Equity | India | Tea & Coffee

Sales Goodricke Group Ltd. 02 Aug, 2018

Note
BUY
CMP (Rs.) Target (2019E) Company Snapshot
295.8 364.2 Goodricke Group Ltd grows, cultivates, manufactures, processes and deals in tea
Potential upside Absolute Rating in various forms. The company's product range includes Bulk Teas - CTC and
23.0% BUY Orthodox teas from the Dooars, Darjeeling and Assam estates and is sold in bulk
form packed in paper sacks, jute bags or tea chests & as Instant tea as well.
Market Info (as on 2nd Aug 2018)
BSE Sensex 37306.55
The Goodricke Group pioneered the concept of instant tea from green leaf from
BSE Smallcap 16531.09
its research and development center .It also set up the world’s first integrated
Stock Detail Instant Tea Plant at Aibheel Tea Garden in the Dooars.

BSE Code 500166 Management:

NSE Code NA Goodricke is professionally managed company led by Mr. AN Singh, Managing
Bloomberg Code GDRK IN Director & CEO and Mr. Arjun Sengupta, CFO. Company is a MNC with Camellia
Market Cap (Cr.) 638.8 Plc. U.K holding 74% stake. Camellia is a 140-year old heritage group with
Free Float (%) 26%
interests in agriculture, Engineering and Private Banking.
52wk Hi/Lo 545/221
Avg. Daily Volume (BSE) 14207
Face Value / Div. per share 10/4.5
Investment Rationale
Shares Outstanding (Cr) 2.16

Shareholding Pattern (%) Some of the key features that make Goodricke fit our bills perfectly
Promoters Public 1. Market leading Brand in Madhya Pradesh and West Bengal.
74 26
2. Healthy Pricing power with 30 % of total sales as Brands.
Financial Snapshot (Rs. Cr)
3. Increase in Export Exposure of the highest Quality Tea from 10 % to 25% over
Y/E March FY16 FY17 FY18 FY19E
last five years that fetches higher realizations.
Net Sales 733.2 680.4 730.6 824.9
4. Fully backward Integrated with the ownership of Tea estates, thus procuring
EBITDA 26.5 63.9 65.7 57.7

Net Profit -12.1 33.1 31.7 45.5 tea leaves at lower cost and with a stable supply.
P/E(x) NA 17.8 20.4 14.0 5. In-house Processing and Packing facility.
ROE (%) -5.0 11.7 10.6 14.8
6.90% land is irrigated eliminating dependence on rainfall that allows very
EPS -5.6 15.3 14.7 21.1
stable Production (This is one of the primary risks apart from the Labor Wages
Share Price Performance in Tea industry).
212.99 7. Professionally and ethically managed company that pays out 50% of dividend
192.99

172.99 with the 74% ownership by the MNC Camellia Plc. U.K, which is second largest
152.99

132.99 player in the world after Mcleod Russel Ltd.

112.99

92.99
8. Very high barriers to entry.
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CLOSE(Goodricke Group Ltd) CLOSE(SMLCAP)

9. Debt free company.
10.Huge operating leverage likely to kick in in coming financial years
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr
Goodricke (%) -1.4 -20.2 -32.6 17.7
Smallcap (%) 3.84 -9.25 -14.54 18.54 Branded Player currently trading as a commodity Player:
Source: Company data, Retail Research
Under Branded Tea Segment "Goodricke Chai" holds the largest market share in
Madhya Pradesh.

Rohit Chavan +91-22- 6614 2694 rohitchavan@geplcapital.com Retail Desk 1

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

Its brand "Roasted Darjeeling" boasts of 54% Market Share Kolkata, India's top
most cities in terms of Darjeeling tea consumption.
Its diversified brands are:
• Khass
• Goodricke Chai.
• Zabardast.
• Roasted.
• Thurbo.
• Premium Darjeeling.
• Castleton Premium: Blue Caddy
• Castleton Vintage: Black caddy.

