Tea major McLeod Russel has sold as many as 31 tea gardens in the past 11 years, and now it is planning to sell more.
While the Khaitan-led company’s decision to monetise more assets is in tune with the proposed one-time settlement (OTS) with its lenders, the sustainability of the business has become doubtful.
McLeod, still the largest bulk tea producer of the country, may sell as many as 15 tea gardens in Assam to Jalans-led Carbon Resources for around Rs 750 crore.
The company’s board earlier this month approved the execution of an agreement with Carbon to exclusively negotiate a mutually agreeable mechanism for selling ‘identified’ gardens for the proposed OTS.
Back in 2012, the company owned 64 tea estates globally, including 48 in Assam and six in West Bengal, with a total production of 102.91 million kgs. Average realisations stood at Rs 149.61 per kg in the financial year 2011-12.
“At McLeod Russel, we recognise that business sustainability is most effectively achieved by the ability to produce the largest volume of the best quality at the lowest cost,” the company had averred in its annual report for FY12.
“Sustainability In A Cyclical Business” was the central theme of the largest bulk tea producer’s annual report.
On a consolidated basis, McLeod then had posted a net profit of Rs 294.26 crore. Ebidta was at Rs 401.16 crore, while Ebidta margin was Rs 28.48. The company held Rs 640 crore in general reserves for 2011-12.
Eleven years down the line, the irony is hard to miss.
The company now owns only 33 tea estates–31 are in Assam and two in West Bengal, thanks to continuous selling of the assets of its several tea estates to improve cash flow, which is necessary to meet rising costs. Total production stands at around 40 million kgs. Reduction in production was mainly due to the sale of tea estates. Debt stands at around Rs 1,700 crore and the promoter now is left with no option but to sell more.
For FY23, the tea producer posted a whopping net loss of Rs 1,056.50 crore. What is more, the loss widened compared to the previous year. Net loss stood at Rs 180.92 crore in FY22. In the financial year 2018-19 net loss was Rs 4.42 crore against a net profit of Rs 67.26 crore in the financial year 2017-18. Profitability continuously took a hit as the number of gardens lessened and sales realisation dwindled. As a result, Ebidta margin declined almost every year.
Notably, the debt-ridden company went into insolvency proceedings in February this year for a default in payment of Rs 347.47 crore to IL&FS Infrastructure Debt Fund, one of its financial creditors. It came out of the insolvency proceedings in May after the Khaitans resorted to an out-of-court settlement. This was the second time when it avoided insolvency proceedings.
“It has not so far been clear that how much haircut the lenders are going to take for the proposed OTS scheme. But even if the OTS sails through finally after the planned asset monetisation, McLeod would have substantially less number of gardens. Moreover, the quality of the residual gardens would be of lesser quality as the buyer would surely be interested in buying only premium and profitable gardens. So, It would put further pressure on McLeod‘s Ebitda and sustainability going forward,” said a senior analyst, who tracks the tea sector.
“Currently, for a tea company one million kg of tea adds around Rs 2 crore at Ebitda level, which has substantially come down due to a significant increase in cost in the sector,” the analyst said.
Carbon Resources is planning to sign a binding deal with McLeod within July 28 for acquiring the tea gardens. However, for Aditya Khaitan, chairman and managing director of the tea major, challenges aplenty.
The company will have to first finalise the contours of the proposed OTS before signing a binding deal for selling gardens. “The management of the company is currently engaged in discussions with the banks for the OTS,” sources close to the development said.
Meanwhile, McLeod Russel has sought shareholders’ approval for the appointment of Khaitan as the MD of the company for a period of three years with effect from May 17, 2023. The Khaitans have only a 6.25% stake in the company.