Research *January to October 6 Page

Domestic demand-supply scenario likely to remain tight India is the largest consumer and second largest producer of tea in the world. Accounting for around 40% of the world s black tea production, India is the largest producer of black tea in the world. However, tea production in India has been lagging behind consumption during the last few years. This has resulted in shrinkage of tea inventories from 306.9 million kg in 2006 to 220.7 million kg in 2009. It is expected to be 206.5 million kg in 2010E, which is just 2.9 months of consumption (lower than the five months of consumption in 2006). Exhibit 9: Domestic tea carry over stocks (million kg) 320 300 280 260 240 220 200 299.9 306.9 285.9 264.7 220.7 206.5 2005 2006 2007 2008E 2009E 2010E Source: Tea board of India, ICICIdirect.com Research The country has witnessed sluggish production growth of around 2.4% CAGR over 2002-2009. It is unlikely to register any significant growth in the near term. This is due to the comparatively lengthy gestation period of a tea plant and the lack of any new land under tea plantation in the last few years. Exhibit 10: Domestic tea production growth (million kg) 1200 1000 800 838.4 878.1 893.0 946.0 982.0 986.4 981.0 968.0 1020.0 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009E 2010E Production (million kgs) Source: Tea board of India, ICICIdirect.com Research 7 Page

With incremental consumption growing at 3.0% CAGR over 2002-2009, domestic demand is outpacing incremental production. As a result, the carry over stocks of previous years have been exhausted. Although a rise in tea prices is likely to attract more investments in tea plantations and drive up production in the long term (which would still take 4-5 years to impact production) we expect the demand-supply scenario to remain tight in the near term, thereby exerting an upward pressure on tea prices. Exhibit 11: Domestic consumption and export demand (million kg) 1100 1000 900 800 700 600 500 400 300 200 201 174 197.7 205.8 196.7 218.2 185.3 190.6 177.8 693 714 735 758 780 803 826.2 850 874.5 2002 2003 2004 2005 2006 2007 2008 2009E 2010E Domestic demand backed by consumption growth (3% CAGR over 2002-9) is outpacing production Domestic Consumption Exports Source: Tea board of India,ICICIdirect.com Research Poor weather conditions to result in production shortfall With unfavourable weather conditions having led to a long-standing dry spell and monsoons playing truant, tea production this year is likely to witness a significant shortfall. During the January-October 2009 period production dipped to 830.4 million kg as against 832.5 million kg during the corresponding period last year. It is likely to decline further on account of the paucity in monsoons. Consequently, we anticipate the demand-supply gap to widen further. Exhibit 12: Domestic tea production (in million kgs) 160 140 120 100 80 60 40 20 0 131.0 123.1 133.6 105.4 107.0 125.8 127.0 134.4 80.0 70.3 118.1 101.5 50.5 71.4 21.6 17.8 45.0 62.6 21.6 15.3 Jan Feb Mar Apr May Jun Jul Aug Sep Oct 2008 2009 Source: Tea board of India, ICICIdirect.com Research 8 Page

Re-plantation to result in loss of production in short-term The precipitous decline in tea prices during 2001-2005 period had hampered tea plantation activity in India. Subsequently, several tea estates in India have been afflicted with low yields and require investments in re-plantation. Yields in North India have declined from 1.64 tonnes per hectare to 1.60 tonnes per hectare. This would result in lower production in the country, going forward as North India contributes 75-77% of the country s production. Exhibit 13: Average yield (tonnes per hectare) 2.20 2.00 1.80 1.60 1.40 2.00 2.00 1.90 1.91 1.82 1.85 1.77 1.80 1.73 1.68 1.68 1.69 1.71 1.70 1.71 1.63 1.64 1.65 1.58 1.60 1.63 1.65 1.68 1.67 2.06 1.70 1.60 1.20 2000 2001 2002 2003 2004 2005 2006 2007 2008 North India South India Overall Source: Tea board of India,ICICIdirect.com Research Although the government has undertaken several initiatives towards uprooting and replanting activities in order to improve yields, the impact of these measures will only be evident in the long-term as new tea bushes will take time to achieve the desired yields. In addition, almost all the quality land in Assam and West Bengal has already been brought under plantation. Hence, it is unlikely that any significant new area can be brought under tea cultivation. From 2004-2009, only 57,055 hectare has been brought under tea cultivation. This would lead to a incremental jump in tea production by not more than 20-30 million kg per annum. This will cause production to remain comparatively stagnant further contributing to the tight domestic supply scenario. Exhibit 14: Tea prices (Rs per kg) and area additions (hectare) from 1998-2007 Hectares ('000) 45 40 35 30 25 20 15 10 5 0 The fall in tea prices had led to lower area additions 80.00 75.00 70.00 65.00 60.00 55.00 50.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Prices (Rs per kg) The lack of new area additions coupled with the lengthy gestation lag of a tea plant is likely to cause a dilutive impact on production Area additions Auction Prices Source: Crisil, ICICIdirect.com Research 9 Page

