McLeod Russel India, the largest tea producer in the world, is radically changing its business model with plans to sell several of its tea gardens after doing a detailed study of all its 55-odd estates in the country, its managing director Aditya Khaitan said.
The company recently inked deals to sell 12 of its plantations for an aggregate price of Rs 472 crore, a process which it would continue to follow as sourcing cheaper raw teas from unregulated small-scale players is turning more sustainable and economical than growing own tea at its regulated gardens.
"We may exit out of 10-20 million (kilogram of production capacity) in terms of tea gardens but we will add that (by sourcing from small growers) in the next two-three years. This will bring down my costs. We would be following the Kenyan business model where the entire tea sector is driven by small 'bought leaf' players. This is a change in strategy which we want to evolve," Khaitan told reporters at the sidelines of the annual general meeting of the company.
McLeod's production at the 12 tea estates being sold is close to 14 million kg.
"Out of our 55 tea gardens, we are identifying those where the yield is low. Instead of investing more in such gardens to raise their yield, which is increasingly turning difficult due to weather turning adverse, we have decided to get out of those," Khaitan said clarifying that the process of identification is on and the company is not in a position to comment now on how many estates might have to be sold in future.
While tea prices have risen in recent times, costs are catching up too, negating most of the gains, putting a question mark on the sustainability of profitable operations of organised players.
"The company has posted operating profit of Rs 17 crore (in the first quarter) against operating profit of Rs 13 crore last year. This is mainly attributed to increase in prices by Rs 16 per kg (during the quarter). Revenue from operations is higher by 15% on higher volume by 8 lakh kg. Staff cost has increased by Rs 25 crore during the quarter on account of interim revision of wages in tea estates effective March," McLeod said in a statement issued on Thursday.
"In the past, there was enough price growth and margin expansion to take care of regular capex needs. But now while tea prices aren't moving up much during the year, costs are going up with talks of minimum wages for tea plantation workers in states like Assam and West Bengal doing the rounds. We can't pass on most of the increase in costs as prices are determined at tea auctions. So, growing our business through the 'bought leaf' suppliers and investing there is the way forward for us," he said.
Unlike organised players, small unorganised players need not pay to their tea pluckers and other workers highly-regulated compensations like accommodation, ration and power, which lead to significant cost disadvantages for large players.
"We are not exiting out of tea, only changing the business model that would be relevant in coming years. There is a need to feel dispassionate about own tea estates. By turning asset-light, we would also be paying some of our debts so that as and when there is a need for capex, we need not borrow," he said.
LOSING WARMTH
- McLeod's production at the 12 tea estates being sold is close to 14 million kg
- The firm may exit another 10-20 million kg production and will source that much from small growers
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