Jay Shree Tea: Losing steam

Recommendation: Accept

Reshma Krishnan

INVESTORS can consider exiting out of this stock using the buyback, as the price offered is at a substantial premium to the present market price and in the wake of fundamentals that do not point to the share commanding a similar outlook.

The current market price is at Rs. 92.75.

Jay Shree Tea and Industries Ltd is making an offer to buy back its shares at Rs. 120 per share. The company is offering to buy back up to 12,30,000 shares. This represents 10 per cent of paid-up equity and will raise the promoters stake in the company by 4.46 per cent. The whole process would involve an outlay of close to Rs. 14.76 crores.

Jay Shree Tea and Industries manages 15 tea gardens in Assam, West Bengal, Tamil Nadu and Kerala. The company is a multi-unit outfit and has diversified over the years into various other sectors. Currently, it manufactures plywood in Andamans and superphosphates and sulphuric acid in West Bengal. The main reason for diversification seems to be that the tea industry, like any other commodity industry, is cyclical and companies look to other sectors to compensate the volatility earnings. It has a fairly strong presence in upper Assam.

The driving motives behind the buyback as cited by the company are that it will result in an improvement in capital productivity and an increase in earnings per share due to a reduction in share capital. Jay Shree Tea already has some of the highest EPS due to its small equity base of Rs. 12.30 crores.

Investors can accept the offer for the following reasons. The outlook for the Indian tea industry is full of uncertainties. Even though the global demand for tea has been rising at a little over two per cent per year. This rise in demand is being met by countries such as Kenya and Sri Lanka, which have lower costs of production due to lower labour costs.

Labour constitutes the biggest cost in tea production, almost 60 per cent. Therefore, a characteristic feature of this industry is low margins and low returns on investment across business cycles. The Government has also recently considered relaxing import regulations for Sri Lankan tea imports and this will add further pressure to an already struggling sector.

This is why economies of scale play such a big role and consequently the industry is experiencing a phase of consolidation. It is possible that Jay Shree tea might become a part of this consolidation process. For instance, recently Unilever had acquired Rossell Industries. If Jay Shree Tea becomes a part of the process, there may be the possibility on an upside beyond the buyback price. But it may be better to take advantage of the buyback now and if the prospect of a consolidation involving the company emerges, investors can consider taking exposures in the stock.

While Jay Shree Tea has had historically strong financials, its performance in FY 2000 was less than impressive. Even though its sales increased by eight per cent from Rs. 212 crores to Rs. 229.05 crores, its net profit figures plunged by almost 51.6 per cent from Rs. 27.65 crores to Rs. 13.38 crores mainly due to losses incurred in the fourth quarter ending March 2000. This indicates that the company's operating efficiencies are declining and costs are rising faster than sales. The poor performance in the fourth quarter also reflected in the margins which were once among the highest in the industry. It has now fallen well below the industry average from 24.70 per cent to 10.4 per cent.

The offer to buyback the share is at a 30 per cent premium from the current market price of Rs. 93. The stock has been trading in the range between Rs. 60 and Rs. 90 for the last six months and touched a high of Rs. 120 in September 1999. Its trading volumes and liquidity in the market is low and this aspect may also be factored in by investors.

ISSUE HIGHLIGHTS

Offer price: Rs. 120

Offer size: 12,30,000 Equity shares

Outlay: 14.76 crores

Equity: 12.30 crores

Offer opens: 2-05-2000

Offer closes: 1-06-2000

Lead manager: ICICI Securities & Finance