Paradigm shift from CTC to Orthodox India, which predominantly produces the CTC variety of tea, is likely to see a paradigm shift in production towards the orthodox variety, which is typically exported. With a rise in demand for orthodox tea emanating from Russian and Middle Eastern countries entailing higher realisations, a foreseeable shift can be envisaged, going forward. Likewise, in an attempt to garner a greater share of the global market, the government of India is offering a subsidy of Rs 3-5 per kg as an incentive scheme to enhance the production of orthodox tea which commands a premium price in contrast to that of the CTC variety. This shift is likely to further tighten the demandsupply gap and trigger an upswing in prices. Consumption steadily rising While production has grown at a CAGR of 2.4% (2002-2009), consumption has grown at a 3.0% CAGR over the same period. With the per capita consumption of tea in India clocking an annual growth rate of around 1-1.2% and disposable incomes on the rise the demand for tea is likely to remain healthy, going forward. We expect consumption to grow at a CAGR of 3.0% in 2009 and 2010. Although tea prices have been steadily rising in recent times, over the past few years tea prices have lagged well behind the rise in index prices of all other commodities. Moreover, since tea constitutes an insignificant portion of family expenses on food items, any further beverage price inflation is unlikely to have a major impact on demand. Exhibit 15: Per capita consumption (grams per head) 710 700 690 680 670 660 650 640 630 701 691 693 696 681 672 663 654 2001 2002 2003 2004 2005 2006 2007 2008 Per capita consumption (grams per head) Source: Crisil, ICICIdirect.com Research 10 Page

Tea prices to remain firm Domestic tea prices have risen by almost 22% to Rs 135 per kg in 2009 due to the decline in tea production in India. Currently, domestic tea prices are the highest since the last nine years. Poor weather conditions in India have taken a toll on tea production. This has resulted in a decline to 830.4 million kg in January-October 2009. This, coupled with high consumption levels, has led to the emergence of a tight demand-supply scenario. Moreover, a decline in production in key tea exporting countries has increased the overseas demand for Indian black tea. We believe domestic tea prices would remain firm on the back of negligible area addition under tea over the last four to five years and firm global tea prices. Exhibit 16: Tea prices (Rs per kg) 140.0 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 The continuing global production shortfall along with the lack of any new area additions to tea has resulted in the upswing of tea prices. Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Source: Tea board of India, ICICIdirect.com Research 11 Page

Risks to our call Tea prices susceptible to demand-supply dynamics Since tea prices are largely dependent on the demand-supply scenario, any significant increase in production levels could hamper tea prices, thereby adversely affecting margins and profits. On the other hand, a higher than expected increase in tea prices could lead to better than expected profitability and, hence, higher multiples. Currency risks India exports around 14% of its tea production to countries such as Russia, Middle East, Pakistan and Europe. Any major fluctuations in currency will negatively impact the profitability of tea producing companies. Exhibit 17: Exporters of tea from India (million kgs) 140 120 100 80 60 40 20 0 9.55 9.55 8.54 9.57 11.33 10.39 8.67 13.14 15.9 21.88 24.55 24.8 23.21 17.88 19.3 36.99 42.02 40.44 2006 2007 2008 Russia UK UAE Iran Kazakhstan USA 12 Page

Rise in labour costs Employee costs constitute a substantial portion of a company s costs. Any noteworthy rise in wages will affect margins. Exhibit 18: Employee Cost (% to sales) 45 40 35 30 25 20 15 10 5 0 38.8 32.9 27.6 McLeod Russel Jayshree tea Harrison Malayalam Higher rainfall than estimated The global shortage in tea is primarily on account of dry weather conditions and the paucity in monsoons in key exporting countries such as Kenya, Sri Lanka and India. However, any chances of these countries receiving above average rainfall after a drought might lead to a higher than expected supply and lower prices. 13 Page

Valuations The Indian tea sector is going through a positive pricing scenario as production has remained stagnant over the past five years and consumption is growing steadily. The stock prices of most tea companies have surged over the past few months, reflecting this phenomenon. We believe tea prices will remain firm as any new area addition under tea cultivation would result in higher production only after four to five years due to the long gestation lag. Given the fixed cost structure of tea companies, any significant rise in prices would be clearly reflected in the expansion of EBITDA margins. Our rating rationale is based on P/E and price to BV. We believe that steady cash flows over the next few years would result in debt repayment by companies which in turn, would lead to higher return rations. We prefer McLeod Russel, Jayshree Tea and Harrison Malayalam in this order purely on the back of the large capacities of these companies. We believe MRIL with the largest capacity and the highest EBITDA margins would emerge as a key beneficiary of rising volumes and higher price realisations. Historically, we have seen MRIL trading at a 9.6% and 70.6% discount to JST and HML. MRIL suffered during the downturn due to its large capacities and low EBITDA per kg. However, in light of the emergence of favourable demand supply dynamics, MRIL is likely to register the highest volumes in the current upturn in tea prices and thereby, the highest margins. We believe MRIL should command a higher valuation multiple due to its ability to fetch higher realisations from exports. HML has been trading at a 31.1% premium to JST due to higher rubber prices during the 2006-2008 period as the natural rubber business contributes more than 50% to its revenues. Exhibit 19: Combined P/E(x) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 McLeod Harrison Jayshree Our earning estimates also reflect a similar valuation rationale. We expect MRL s net profit to grow at a CAGR of 47.5% compared to 42.1% and 57.8% for JST and HML, respectively, during FY09-12E. 14 Page

