Demand for quality tea gardens remains robust despite shrinking margins

Margins are shrinking; prices are stagnant, but the demand for quality tea gardens remains as robust as ever

A proposed tea garden sale by McLeod Russel India, the tea producer from the storied business house of Kolkata, the Brij Mohan Khaitan group, has drawn interest from some reputable players, belying the myriad challenges that the industry often highlights.

In the world of tea, McLeod Russel is a behemoth – its 33 estates in Assam and Dooars (north Bengal) produce about 43 million kg (mkg), making it the largest in the country. The total production with their estates in Vietnam and Uganda stands at about 69 mkg.

The Khaitans, according to industry sources, are looking to offload 13 to 14 of its India estates to finance a one-time settlement (OTS) for its Rs 1,600 crore (principal) debt with banks. And if initial indications are anything to go by, then there is no dearth of interest. 

Leading the pack is Carbon Resources, a Kolkata-based company that manufactures inputs for ferro-alloys, steel, and aluminium industries. An “outsider” of sorts, the company’s interest perhaps best outlines that demand for good tea gardens continues to be unabated despite the worsening financial metrics of the sector.

The Suresh Jalan family-owned Carbon is engaged in talks with the Khaitans all over again and is looking to sign a binding term sheet. In the past nine months though, the engagement has had its fair share of twists and turns.

Carbon raised the proverbial storm in a tea cup by picking up a 5.03 per cent stake in McLeod Russel in a surprise move on September 16 last year. On the same day, it approached the tea producer’s bankers with a non-binding letter of intent to settle dues and take a controlling stake in the company. The Khaitans were then in the middle of discussing a debt resolution plan with the bankers.

But the proposal achieved little apart from bringing the two sides to the negotiating table. In January this year, McLeod said that it had entered into an exclusivity agreement with Carbon to discuss a proposed OTS. But it became infructuous when the tea company was dragged into insolvency proceedings by IL&FS Infrastructure Debt Fund in February.

Once out of National Company Law Tribunal, discussions resumed but fell through leading Carbon to offload McLeod shares in the open market about a week back. The two sides are, however, giving the deal another go.

While the saga continues, some big names in the tea industry are waiting in the wings, ready to step in should the Carbon deal go south.

“If there are synergies and we are able to improve our portfolio then we may look at buying some gardens from McLeod,” said Himanshu Shah, chairman, M K Shah Exports.

In 2018, M K Shah, one of India’s largest orthodox tea producers, had scooped up eight estates from McLeod Russel for Rs 331 crore. “So many assets have been sold since, but we have not shown any interest. Now again, we have an appetite for gardens provided the fit is right,” Shah said. The company’s estates, spread across Assam, produce around 19 mkg.

Likewise, C K Dhanuka, whose ties with tea go back 50 years, is in a buying mode and willing to pick up 7 to 8 mkg “at the right price”. “I am interested but not desperate,” he said.

Last year, Dhanuka acquired six estates – two from the Apeejay Surrendra group and four from Warren Tea – taking the production to 15 mkg.

Rossell India, which produces 5.6 mkg from its six estates in Assam, is also in “preliminary” discussions for acquiring McLeod’s gardens. According to sources in the know, it is willing to acquire up to 5 mkg to take the production to more than 10 mkg.

But it’s all a bit up in the air right now. Sources close to the Khaitan family said that nothing has been finalised and the banks need to decide on the OTS amount.

So what is making tea tick for some? After all, the profit margins in the industry have dropped over the years with tea prices stagnating. “The operating profit margin in FY14 was around 12 per cent and in FY22 stood at 5 per cent,” Kaushik Das, vice-president, Icra said.

According to Das, the wage cost in the industry has outpaced tea prices. The total wage per man day in West Bengal and Assam increased at a CAGR of 7 per cent and 10 per cent, respectively, during CY2014-CY2019, while the average North India auction prices remained stagnant during the same period, with a CAGR of only 1 per cent, an Icra report showed.

But big players want to get bigger to get the benefit of economies of scale. “In today’s world, size matters,” explained Shah. “The pie of quality tea in total tea production has shrunk over the years. And McLeod has a number of good quality gardens in their basket providing an opportunity.”

Dhanuka believes that the government going forward would give into the industry’s demand for a floor price. For Rossell, tea is core competence.

What’s the hook for a non-tea player like Carbon? “If you enter a business, it should make sense from the point of scalability,” Carbon director, Abhinav Jalan, said.

But it’s not everyone’s cup of tea. Last year, Warren Tea, which traces its lineage to the 1850s, exited plantations. “It was a strategic decision to focus more on our hotels and IT businesses,” Vivek Goenka, president, Warren Tea, said.

Among the oldest tea groups in the country, the Apeejay Surrendra group, has sold most of its gardens in the last one and a half years. At the peak of its association with the industry, it had 17 estates, which is now down to two. Going forward, it would retain one estate and build school, hospital, and tourism infrastructure there.

But if there are sellers, there are buyers as well. And the serious ones from the industry are putting their buck on Assam estates quite unlike Darjeeling, which has seen a heightened interest from non-tea players.

The reasons are two: The yield in Assam is much higher, making it more remunerative for buyers. And of course, the picturesque setting – the rolling greens of the tea estates with snow-capped peaks in the backdrop – makes Darjeeling more alluring from a tourism point of view.

McLeod gardens, in a way, are basking in dual advantage. The gardens on offer are in Assam and the industry reckons, despite all its financial woes, the assets are of good quality. Small wonder that the 31 estates in Assam are whetting the appetite of buyers even as the McLeod pot continues to boil.