McLeod Russel India Ltd., the largest producer of tea in the world, has agreed for the first time in the company’s independent history to sell one of its tea estates as it undertakes a reorganization of its asset portfolio.
The company announced its decision to sell its 604.14-hectare Bhatpara Tea Estate in the Dooars region of West Bengal for Rs 13.2 cr (US$2 million) to Voom Food Industries, a part of the Chandanbari Tea Group, which has been active in tea processing and packaging, and marketing for three decades.
“There are a few gardens where yield is low and cost is high. We first look at whether these marginal estates can be revived or not and what kind of investments are required. And in case, we find there are difficulties to revive them, we may look at it (disposing of assets)…” Kamal Kishore Baheti, CFO and whole time director with McLeod Russel, told IANS.
The estate, which produces 987,371 kilograms of tea annually, and contributes Rs 15.53 cr (US$2.3 million) per year to the company’s bottom line, has been under the scrutiny of management for years, reports Business-Standard.
“It was a marginal estate and we wanted to sell it. It is a standalone case. It is not that we are trying to get out of the marginal tea estates,” Baheti said.
Currently, the McLeod Russel Board has not approved the sale of additional tea gardens, however, as the company continues to restructure its portfolio, Baheti told Live Mint that the company had a few more tea estates located in Assam and Darjeeling that are small in size and lagging in profitability that could be targeted through the rationalization process.
In India, McLeod Russel now owns 43 tea gardens in Assam and 5 in Bengal. Outside of India, the company owns tea estates in Uganda, Vietnam, and Rwanda, which collectively span 39,770 hectares and produce more than 100 million kilograms of black tea per year.
Between 2005 and 2010, the company saw a period of acquisition, adding multiple Indian tea companies to its holdings, including Williamson Tea Assam, Doom Dooma Tea, Moran Tea, and Borelli Tea. From these holdings, the company posted revenue of Rs 1,776.43 cr (US$265.5 million) and net profit of Rs 64.45 cr (US$9.7 million) last year.
To a Tea
Tea is the second most consumed drink in the world after water. Between 2009 and 2016 the global tea market has seen a compounded annual growth rate (CAGR) of 5.6 percent, according to the report, Tea Market: Global Industry Trends, Share, Size, Growth, Opportunity, and Forecast 2017-2022 issued by IMARC Group. This growth has pushed output to reach 5.6 million tons last year, and has generated expectations that production will top 7.2 million tons by 2022.
One of the key drivers of this growth are the health benefits associated with tea consumption and the increasing health awareness of consumers. While in emerging markets, modernization of distribution channels will add to the segment’s growth.
Trouble in the Garden
In India’s Darjeeling region, however, widespread political strife, which was sparked by an announcement making Bengali required in all West Bengal schools but has since grown into a full-blown political crisis, has caused a prolonged shutdown of tea production in West Bengal, resulting in production being cut this June by 90 percent compared to the same month the year before, according to data from the Tea Board of India.
“The shutdown has halted production since June 15,” an unnamed planter told the Deccan Herald. “Since then, all hill tea gardens are closed. Before that, we could salvage some of this year’s First flush. But, the Second flush crop, which starts to come from end of May and continues till July-end, has been mostly ruined.”
Tea production has also fallen by 10.1 percent in Assam, the region that accounts for half of India’s tea production, due to flooding.
For Darjeeling, tea production for the month of June was expected to be 0.14 million kilograms compared to 1.3 million kilograms produced in June 2016, according to the Tea Board of India.
All told, Reuters reports that tea exports could decline by 20 to 25 percent this year, as banking in the region has shut down and transportation has been made near impossible.
“There is utter chaos in the hills and we are losing over 20 million rupees ($470,000) a day,” Rajiv Lochan, secretary of the Siliguri Tea Traders’ Association, told Reuters.
Amid these challenges facing the industry, Voom Industries plans to make an investment in the Bhatpara Tea Estate in West Bengal significant enough to make the property viable in the long-term.
-Lynda Kiernan
Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration, please contact Ms. Kiernan at lkiernan@globalaginvesting.com
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