Exhibit 20: Combined Price to book value(x) 2.15 1.65 1.15 0.65 0.15 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 McLeod Harrison Jayshree Exhibit 21: RoNW Vs EV/million kg (FY12E EV/ million kg (Rs cr) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 RoNW (%) McLeod Harrison Jayshree Exhibit 22: EPS CAGR FY09-12E vs. FY12 PE FY11 P/E 10.6 10.4 10.2 10.0 9.8 9.6 9.4 9.2 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 EPS CAGR(%) McLeod Russel Harrison Malayalam Jayshree Tea 15 Page

Exhibit 23: Comparative Valuation Year End Mar 31 McLeod Russel Harrison Malayalam Jayshree Tea CMP (Rs) 252 131 339 Rating Strong Buy Buy Strong Buy Price Target (Rs) 334 149 410 upside (%) 32.5 13.7 20.9 Valuation FY10 P/E 16.7 20.2 13.2 FY11 P/E 12.2 12.9 11.8 FY12 P/E 10.0 9.6 10.3 FY10 EV/EBITDA 10.6 13.4 11.3 FY11 EV/EBITDA 8.3 10.5 7.5 FY12 EV/EBITDA 7.1 7.7 6.4 CAGR (%) growth rate (FY09-12) Revenue 19.4 10.2 11.3 EBITDA 24.6 21.8 42.8 PAT 47.5 57.8 42.1 EPS 48.8 57.8 40.0 Profitability EBITDA Margin (%), FY11E 28.1 8.6 13.8 EBITDA Margin (%), FY12E 28.7 10.2 13.9 Return Ratios RoNW (%) FY11E 14.7 6.4 16.5 RoNW (%) FY12E 15.3 8.2 16.8 RoCE (%) FY11E 11.6 3.4 7.3 RoCE (%) FY12E 14.3 6.1 11.1 16 Page

December 18, 2009 Tea Initiating Coverage McLeod Russel (MCLRUS) Current Price Rs 252 Potential upside 32.5% Target Price Rs 334 Time Frame 12 months The Perfect brew McLeod Russel India Ltd (MRIL), the largest producer of bulk tea in the country with an 8% market share, is set to benefit from soaring tea prices and added capacities it has created over the years through synergistic acquisitions. With tea volumes and realisations set to rise, we expect the company s EPS to witness a CAGR of 48.8% over FY09-12E. We initiate coverage on the stock with a STRONG BUY rating. Volume growth, high price realisation to boost sales MRIL is the largest bulk producer of tea in India with a majority of its tea estates located in Assam, which is known for its high quality tea estates. With the widening gap between the demand and supply of tea putting an upward pressure on prices, we expect realisations to rise to Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E, respectively thereby enabling sales to grow at a CAGR of 19.4% from FY09-FY12E to Rs 1411.0 crore in FY12E from Rs 828.9 crore in FY09. Highest EBITDA margin in the industry MRIL enjoys the highest EBITDA margins in the industry as most of its tea estates are situated in high yielding areas in Assam. Given the fixed cost structure of tea, the company s higher plucking average per worker and its focus on exports, we believe that a rise in tea prices would directly reflect in EBITDA margin expansion to 28.1% in FY11E and 28.7% in FY12E. Rising exports to enhance margins MRIL mainly exports to UK, Germany, Ireland, Japan, Middle East, US and Pakistan. With the emergence of favourable global demand supply dynamics triggering a spurt in tea prices, we expect the company to export 34.6 million kg in FY12E and register a 25.0% CAGR in export revenues from FY09-FY12E, which will entail a considerable improvement in earnings. Valuations Historically, the stock has traded in a price band of 6-21x its one-year forward earnings. At the current market price of Rs 252, MRIL is trading at 12.2x its FY11E EPS of Rs 20.7 and 10.0x its FY12E EPS of Rs 25.1. On an EV/EBITDA, basis it is trading at 8.3x its FY11E EBITDA and 7.1x its FY12E EBITDA. On a price to book value basis it is trading at 1.8x its FY11E P/BV and1.5x its FY12E P/BV. We value the stock at 13x its FY12E EPS with a target price of 334. We are initiating coverage on the stock with a STRONG BUY rating. Exhibit 1: Key Financials (Rs crore) Year to March 31 FY08 FY09E FY10E FY11E FY12E Net Profit (Rs crore) 46.4 85.6 165.6 227.0 274.9 Shares in issue (crore) 10.8 10.9 10.9 10.9 10.9 EPS (Rs) 4.3 7.6 15.1 20.7 25.1 Growth (%) -41.7 78.0 98.4 37.1 21.1 P/E (x) 58.8 33.0 16.7 12.2 10.0 Price/Book (x) 2.38 2.29 2.05 1.79 1.54 EV/EBITDA (x) 47.4 15.1 10.6 8.3 7.1 EBITDA Margin (%) 10.2 25.3 27.5 28.1 28.7 Net Profit Margin (%) 7.1 10.3 15.7 17.7 19.5 RoNW (%) 4.1 7.1 12.3 14.7 15.3 RoCE (%) 0.9 1.5 8.5 11.6 14.3 Analysts Name Sanjay Manyal sanjay.manyal@icicisecurities.com Ritika Shewakramani ritika.shewakramani@icicisecurities.com Sales & EPS trend 1600 1100 600 100 4.3 654.2 Stock Metrics 7.6 828.9 15.1 20.7 25.1 1053.2 1282.1 1411.0 FY08 FY09 FY10E FY11E FY12E Bloomberg Code Reuters Code Net Sales Face value (Rs) 5 EPS (Rs.) MCLR IN MCLE.BO Promoters Holding 45.36 Market Cap (Rs cr) 2845.9 52 week H/L 217.7 / 35 Sensex 16863 Average volumes 394190 Comparative return metrics 30.0 20.0 10.0 Stock return 1M 3M 6M 12M Mcleod 21.2 27.8 149.2 205.6 Jayshree 23.1 57.9 137.1 244.8 Harrison 23.8 22.3 51.7 93.3 Price Trend 350 310 270 230 190 150 110 70 30 4-Jan-08 4-Mar-08 STRONG BUY 4-May-08 Target Price Absolute Buy 4-Jul-08 4-Sep-08 4-Nov-08 4-Jan-09 4-Mar-09 Absolute Sell 4-May-09 4-Jul-09 0.0 17 Page

