Banks to revalue McLeod Russel's gardens amidst falling tea price

Falling tea prices have prompted lenders of McLeod Russel to carry out a valuation of the company for the purpose of debt restructuring.

The promoters of the country’s largest bulk tea producer had made a One-Time Settlement (OTS) offer of Rs 1,030 crore to lenders earlier this year against its entire outstanding loan and interest. However, the tea market has deteriorated since then, calling for a re-validating of the valuation of the company, its gardens, and its assets. The principal debt with banks is said to be Rs 1,600-1,700 crore.
 

McLeod sources explained that the OTS offer made to banks was based on the market conditions prevalent last year. “But the situation has changed dramatically from last year where costs have gone up and prices have come down. That update has been given and hence banks need a more recent valuation report,” they said, adding that the process had been initiated.

Tea prices have been under pressure this year. The average price for Assam Orthodox stood at Rs 221.09 per kg compared to Rs 304.10 per kg last year; the average price for North India CTC was Rs 216.43 per kg compared to Rs 222.80 per kg. What has added to the cost is that the Assam and West Bengal governments have hiked wages.

The change in market dynamics is reflected in McLeod’s results in Q2FY24. Revenue from operations, on a consolidated basis, was lower by 13.92 per cent at Rs 365.88 crore in the July to September quarter; the net profit at Rs 61.15 crore was down by 53.31 per cent.

The main problem this year was with exports, McLeod sources indicated. “Africa had a huge surplus which impacted prices. And Iran was subdued in orthodox buying. So the movement of the teas outside the country was hampered.”

While disclosing its results, McLeod said that considering the current market trends and conditions, the current valuation was expected to be substantially lower than the earlier valuation considered for the purpose of OTS.

However, the change in market dynamics was unlikely to impact the OTS offer made to bankers by the promoters of McLeod Russel. "As of now, there is status quo on everything," sources said. The OTS amount is proposed to be funded from asset monetisation, promoters’ contribution and a special situation fund, and an understanding with electrode paste maker, Carbon Resources, for selling certain identified tea estates.

Bankers to McLeod Russel had signed an inter-creditor agreement (ICA) for arriving at and implementing a debt resolution in terms of the Reserve Bank of India circular dated June 7, 2019, in November 2021. A techno-economic viability and valuation of tea estates and other assets and credit rating for the draft resolution plan had also been done. However, the tea market has worsened since the last valuation report. "Hence there is a need for a new one," company sources said.

Even as discussions around debt resolution are on, a consensus is yet to emerge, and two banks have filed petitions under the Insolvency and Bankruptcy Code with the Kolkata bench of the National Company Law Tribunal.

McLeod: At a glance

India – 43 million kg from 33 estates

Assam – 31 estates

Dooars (West Bengal) – 2

Total production – 69 mkg across India, Vietnam*, Uganda
 

*agreement for selling Vietnam business signed recently