Wednesday, 18 September 2013

Goodricke Group-Enjoy a Nice Cup of Tea...

What is so peculiar about sachin tendulkar? Well he can judge or foresee FUTURE much better than anyone else. He can foresee much earlier where the ball is going after pitching and so there he is...smashing hundreds at will. Same is true also for stock picking. You can only earn astronomical returns if you can foresee or feel some type of growth story in any particular sector which is going to shape up much better in the future.

If you can find those sector which are going to witness greater activity in the future then you have almost done 70-80% of what is required to find a great stock capable of giving great analytic skills would help to find the suitable company among the just cant help you finding a company on an absolute basis. The main crux is your ability to continuously finding next big thing which is going to change our lives emphatically.

I am highly optimistic about agriculture sector...infact this is my favourite and something into which i see myself indulging as an active stakeholder in near future. I am picking agriculture stocks for quite a long time and all of them are going great.

Today our focus area is tea sector and the company under scanner is Goodricke group. I also like Mcloed russel but it has just got doubled after i picked it but couldn’t buy it. 

Our old sages and Rishis were just great, their works in the forms of various scriptures is just beyond imagination. They have touched every sphere of our visible and non visible life. Like Ayurveda, i mean how without any known expertise in terms of sophisticated laboratories, they can analyse human anatomy and devise solutions in the form of natural formulations which surprise even the today’s best doctors.

Not many people know that they have written a great detail about agriculture also. There is another VEDA, named Vrikshayurveda by Surapala which contains great details about soils, type of crops to be produced according to type of soil, pest and fertility management  via natural resources like they say that Fish flesh can eliminate all types of diseases of crops. They mainly use fermented formulations comprising Cow dung, cow urine along with various type of biomass.

One such experiment was done in Abali tea estate in Arunachal Pradesh in india where two person one swami valmiki from Karnataka and Binod saharia ( estate owner ) use the treasury of Vrikshayurveda to produce Organic tea using manures made from cow dung, pesticides made from cow urine and biomass reducing the cost of production to great extent, augmenting the production and enhancing the fertility of the soil and almost eliminated the various pests of tea plants. To surprise there are no mosquitoes in the estates which are the main cause behind the malaria in the labour force.

Why i find Vrikshaayurveda relevant to Goodricke? Well company has applied to RBI for venturing into dairy farming also after successfully running a 50 cows model experiment. In the initial phase they will maintain 2000 cows producing around 10000 litres of milk. However as per their plans, they will also collect cow urine and dung to make manures and pesticides for their tea plantations which would further cut their costs by 5%. I feel they are also using the knowledge of vrikshayurveda.

They are the first company in the sector to get the rainforest alliance Certification which is an indicator of their environmental friendly ways of producing tea, maintaining the biodiversity of the surroundings. RA certification is a hard process since they have very strict rules to follows like proper water usage and waste water discharge, soil management, reduction of chemical inputs, health and safety of workforce etc. This certifications will help in getting better price for their tea.

Now to the company, it is a subsidiary of Camellia PLC of UK listed which is a 1 lakh crore company dealing into farming produce like maize , barley , wine, pistas, tea, horticulture produce and distribution, banking and engg all over the world. Parent has told many times that they are looking to buy tea estates all over the world. They also made plans once in 2006 to venture into horticulture produce on the estates of Goodricke in india which are yet to begin....however i feel since the expertise of the parent is in the horticulture, we can see some positive step in this direction very soon because prices of the agri produce are increasing all over the world and they are not going to come down. For the record Goodricke has 10000 hect ( almost 25000 acres ) of tea estates in 17 gardens in india.

Prices of tea haven’t increased much as compared to other agri products so they are due for a ride. Tea plants are different business in the sense that they don’t require fresh seeding for every crop, infact tea bushes produce tea for 30-40 years....they just need labour hence labour cost is the main component of the total cost and this was the main reason for the loss shown by the company in june-12 qtr as wages are revised from last year by almost 30-40% and they have paid the arrears in this qtr. This is also the main reason for reduce cash in the books although company is earning good cash from operations since their estates are more than 100 years old. You will be surprised that such a huge land bank of 25000 acres are valued at just 65 crore in the books which i feel is the biggest wealth of the company.

Company is planting new tea bushes and till date around 1100 hectares have been planted with new tea bushes. In tea plantations, you need to leave the land free from tea for some years to enable it to rejuvenate so that it can recoup its nutritional and mineral balance and this is where the scope for horticulture crops comes in. 

They are investing greatly into dairy sector also which in india is mired with some very Indian problems like one of very low productivity per cattle as compared with the world average, but with the parent like camellia PLC which can really invest big time and bring their technological expertise into play augurs well for the company.

With the turnover of  547 cr net profit was 20 cr in 2012-13, NP was down mainly on account of payment of arrears of wage revision. It is having negligible debt in the books and so company can leverage on it in the future for its acquisition plans.