Background McLeod Russel India Ltd (MRIL), the tea company of the BM Khaitan group, was originally incorporated as Eveready Co India Pvt Ltd on May 5 1998. The company is one of the largest tea plantation companies, accounting for 8% of India s production and 3.75% of global production. MRIL owns more than 59 high quality tea estates spread across 35,971.3 hectares, primarily in Assam and some in the Dooars region of West Bengal. In 2004, the company was demerged from Eveready Industries to focus on its core tea business. Ever since then the company has grown via the inorganic route by acquiring Borelli Tea holdings in 2005, which gave it access to large high quality estates of Williamson Tea Assam (WTAL). In 2006 and 2007, MRIL acquired two more quality tea companies, namely, the Doom Dooma Tea Co and the Moran Tea Co India Ltd. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US $7 million) and Olyana Holdings LLC, US (US $2.75 million), respectively, through its UK based subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Co and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. The bulk tea produced by the company is sold via auctions and direct sales in India. MRIL also exports about onethird of its production to UK, Middle East, CIS, etc. Shareholding pattern (Q2FY10) Shareholders % holding Promoter 45.4 Institution 30.9 Individual 16.1 Other investor 7.7 Promoter & Institutional holding trend (%) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 45.6 45.6 45.36 45.4 26.9 27.96 30.9 34.9 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Promoter Institution Exhibit 2: MRIL s revenue mix (FY09) McLeod Russel (Rs 829 crore) Domestic (61%) Exports (39%) Auction (40%) Depot Sales (16%) Private Sales (9%) 18 Page

Investment Rationale Volume growth, high price realisation to boost sales MRIL is the largest bulk tea producer in India with majority of its tea estates located in Assam, which is known for its high quality tea. Buoyed by volume growth through acquisitions of five tea estates during the 2005-09 period, MRIL s revenues have grown at a CAGR of 22.4% from Rs 302.9 crore in FY06 to Rs 828.9 crore in FY09. The company reported a 59.5% growth in sales in FY06 post the merger of Williamson Tea Assam Ltd. These acquisitions have resulted in a rise in consolidated volumes from 40 million kg in FY05 to 75 million kg in FY09. This expansion via the inorganic route coupled with a surge in tea prices on account of a severe supply crunch in major tea exporting countries (Kenya and Sri Lanka) would enable the company to witness a significant rise in average realisations to Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E, respectively. Tea prices are expected to remain firm on the back of a lengthy gestation lag of a tea plant (five years) and the lack of any new area additions. Hence, we expect MRIL to register a CAGR of 19.4% in sales from FY09-FY12E led by 6.9% volume growth and 11.8% realisation growth. Moreover, we believe that any further acquisitions undertaken in the future would enhance production levels and spur revenue growth, going forward. Exhibit 3: Sales growth from FY05-F12E 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Merger of Willimson t 6.0 59.5 Acquired Doom Dooma Acquired Moren Tea 18.5 Acquired Phu Ben Tea 8.0 320.2 510.8 605.5 654.2 828.9 1064.0 1307.0 1411.0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 26.7 Acquired Olyana Holding 28.4 22.8 Possible Acquisition 8.0 1500 1300 1100 900 700 500 300 100 Sales (Rs Crore) Sales growth % (Y-o-Y) Exhibit 4: Volumes and realisations of tea Realisations (Rs per kg) 180.0 160.0 140.0 120.0 100.0 80.0 60.0 35 14 33 14 11 27 27 5 35 53 56 61 48 51 53 56 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Volume (Domestic) Volume (Exports) Realisations (Domestic) Realisations (Exports) 100 90 80 70 60 50 40 30 20 10 0 Production (in million kgs) 19 Page