Better pricing Power with increasing share of Branded sales:

Over the period of time company has increased its branded sales significantly to
30% of total sales, which commands premium, thereby giving company a pricing
power.
In Bulk commoditized business as well, which is 70-75% of the sales, it is able to
fetch higher prices in auction across all estates owing to its superior quality. You
may see the price premium that auction prices of Goodricke estates fetch over
other estates in the same area:

Darjeeling Estates 2011 2012 2013 2014

Goodricke 363.34 466 462 453
Others 325.87 440 379 330
% premium 11% 6% 22% 37%

Dooars Estates 2011 2012 2013 2014

Goodricke 147.09 156 159 176
Others 126.94 152 152 149
% premium 16% 3% 5% 18%

Assam Estates 2011 2012 2013 2014

Goodricke 166.54 194 214 214
Others 135.72 181 162 162
% premium 23% 7% 32% 32%

Company is a preferred supplier to the Indian Army, Air India and other airlines
as well, which demonstrates company’s Quality and Reliable supply

Retail Desk | Sales Note 2

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

capabilities.

Consistent growth in average realization of Goodricke Teas vs. Industry’s

stunted tea prices:
From 2012-17, Average Realization of the Goodricke Group has consistently
increased by CAGR of 9%, equivalent to whopping 40% absolute increase in
realization. In this time frame Average tea prices of the industry have
remained flattish with a Cagr of mere 0.4%.

Cagr
Goodricke 2012 2013 2014 2016 2017 Growth
Volume Mn. Kg 20.7 22.3 22.1 21.8 18.8
Revenue 540.3 579.8 602.3 733.2 680.4
Average Realization
( Rs/Kg) 260.6 260.1 272.7 335.7 362.3 9%

Cagr
Year 2012 2013 2014 2015 2016 2017 Growth
Avg. Realization of
Industry tea 137.2 142.3 144.8 142 143.9 140 0.4%
*Annual Reports, GEPL Research

How could Goodricke do this when all others couldn't? The reason is consistent
growth of premium branded segment to 25-30% of sales. Coupled with its
premium commanding Exports consistently increasingly from 8% in 2011 to
25% by 2017. These both give a strong indication that Goodricke is no
longer just a commodity player but is on the path to become a strong
branded player.

Increase in Export Exposure of the highest Quality Tea from 8 % to 25% over last
five years.

Goodricke group 2010 2011 2012 2013 2014 2016 2017

Gross Revenue 400.4 458.1 538.4 578.3 661.1 742.7 680.4
Domestic 370.0 385.9 449.2 454.4 530.7 560.6 507.5
Export 30.4 72.2 89.2 123.9 130.4 182.1 172.9

Gross Revenue % Total

Domestic 92% 84% 83% 79% 80% 75% 75%
Export 8% 16% 17% 21% 20% 25% 25%

Retail Desk | Sales Note 3

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

Completely Integrated:
Goodricke Owns all of its Estates that help company to procure Tea leave at
lower prices. More important is the fact that, unlike other players, Goodricke
Doors Estates and Darjeeling are 90 % Irrigated. This makes company almost
Draught Proof. The Production of tea directly depends on the rainfall. And as
the business is majorly fixed cost, break even production is must or the company
faces huge losses. This makes Tea Industry heavily dependent on rains. Goodricke
being 90% irrigated has significantly hedged itself against this problem and hence
possess significant advantage over competitors. In the history of Goodricke since
2005 company's production has not gone below 16 Mn Kg. Apart from this it also
has its own Processing and packaging plant and also has Instant Tea plant and
brands the final product by itself.
Operating Leverage likely to kick in:
Tea Industry is largely a fixed cost business with labor Wages contributing the
most to these fixed costs. As these are fixed in nature they keep on accruing
every year irrespective of production, Prices and hence revenue from tea sales.
On the reverse side they do not increase proportionately if there is a sudden
increase in production or prices of tea. Thus, as the tea prices of tea increase
incrementally, operating leverage kicks in and all the surplus revenue flows
straightaway to the profits.
In the past this scenario took place for both Goodricke and Mcleod Russel Ltd.

