Tea plantation companies bring focus back to quality to improve margins

Quality has been the major impediment for the plantation companies to keep pace with rising input costs vis-a-vis price realisations

After witnessing a dent in profitability owing to their ‘volume play’, tea companies are reverting to quality, which they think will help improve margins and make them sustainable.

Quality has not been one of the thrust areas for plantation companies, which have been trying to keep pace with rising input costs vis-a-vis price realisations. 

Over the past five-six years, while input costs rose by around 15 per cent, prices improved 5-7 per cent only.

For instance, during 2013-14, Warren Tea made a net profit of Rs 20.24 crore, while during 2018-19, the company registered a net loss of Rs 15.92 crore. For the past three financial years, the company hasn’t been making any profit. Same has been the case with Willamson Magor Group-owned McLeod Russel, which posted a Rs 257.15 crore net profit during 2013-14 but registered a net loss of Rs 4.42 crore in the last financial year. 

For McLeod, however, apart from prices, group affairs have been a drag on its balance sheet. This resulted in mounting debts of around Rs 1,700 crore.

Goodricke had posted a Rs 22.24 crore profit in calendar year 2014 but it shrank to Rs 9.49 crore during the financial year ended March 31, 2019.

Rossel India, too, had posted a Rs 20.40 crore profit during 2013-14 but the figure fell to Rs 57 lakh in the last financial year.

With focus back on quality, prices of hig-end teas increased by 3-5 per cent for Warren Tea, while the low-end prices shrank by the same percentage. In case of Goodricke, too, prices of Assam tea (upper quality) increased by five per cent. 

The drive to improve quality, in fact, led Goodricke, Luxmi Tea and MK Shah Exports to buy estates from McLeod in the Assam region when it was up for sale.

“The gardens are of good quality and we are investing around Rs 2-3 crore in the estates,” said Atul Asthana, chairman and managing director of the Goodricke Group.

Sharing a similar view, Rudra Chatterjee, director at Luxmi Tea, who also bought gardens from McLeod in Assam and Africa, said, “Auction prices have improved for the estates we bought. The average auction prices are the highest for the estates in Moran region in Assam and we saw it as a good opportunity to buy those estates and improve quality.”

Luxmi Tea had sold estates in Dooars and Upper Assam and opted to buy plantations from McLeod in a bid to strengthen the company’s financial position. 

In fact, after the acquisition, estates in Moran, under Luxmi Tea, fetched 10-12 per cent higher prices owing to quality improvement at the cost of a fall in production volume.

On an average, for major plantation companies, prices increased 7-8 per cent in the quality tea range while it dipped by a similar percentage for lower quality teas.

In case of Assam Company, which had to undergo insolvency resolution in the National Company Law Tribunal (NCLT), the firm was able to bounce back riding on quality produce.

During July this year, its Doomur estate in Assam achieved the number one rank in average tea sale price of CTC tea at Kolkata auctions. In a similar auction last year, the produce from this tea estate had ranked at 185th. 

Besides, its Maijan Orthodox Golden Tea tips fetched a record $1,000 per kg in Guwahati. 

Better quality teas, which are priced above Rs 200 a kg in bulk sale, comprise around 20 per cent of the total tea production of around 1,300 million kg.

“We have decided to focus on quality and rationalise the estates besides bringing down the debt considerably. Asset monetisation is the way out,” said Vivek Goenka, executive director at Warren Tea.

Warren Tea has sold its Sealkotee tea estate in Assam for Rs 19 crore to pare debt and sale of other estates is likely.