Strategic expansion via the inorganic route MRIL has witnessed consistent volume growth through various acquisitions of tea estates over 2005-2009. The company currently operates over 59 tea estates from 30 tea estates in 2004, thereby doubling its production capacity from 40 million kg per annum in FY05 to 75 million kg per annum in FY09. The company acquired Doom Dooma and Moran Tea Co in 2006 and 2007 with an annual production capacity of 6 million kg and 4 million kg, respectively. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US$7 million) and Olyana Holdings LLC, US (US$2.75 million), respectively, through its UKbased subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Company and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. Given the company s aggressive acquisition plans, we expect this trend to continue, thereby driving inorganic growth, going forward. Exhibit 5: Acquisitions undertaken by MRIL Production capacity (in Cost of Acquisition Companies Year million kg) (Rs crore) Acquisition price (Rs crore per million kg) Williamson Tea Assam Ltd 2005 22.0 146.0 6.6 Doom Dooma Tea Company 2006 6.0 69.0 11.5 Moran Tea Company 2007 4.3 57.3 13.3 Phu Ben Tea Company 2008 4.5 34.3 7.6 Olyana Holding LLC 2009 1.7 13.5 7.9 Total 38.5 320.1 8.3 High yields vis-à-vis the industry through re-plantation initiatives Given the lack of any new area under tea cultivation in Assam and West Bengal, re-plantation is the only way to enhance production and improve yields of the existing tea bushes. Subsequently, the company has started re-planting 2% of its tea bushes every year since 1994. This means that 32% of the company s total area under tea fetched higher yields and production increased by 0.5% every year. This has resulted in an overall yield of 2.19 tonnes per hectare, which is significantly higher than the industry average of 1.7 tonnes per hectare. The company spends around Rs 20.0 crore of capital expenditure on re-plantation every year, which will translate to higher volumes going forward. Exhibit 6: Productivity of MRIL vis-à-vis industry (tonnes per hectare) 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 2.08 2.19 2.19 1.59 1.73 1.71 1.70 1.73 FY06 FY07 FY08 FY09 McLeod Industry 20 Page

Highest EBITDA margin in industry MRIL enjoys the highest EBITDA margin in the industry as the company owns most of its tea estates in high quality yielding areas in Assam. In light of the fixed cost structure of tea, the company s higher plucking average per worker and its focus on exports, we believe the rise in tea prices would lead to high EBITDA margins. Exhibit 7: MRIL s EBITDA margins vis-à-vis industry 33.0 30.0 27.0 24.0 21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0-3.0 27.5 28.1 28.7 25.3 13.1 13.2 10.2 13.8 13.9 8.4 11.5 6.9 7.5 4.9 9.6 8.0 8.6 5.0 6.6 FY06 FY07 FY08 FY09 FY10E FY11E FY12E -0.4 0.2 Mcleod Russel Harrison Malayalam Jayshree tea MRIL enjoys the highest margins vis-à-vis the tea industry Fixed cost structure to enhance EBITDA margins The company s cost structure constitutes employee costs, power costs, raw material (bought leaf), selling costs and other manufacturing costs. With a significant portion of the company s costs being fixed in nature, we expect any significant rise in tea prices to directly reflect in EBITDA margin expansion. Moreover, since the company commands a higher plucking productivity per plucker (25 per kg) as compared with the industry average of Rs 21 per kg, we expect the company s margins to further benefit. Exhibit 8: A break up of realisations and EBITDA margins 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 27.5 28.1 28.7 25.3 30.1 44.8 44.5 4.2 11.3 8.9 27.8 10.2 4.9 13.1 75.9 75.1 78.4 86.8 106.7 107.2 110.5 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 180 160 140 120 100 80. 60. 40. 20. 0.0 The fixed cost structure of tea along with rising tea prices will enable MRIL witness an improvement in margins. Total cost (Rs per kg) EBITDA (Rs per kg) EBITDA margins (%) 21 Page

Exhibit 9: Fixed cost structure of the company (Rs crore) FY06 FY07 FY08 FY09 FY10E FY11E FY12E Average realization of Tea per kg 80.0 86.2 87.2 111.0 136.8 152.0 155.1 Other operating income 0.1 0.2 0.2 3.6 1.2 0.0 0.0 Raw material 4.5 4.3 5.4 5.2 5.8 12.5 11.1 Employee Cost 36.2 35.9 39.3 43.2 49.4 49.0 52.0 Power Cost 12.5 12.2 11.3 11.9 18.1 16.4 17.1 Other Manufacturing cost 6.5 6.5 6.4 7.8 17.4 9.5 9.9 Selling & Admin cost 16.2 16.2 16.0 18.6 16.0 19.7 20.5 Total Cost 75.9 75.1 78.4 86.8 106.7 107.2 110.5 EBITDA per kg 4.2 11.3 8.9 27.8 30.1 44.8 44.5 Premium quality tea estates to command higher realisations MRIL is the largest bulk tea producer in the country, accounting for 8% of tea production in India. Since a significant portion of the company s tea estates are located in Assam and West Bengal, which are known for their high quality tea, the company is able to produce premium quality tea from these estates at a yield of 2200 kg/ha. This is significantly higher than the industry average of 1700 kg/ha and in turn, enables the company to fetch realisations that are almost 30% higher than that of the industry thereby, enabling it to improve margins. Exhibit 10: MRIL s area under tea cultivation (hectares) Location FY07 FY08 FY09 FY10E FY11E FY12E Bishnauth 3601.1 3742.5 3742.5 3742.5 3742.5 3742.5 Dhunseri 1260.0 1268.2 1268.2 1268.2 1268.2 1268.2 Doom Dooma 5716.9 5670.7 5670.7 5670.7 5670.7 5670.7 East Boroi 3805.2 3783.6 3783.6 3783.6 3783.6 3783.6 Jorhat 891.5 894.7 894.7 894.7 894.7 894.7 Mangaldai 2970.6 2990.0 2990.0 2990.0 2990.0 2990.0 Margherita 3478.6 3491.5 3491.5 3491.5 3491.5 3491.5 Moran 1148.5 3232.2 3232.2 3232.2 3232.2 3232.2 Thakurbari 3365.5 3211.6 3211.6 3211.6 3211.6 3211.6 Tingri 2134.4 2135.7 2135.7 2135.7 2135.7 2135.7 Dooars 3580.8 3550.7 3550.7 3550.7 3550.7 3550.7 Vietnam 0.0 0.0 2000.0 3000.0 5000.0 5000.0 Africa 0.0 0.0 0.0 1700.0 1700.0 1700.0 Total Area 31953.1 33971.3 35971.3 38671.3 38971.3 38971.3 Increasing Orthodox tea production to boost export realisation India exports tea primarily to Russia, Middle East and Iran, which mainly consume orthodox tea. Orthodox tea fetches higher realisations (almost Rs 15-20 per kg higher) than CTC tea. With the rising demand for orthodox tea, the company is increasing its capacity from 3.5 million kg in FY08 to 10 million kg FY10 onwards. We believe the company s increased focus on orthodox tea would result in an improvement in EBITDA margins, going forward. 22 Page