Goodricke Group 2007 2009 CAGR (2 Yr.)

sales in Cr. 237 371 25.1%
Price Realization (Rs/Kg) 112.9 186 28.4%
Total Operating Cost In Cr. 221 320 20.3%
Operating Profit 16 51 78.5%
Operating Margins 7% 14% 42.7%
PAT 7.7 41.9 133.3%

Mcleod Russel 2008 2010 CAGR (2 Yr.)

sales in Cr. 653 1106 30.1%
Price Realization (Rs/Kg) 87.2 137.3 25.5%
Total Operating Cost In Cr. 586.4 774.6 14.9%
Operating Profit 66.6 331.4 123.1%
Operating Margins 10% 30% 71.4%
PAT 46.4 231 123.1%

Retail Desk | Sales Note 4

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

You may see as the Goodricke’s Price Realization increased by 28% from
2007 to 2009 Net Profits exploded by 133%. Same was the case with Mcleod
Russel.

Considering tea prices are stagnant for last five years, we are expecting that
prices are likely to go up with lower production in India as well as Kenya which
has created a deficit in Tea supply, and as prices surge suddenly operating
leverage is likely to kick in.

Even if this scenario doesn't play out, the branded segment and the exports are
slowly and steadily increasing and can go quickly from 25% to 35% of the sales
and likely to increase even further. We are comfortable saying this as Goodricke
has acquired 8 tea brands from Godfrey Phillips for a sum of Rs. 20 Cr. Combined
annual turnover of these brands is Rs. 100 cr. With these acquisitions company
has got access to Godfrey’s distributor channels as well across markets like
Jammu Kashmir, Punjab, UP, Bihar, Rajasthan where company plans to promote
its already established flagship brands like Goodricke Chai and Darjeeling Tea.
This gives us a strong indicator that company wants to emerge as a branded
player.

Company is performing all these activities to create a good Moat around business
that will ensure an operating leverage kick-in in a good scenario and a
sustainable growth of premium brands in the absence of it.

Debt Free Status compared to peers:

By large, Tea industry is commoditized and a cyclical Industry (Goodricke can
turn out to be exception among the peers). Research at GEPL has taught us that
leveraging in a cyclical business can turn out to be a financial weapon if done
wrong and has potential to explode when things turn downwards. Many players
in Tea industry like Dhunseri Tea , Jay Shree Tea and Rossell India Ltd are debt
laden and also have diversified into unrelated businesses. Jay Shree Tea has
Investments and Finance arm and is active in Sugar Industry. Rossell India, along
with Tea business, is also active in Aerospace and Defense business, Hospitality
business and Product Support and Services industry.

Even though Mcleod Russel is largest player in the world with 39000 hectares of

Retail Desk | Sales Note 5

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

land under cultivation and hence may get more economies of scale, we are not
comfortable with the capital allocation skills of the management and we also
sense some corporate governance issues that make us avoid associating our
client’s hard earned money with it.

Valuation

We are using ‘Mcap to Net Sales’ ratio to judge the future valuation of this
company. The reason being in businesses like Goodricke that operate on
operating leverage, volatility of its financial numbers increase as you go down
the Profit and loss statement. By this we mean that Net profits are much more
volatile than Operating profits. And operating profits are more volatile than gross
profits and so on. So as a ratio a Net Sales multiple is more reliable compared to
others.

Base Case Scenario Assumptions:

• Price Realization of bulk tea improves by ~13% in coming financial year.

• As there is a sudden surge in prices of bulk tea the % contribution by
branded segment should reduce down from 30% but volume would
compensate for the value and % contribution of 30% would remain intact.
• Operating expenses increase at little higher rate of 12%.
• With the operating leverage kicking in we are expecting a sharp increase
in net profit with profit margins at its peak. GEPL, hence, is assigning
“Mcap-to-Net Sales” multiple of 1. This multiple corresponds well with
how market had valued Goodricke in the past according to its profit
margins. As you can see below.

