 "Plucking the right leaf: McLeod Russel looks at new ways for growth")
By Sudipta Datta
Doom Dooma. Pertabghur. Phu Ben. Mwenge. Gisovu-some impossible to pronounce names roll off the tongue of Aditya Khaitan, Managing Director, McLeod Russel, as he talks about the 62 tea gardens the largest producer of bulk tea in the world owns in two continents, Asia and Africa. Paintings of tea gardens adorn the walls of his ninth floor office in the heart of the business district of Kolkata. There are magazines on tea strewn around and he explains that he likes to visit all his gardens at least once a year.
At a time when the tea industry is in peril-production is down due to a long spell of volatile weather, the Indian tea bush is old and hence has productivity issues, there’s a huge labour shortage, the Iran crisis has hit exports and China, already the leader in green tea, is taking baby steps in black tea, India’s forte-Khaitan is relatively calm, extolling the values of patience.
Looking back
McLeod Russel is treading cautiously, which wasn’t always the case. Though the Khaitans have been associated with tea for years-with BM Khaitan, Aditya’s father, becoming chairman of Williamson Magor Group in 1964 after being invited to join the board-they began a journey towards aggressive growth only in June 2005. That was when McLeod Russel acquired Williamson Tea Assam from the Magor Group based in the UK. It was troubled times in the Assam Valley and many of the big tea companies including Hindustan Lever were exiting the state. Sniffing an opportunity, McLeod Russel quickly moved in to buy Doom Dooma, Borelli, Moran and other tea estates. Over three years, it added 24 gardens by investing nearly Rs 350 crore, a large part of it through debt. Remind Khaitan of the heady days of 2005-07, and he quips: “Just because things turned out successfully for us, it doesn’t mean we can continue in the same vein.”
Khaitan’s rather conservative approach comes on the back of a ’nightmarish’ year the tea industry has had. “Right from March to November last year, the weather was volatile-we had rain when a dry spell was required and vice-versa. As a result, the tea industry will start the year with a deficit for the second year in a row,” he says. India produced 988 million kg tea in FY12, the production is expected to be flat in FY13, with 2013 staring at an accumulated tea deficit of at least 100-150 million kgs. Tea consumption has grown at a compounded annual growth rate of 2.5 percent over the last decade but supply has struggled to keep pace, a trend mirrored in other black tea producing countries like Kenya.
Impact Shorts
More ShortsMcLeod Russel, which produced 104 million kg last year, has seen a fall in domestic production to around 80 million kg. Its overseas garden output-22 million kg-helped it tide over the production deficit. “We were also lucky to have been able to compensate our production losses through higher prices. We lost 7 million kgs of the domestic crop, but added 5 million kgs from outgrowers, a 3 percent rise in production there. We will add 5 million kg more from outgrowers this year,” says Khaitan.
[caption id=“attachment_687440” align=“alignleft” width=“380”] McLeod’s tea estates in other countries yield a sizeable output- four gardens in Vietnam (4.5 million kg), five in Uganda (15 million kg), one in Rwanda (1.7 million kg), five in West Bengal and the rest in Assam.[/caption]
By next year, the company wants to raise the quantity it outsources to 25 million kg. “We are tackling our crop position, uprooting and replacing old bushes. We did that a lot in2005, when we were acquiring gardens and that has helped us to increase productivity. In order to make up the deficit, we are buying outgrowers leaf.” Khaitan mentions that the second vertical, the bought-leaf one, has become quite prominent and they will produce around 18 million ton in this category.
Khaitan expects prices to stay Rs. 15-Rs. 20 higher per kg this season. “If weather is conducive, prices will remain at this level; if weather is foul, production will take a hit and prices will rise,” he points out.
Streaming through
Though the burst of aggression and an inorganic route to growth helped it take production from 42 million kg in FY05 to 82 million by FY12 and an additional 22 million kg from overseas gardens, the Khaitans are not bullish on acquisitions right now.
“The outlook on tea for the long-term is positive, and so assets are not only difficult to come by, but also highly priced,” explains Khaitan. “With the tea outlook positive for the next four-five years, people are holding on to assets, and we must learn to sit and wait. If it doesn’t make financial sense, we should not and will not buy.”
There is a deficit in inventory, domestic as well as overseas. “But instead of buying gardens at a high price to spur growth, we would rather reduce our debt further and strengthen the balance sheet,” he adds.
At the end of FY12, total debt was pegged at Rs. 166 crore from Rs. 450 crore in FY08. “We have reduced our debt considerably, but there is still some left. Our aim is to move towards being a net zero debt company and then prepare a war chest for the future. We don’t have a large capital expenditure ahead (wage revision has been accounted for last year). We want to generate cash in the next four-five years internally to enable us to buy assets,” he says.
McLeod’s tea estates in other countries yield a sizeable output- four gardens in Vietnam (4.5 million kg), five in Uganda (15 million kg), one in Rwanda (1.7 million kg), five in West Bengal and the rest in Assam. In the quarter just ended, net profit grew by five percent year-on-year to Rs. 123 crore. It ended FY12 with a net profit of Rs. 294 crore on revenues of Rs. 1,445 crore.
Plucking the right leaf
The toughest challenges ahead are labour and weather for McLeod Russel, besides other tea companies. “We have to find ways to combat labour shortage. We have introduced plucking machines at some of our gardens, but that takes a toll on the quality of the leaf. We are also totally exposed to the weather. By being on both ends of the Brahmaputra, we face both drought and floods.”
China is not a threat but an opportunity
Ask him about the threat from China, and he says China is primarily a green tea grower and consumes almost everything it produces. It is just warming up to black tea and “that means a new market is opening up for Indian black tea producers; so China is not a threat, but an opportunity.”
So, has the Indian tea industry done enough to hold on to its number one position as the largest producers of black tea in the world? “We could have done better,” smiles Khaitan, adding, “Tea is a boring business. What you invest today you don’t see for many years, there’s no instantaneous return tomorrow. But we are passionate about tea and are in it for the long-term.”
(The story was first published in Entrepreneur magazine)
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