Rising exports to enhance margin A production shortfall in key tea producing countries like Kenya and Sri Lanka led by prolonged dry spells has led to a drastic decline in tea production by 12.1% to 209.5 million kg and 16.8% YoY, to 208.1 million kgs respectively, in these countries till September 2009. This decline, coupled with an increase in international demand, has lead to a surge in global tea prices. The company mainly exports to UK, Germany, Ireland, Japan, Middle East, US and Pakistan. Given the current upswing in global prices, we expect the company to export around 34.6 million kg thereby, registering a noteworthy rise in EBITDA margins. We expect MRIL to increase their proportion of exports given uptrend in tea prices. Exhibit 11: MRIL s exports (Rs crore) 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 35.6 38.0 38.0 34.0 17.4 19.9 19.0 13.1 562.1 615.5 314.8 378.8 51.5 110.7 146.6 145.2 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Exports (Rs crore) % to Sales 23 Page

Financials Revenues to steadily advance Sales in FY09 grew by 26.7% to Rs 828.9 crore from Rs 654.2 crore in FY08. This was on the back of higher realisations which increased from Rs 87.2 per kg to Rs 111 per kg on the back of soaring tea prices. Going forward, we expect net sales to grow at a CAGR of 19.4% over FY09-12E from Rs 654.2 crore in FY09 to Rs 1411.0 crore in FY12E. The company which has added capacities via synergistic inorganic acquisitions including the Phu Ben Tea Company in Vietnam (4.5 million kg) and Olyana Holdings in Africa (1.7 million kg) is likely to benefit from rising volumes and higher tea prices as tea production is likely to increase only after 2011. Exhibit 12: Sales growth (Rs crore) 1600 1400 1200 1000 800 600 510.8 605.5 654.2 828.9 1064.0 1307.0 1411.0 We expect MRIL to register 19.4% sales CAGR from FY09-FY12E. 400 200 FY06 FY07 FY08 FY09 FY10E FY11E FY12E High tea realisations to boost EBITDA margins The EBITDA margin improved from 10.2% in FY08 to 25.3% in FY09 mainly on account of high tea price realisations and the fixed cost structure of tea.going forward, we expect the EBITDA margin to improve to 28.1% in FY11E and 28.7% in FY12E. This would be on account of rising tea prices and higher contributions from exports. Moreover, the increase in capacity of Orthodox tea (which commands a higher price vis-à-vis CTC tea) would also aid in improving margins. Exhibit 13: EBITDA margins (%) 35.0 30.0 25.0 25.3 27.5 28.1 28.7 20.0 15.0 10.0 5.0 4.9 13.1 10.2 0.0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 24 Page

Bottomline to accelerate at a CAGR of 47.5% The net profit has grown by 84.5% CAGR from Rs 46.4 crore in FY08 to Rs 85.6 crore in FY09 on the back of higher EBITDA margins led by high tea price realisations and higher contributions from exports. Further, in light of the tight global supply scenario, the company will gain from rising tea prices which will reflect in rising margins and improved earnings. Subsequently, the bottomline is expected to grow at a CAGR of 47.5% over FY09-FY12E to Rs 274.9 crore in FY12E. Exhibit 14: Net profit growth (Rs crore) 310 260 210 160 110 60 10 274.9 227.0 165.6 79.6 85.6 46.4 22.1 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Backed by rising margins, we expect net profit to grow at a 47.5% CAGR over FY09-FY12E. Comfortably leveraged MRIL s debt to equity has gone down from 0.6 in 2006 to 0.4 in 2009 despite the five acquisitions undertaken by the company and the depressed tea price scenario during 2005-2008. This reflects the company s ability to generate comfortable cash flows even in a low commodity cycle. We expect the company to generate Rs 128.9 crore of free cash flows in FY10E which will not only result in lower interest costs but also enable it to fund any further acquisitions going forward. Exhibit 15: Debt to equity ratio 0.60 0.50 0.40 0.30 0.20 0.10 0.00 0.56 0.35 0.40 0.36 0.27 0.22. 0.11 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Debt to Equity 25 Page