One more big thing is the opening of Tea Bars in the country. Although we Indian drink tea all day like an addiction but still it is a surprise just to find only 40 odd tea bars as compared to 1800 Coffee parlours in the country. It is because perhaps we take tea as a poor man’s drink and coffee the upper cut. However we still don’t know anything about drinking tea if we think that tea is made of milk only. The fact infact is that the true aroma and smoothness of tea can only be sensed without milk.

Tea is just like chicken where you can do as many experiments as you want to enhance its taste and aroma. You can add ginger, cinnamon, tulsi, masala, lemon, dry fruits etc. Ice tea is the next big thing to happen in the non alcoholic beverage segment in india. Companies are having big plans to revive the tea bars in the country, Goodricke is one of is still running some bars in the country...i think they have one in Bhopal also( I’ll be visiting it in my next trip to Bhopal ).

This is one of the cheapest stock available in the sector relative to its superior balance sheet , high quality produce and strong parent.

Tea drinking is growing in the US at a faster rate than coffee, according to IBISWorld. In the last decade, the amount of tea consumed by the average American grew 22.5% and will rise an additional 3% in the next five years. Coffee slumped 1.9% between 2003 and 2013 and will grow less than 1% through 2018.
 In USA, Tea sales at restaurants, grocery stores and shops reached $15.7 billion in 2012, up nearly 32% from 2007, according to consumer goods research firm Packaged Facts. In the next two years, the market is expected to expand to $18 billion. Hotels and caterers are procuring Indian tea. And Americans have started preferring hot tea to the cold version.

Media reports say the tea-drinking demography is widening in the US and that aging baby-boomers and Redbullswigging youngsters are expected to buy more tea. 

The currency depreciation is likely to make prices of Indian tea more competitive in the international market. Exporters will have been at a disadvantage had the depreciation not happened this year when Kenyan prices are down.Kenya had a bumper crop in May when India lost a lot of trade enquiries to it. A softer Kenyan price would have pushed India out of the race in CTC in markets such as the UAE, the UK, Pakistan and Egypt.

McLeod Russel and others are expecting a 10 per cent jump in exports, while Goodricke Group expects 20 per cent.
Goodricke has started selling its TEA online and it is having big plans to foray into packaged tea which is a high margin business. I have seen their ads on TV and they are quiet serious about it as success in this move will be a game changer for the company.

Also the Centre’s decision to once again relax the norms for foreign direct investment (FDI) in tea plantations which may offer good investment opportunities for foreign companies in India in view of the recent devaluation of rupee. I am not in a position to comment on this but this can also be one of the better things for the sector.

What is so peculiar about tea? Well apart from the fact that it contains virtually nil calories (without sugar and Milk) and a cup contains only 40 calories with milk and sugar with about 300 calories of any cold drink but tea contains many of much needed antioxidants and vitamins. Latest research shows that it can cure low Blood pressure and many of heart diseases. It contains much lesser caffeine (1/3rd ) than coffee. So the need is only to promote it as a health drink.

But another thing which is distinctive about tea is the fact it is the only agricultural commodity which hasn’t seen price boom as seen by all other agri products whether it is onion or potato during last decade. The prices of other commodities have got trebled or much more in this period. But tea after the boom of 1998 just collapsed....because to reap the benefit of boom in prices tea growers started growing tea which was much more than demand at that time and so it crashed like anything forcing many estates to closed down. The revival happened to small extent in 2010.

But demand is getting increased by 3-4% every year with no real hike in production, so the equation is going to change very soon with demand outstripping supply significantly leading to awaited boom in tea prices because in this period of last decade, costs which are mainly labour have increased by 3 times and i feel this will force much needed consolidation in the sector with less efficient tea estates producing low quality tea will get out of the race and will be acquired by more efficient...the trend which we are and will be going to see in Indian telecom sector.

One more thing....we are talking about difficult time faced by tea growers during last decade....but we as consumers haven’t witnessed anything like crashing tea prices which infact are ruling at around 350/- per kg much more than of 100-150/- of last decade. Here is the catch....tea in india is allowed to sell only through auctions which is almost 150 years old system...but this should be a good system unless not marred by speculative forces. Big guns of tea market like Tata and HUL have great control over the auctioning of tea which is facilitated through authorised agents who are mere puppets in the hands of these big guns which control almost entire retail tea market of the world....tata tea doesn’t produce any tea at all now it acquires it from other producing gardens. So the wholesale prices were ruling around 100-120 last year...which are expected to see a boom this year due to shortfall in production around the world.

However E-auctioning route which has just started here will surely put a break to this speculative practice. But tea producing companies like Goodricke are now investing in establishing their own tea brands rather than selling in wholesale market.

 Goodricke is a good and safe is also giving dividends around Rs. 4-5/- which works around 3-4% of current price.


(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

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