Tatas may exit plantations

Tata Tea to sell Estates in Bengal, Assam, Kerala.

In a move that will set the dovecotes afflutter in the Indian tea industry, Tata Tea is planning on exiting almost its entire plantations business.

A senior Tata group source told Business Standard, it would be putting up most of its four tea estates in West Bengal and its 21 tea estates in Assam on the block. It will also exit its plantations in south India, in Munnar in Kerala and Anamallais in Tamil Nadu.

However, in the case of the Kerala plantations, Tata Tea proposes to offer its employees two options. In the first, they will have the opportunity of forming cooperative societies, which will then run the tea estates.

Alternatively, Tata Tea will offer managers the opportunity of an executive buyout. Tata Tea will then buy tea from the workers' cooperatives or the new companies that will be formed, at market rates. Tata Tea can also acquire equity in the new companies.

The company is also talking to financial institutions to help the managements of estates fund the buyouts.

The different approach that Tata Tea is adopting for its estates in Kerala partly stems from the political sensitivities in the state.

The plantation land in Kerala comprises land that was given on concessionary terms to James Finley & Co, whose tea estates the Tatas acquired some decades ago. Tata Tea's employees had also been committed to it for generations, a source explained.

Tata Tea owns some 53 tea plantations and a coffee estate in India, with a total area of around 54,000 hectares. Of this, around 26,000 hectares is under tea cultivation. The Rs 783 crore (in the year ending March 2004) company produces around 60 million kg of black tea and 2 million kg of instant tea annually.

Tata Tea, the source explained, had been striving to lower costs. Employee costs account for some 60 per cent of the company's total costs. Also, tea prices have been dropping. Thirdly, with its acquisition of Tetley in the UK, Tata Tea has shifted focus to brands.

As a result, it will buy tea from auctions, apart from the new cooperative societies and companies that are to be formed in Kerala.

Also, Tata Tea has never kept secret its intentions of eventually merging Tetley with itself. Once that happens, the Indian tea company will seek a larger presence on the world stage by scouting for acquisitions.

"Although the final blueprint is not yet ready, the company could retain a few of the better plantations in north India. It won't exit the Watawalla plantations in Sri Lanka," a source said.

Exactly how much Tata Tea's plantations are worth is not clear. Nikhil Vora, an SSKI analyst who tracks the company, says the estates will have to be valued on merit and the price will depend on tea prices and the areas in which the estates are located.

The south Indian estates, he says, will fetch a far lower price than the north Indian ones because the cost of production per kg for south Indian tea is about Rs 51 versus the realisation of around Rs 48, though the gap is set to narrow for Tata Tea.

In contrast, the cost of production in north India is about Rs 52 per kg, with the average realisation being Rs 62.

Tata Tea's pathbreaking exit will be closely watched by other tea companies. Some industry sources think other tea companies will follow suit.

Quit mode

• Tata Tea will sell almost all its plantations, except for a few in north India
• In Kerala, it will offer employees two options: form cooperative societies or opt for executive buyouts. Tata Tea will will buy tea from the cooperative societies
• Tata Tea is exiting the plantations business for three reasons: it wants to cut costs; tea prices have been dropping; and it has shifted its focus to brands