Valuations Historically, the stock has traded in a price band of 6-21x its one-year forward earnings. At the current market price of Rs 252, MRIL is trading at 12.2x its FY11E EPS of Rs 20.7 and 10.0x its FY12E EPS of Rs 25.1. On an EV/EBITDA basis the stock is trading at 8.3x its FY11E EBITDA and 7.1x its FY12E EBITDA. On a price to book value basis, it is trading at 1.8x its FY11E P/BV and1.5x its FY12E P/BV. With its focus on volume growth via the inorganic route and production through bought leaf, a rise in average realisations led by higher export contributions, will benefit the company which commands the highest margins in the industry. We value the stock at 13x its FY12E EPS with a target price of 334. We are initiating coverage on the stock with a STRONG BUY rating. Exhibit 16: P/E band 400.0 350.0 300.0 250.0 200.0 150.0 100.0 21x 16x 11x 6x 50.0 0.0 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 EPS sensitivity to tea prices We believe tea prices would remain firm on the back of a significant decline in global tea production. We have assumed the company s average realisation to be Rs 152.0 per kg in FY11E and Rs 155.1 per kg in FY12E respectively. A bullish scenario Given that the production levels in key tea exporting countries are lower than estimated and tea prices register a 10% rise from our assumed prices, a bullish scenario would result in a rise in EPS to Rs 27.4 in FY11E and Rs 32.5 in FY12E. A bearish scenario On the other hand, higher than estimated production in Kenya and Sri Lanka would result in a 10% decline in tea prices and a bearish scenario would emerge causing the FY11E EPS and FY12E EPS to dip to Rs 14.1 and Rs 17.8 respectively. Exhibit 17: EPS Sensitivity Analysis Variation in Tea Prices Bear case Base case Bull Case -10% -5% 0% 5% 10% FY11E 14.1 17.4 20.7 24.1 27.4 FY12E 17.8 21.4 25.1 28.8 32.5 26 Page

P&L Statement (Rs crore) Key Ratio Year End March 31 FY08 FY09 FY10E FY11E FY12E Sales 654.2 828.9 1053.2 1282.1 1411.0 Growth (%) 8.0 26.7 27.1 21.7 10.1 Raw Material Cost 40.6 38.9 45.3 107.8 100.8 Staff Cost 295.3 322.0 384.3 421.4 473.2 Administrative & selling Cost 106.9 124.3 107.1 153.9 169.3 Other Operational Cost 145.9 161.1 293.3 238.5 262.5 Total Expenditure 588.7 646.4 830.0 921.5 1005.8 EBITDA 66.8 209.4 289.4 360.6 405.3 Growth (%) -15.5 213.5 38.2 24.6 12.4 Other Income 46.7 0.4 13.6 20.6 22.7 Depreciation 24.6 32.7 32.0 41.8 41.8 EBIT 88.9 177.1 271.0 339.5 386.2 Interest 36.8 75.9 41.3 41.6 32.0 Profit before tax 52.0 101.2 208.3 276.8 335.2 Growth (%) 94.4 105.9 32.9 21.1 Tax 5.6 15.6 42.7 49.8 60.3 Net Profit 46.4 85.6 165.6 227.0 274.9 % to sales FY08 FY09 FY10E FY11E FY12E Raw material cost. 6.2 4.7 4.3 8.4 7.1 Staff cost 45.1 38.8 36.5 32.9 33.5 Average cost of debt 8.1 11.9 10.3 12.0 12.0 Effective tax rate 10.8 15.4 20.5 18.0 18.0 Profitability Ratio (%) EBITDA Margin (%) 10.2 25.3 27.5 28.1 28.7 PAT Margin (%) 7.1 10.3 15.7 17.7 19.5 Adj, PAT Margin 7.1 10.3 15.7 17.7 19.5 Per share data (Rs) EV / per share 292.4 289.4 280.9 272.3 263.1 Book Value 105.7 109.9 122.7 141.1 163.9 Cash per share 1.8 2.5 4.2 10.1 7.3 EPS 4.3 7.6 15.1 20.7 25.1 Cash EPS 6.6 10.8 18.1 24.6 28.9 DPS 1.2 2.3 2.3 2.3 2.3 Growth (%) -41.7 84.5 93.3 37.1 21.1 Balance Sheet (Rs crore) Key Ratios Year End March FY08 FY09E FY10E FY11E FY12E Equity Capital 54.2 54.7 54.7 54.7 54.7 Reserves & Surplus 1090.2 1148.1 1288.1 1489.5 1738.7 Net Worth 1144.4 1202.8 1342.8 1544.2 1793.5 Total Loans 457.0 437.0 362.0 332.0 202.0 Deferred Tax Liability 49.6 49.6 49.6 49.6 49.6 Sources of funds 1651.0 1689.4 1754.4 1925.8 2045.0 Gross Block 1984.8 2014.8 2049.8 2089.8 2059.8 Depreciation 366.0 398.7 430.7 472.5 514.3 Net Block 1618.8 1616.1 1619.1 1617.3 1545.5 Capital WIP 8.2 10.0 20.0 20.0 20.0 Investment 12.3 17.3 27.3 127.3 227.3 Inventories 44.0 55.3 73.1 89.0 156.8 Debtors 28.2 34.5 43.9 53.4 78.4 Cash 19.7 27.5 45.7 110.3 80.0 Loans and Advances 87.3 103.6 146.3 178.1 235.2 Deferred Tax Asset 0.0 0.0 0.0 0.0 0.0 Total Current assets 239.6 289.9 396.8 537.7 707.2 Creditors 145.3 195.7 234.0 284.9 352.8 Other Current Liabilities 0.0 0.0 0.0 0.0 0.0 Total Current Liabilities 227.3 243.9 308.8 376.5 454.9 Net Current Assets 12.2 46.0 88.0 161.2 252.3 Application of funds 1651.5 1689.4 1754.4 1925.8 2045.0 Return ratios (%) FY08 FY09 FY10E FY11E FY12E RoNW 4.1 7.1 12.3 14.7 15.3 RoCE 0.9 1.5 8.5 11.6 14.3 Financial Health Ratio Operating CF (Rs cr) 74.4 157.8 257.9 351.7 287.7 FCFF (Rs cr) 52.2 58.3 128.9 220.2 225.3 Cap. Emp (Rs cr.) 1631.1 1662.1 1707.1 1778.5 1797.8 Debt to Equity 0.4 0.4 0.3 0.2 0.1 Debt to Capital Employed 0.3 0.3 0.2 0.2 0.1 Interest Coverage ratio (x) 1.1 3.4 6.2 7.7 11.3 Debt to EBITDA (x) 0.3 0.3 0.2 0.2 0.1 DuPont Ratio Analysis PAT/PBT 0.89 0.85 0.79 0.82 0.82 PBT/PBIT 3.42 4.00 1.43 1.29 1.18 PBIT/Sales 0.02 0.03 0.14 0.14 0.01 Sales/Assets 0.33 0.41 0.52 0.63 0.69 Assets/Net worth 1.73 1.68 1.53 1.35 1.15 27 Page