Year Mcap/Ne
Co_Name End Net Sales PAT Market Cap PATM t Sales
Goodricke Group 200812 293.19 17.6 112.97 6% 0.4
Goodricke Group 200912 371.18 41.9 363.42 11% 1.0
Goodricke Group 201012 399.31 45.0 321.3 11% 0.8
Goodricke Group 201112 459.73 37.4 226.58 8% 0.5

Projections for Goodricke Group for FY2019 can be seen in the following table.

Retail Desk | Sales Note 6

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

Goodricke Group 2018 2019E

Bulk Tea Revenue 511.0 577.4
Branded Revenue 219.0 247.4
Total Revenue 730.0 824.8
Operating Expenses 685.0 767.2
Operating profits 45.0 57.6
OPM 6% 8%
Mcap 581.3 824.9
Mcap/Net Sales 0.80 0.95
One year Abs. returns 23.0%

With these assumptions, we foresee Goodricke’s Operating Profits zooming

up from Rs 45 Cr. to Rs. 57.6 Cr. In next 12 to 15 months Mcap is likely to
zoom up from Rs. 581 Cr. to Rs. 824.9 Cr giving a return of 23.0% in the time
period.

The size of the company with 750 Cr of sales is good enough for Institutions to
participate, which is zero at the given moment. Discovery of the Branded Player
in otherwise commodity Industry may also give company a further re-rating

Some of the key risks:

1. Delay in revival of cycle: Prices of tea have been stagnant for last five
years. Though it is likely to go up looking at the historical trend of tea
prices any delay can lead to our thesis take more time to play out and
hence reduce our yearly returns proportionately.
2. Wage Hike in 2018: Wage prices are bound to go up by double digit
percentage and if the above risk of price stagnation materializes
operative leverage would not kick in. But if above scenario takes place
we would see a sustainable growth of branded business instead of
explosive profits expansion due to operating leverage.
3. Labour Unrest: All the Estates have unions and if there are strikes by
them that can hamper the company negatively.

Retail Desk | Sales Note 7

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

Post Script and one important observation:

Losses in FY 2016:
In 2016, Goodricke Shifted its accounting Year from Calendar year (i.e. from Jan
to Dec) to Financial year (From April 1 to 31 March) .This resulted in accounting
loss. To understand this you will have to understand Tea Plant's Cycle.

Tea plant requires moderately hot and humid climate for better quality, better
yield, and better crop distribution. The ambient temperature for this is from 13
degree C to 32 degree C. Indian winter temperature goes down below 12 D
Celsius resulting in a stunted growth of the Tea Plant and hence Tea Leaves. This
is known as Winter Dormancy.
Plucking of Leaves start from March and it keeps on increasing as the
temperature starts going up.

A close look at Quarterly Sales would give us an interesting insight.

Revenue contribution of 4th Quarter (i.e. Form 1st Jan to 31 March) sales to the
total sales is the lowest among all Quarters. Incidentally this is also the quarter
when the company makes the loss as sales are not adequate to cover wages.
As Goodricke Shifted its accounting year from December End to March End, it
reported numbers for 15 months that include Two loss making 4th quarters.
Hence one may observe Accounting losses for FY 16.

Retail Desk | Sales Note 8

Equity | India | Tea & Coffee

Goodricke Group Ltd. 02 Aug, 2018

NOTES

Name Designation Email Contact

Rohit V Chavan Analyst - Fundamental Research rohit.chavan@geplcapital.com 91 (22) 6614 2694

I, Mr. Rohit Chavan (Research Analyst of GEPL), having Education Qualification MBA Finance, hereby certify that all of the views expressed in this research report accurately reflect my views
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Retail Desk | Sales Note 9