Cash flow statement (Rs crore) Working capital ratios Year End March FY08 FY09E FY10E FY11E FY12E Profit before tax 52.0 101.2 208.3 276.8 335.2 Depreciation 24.6 32.7 32.0 41.8 41.8 Other items 5.6 49.9 41.3 41.6 32.0 Direct taxes paid -3.7-67.7-84.0-91.5-92.4 Cash Flow before working capital 78.5 116.2 197.6 268.8 316.7 Inc/dec in debtors -3.8-6.3-9.3-9.5-25.0 Inc/dec in trade receivable 0.0-25.0-61.4-50.9-107.0 Inc/dec in inventory -0.1-11.3-17.9-15.9-67.7 Inc/dec in current liability -3.9 16.6 64.9 67.7 78.4 Net cash from operating Activities 70.7 90.1 173.9 260.2 195.3 Purchase of fixed Assets -16.9-36.8-55.0-140.0-70.0 Purchase/Sale of investment -56.7 0.0 0.0 0.0 0.0 Interest and dividend received 3.1 0.0 0.0 0.0 0.0 Net cash used in investing activity -70.6-36.8-55.0-140.0-70.0 Borrowings 59.2-20.0-75 -30-130 Dividend paid -56.3-25.6-25.6-25.6-25.6 Net Cash used from Financing Activity 3.0-45.6-100.6-55.6-155.6 Forex Differences -0.8 0.0 0.0 0.0 0.0 Net increase/decrease 2.3 7.7 18.3 64.6-30.3 Op bal cash & cash equivalents 17.0 19.7 27.5 45.7 110.3 Closing cash/ cash equivalent 19.7 27.5 45.7 110.3 80.0 FY08 FY09 FY10E FY11E FY12E Woking cap. / sales 0.6 0.6 0.6 0.6 0.7 Creditors turnover 4.5 4.2 4.5 4.5 4.0 Current ratio 1.1 1.2 1.3 1.4 1.6 Quick ratio 1.0 1.1 1.1 1.1 1.4 Cash to abs. liability 0.1 0.1 0.1 0.3 0.2 WC(excl. cash)/sale 0.6 0.6 0.6 0.6 0.7 Y-o-Y Growth (%) FY08 FY09 FY10E FY11E FY12E Net Sales 8.0 26.7 27.1 21.7 10.1 EBIDTA -15.5 213.5 38.2 24.6 12.4 Adj Net Profit -41.7 84.5 93.3 37.1 21.1 EPS -41.7 78.0 98.4 37.1 21.1 Cash EPS -32.7 64.9 67.0 36.0 17.8 Net Worth -0.1 5.1 11.6 15.0 16.1 Valuation FY08 FY09 FY10E FY11E FY12E PE 58.8 33.0 16.7 12.2 10.0 EV/EBITDA 47.4 15.1 10.6 8.3 7.1 EV/Sales 4.8 3.8 2.9 2.3 2.0 Div Yield (%) 0.4 0.8 0.8 0.8 0.8 Price/BV 2.4 2.3 2.1 1.8 1.5 28 Page