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Tea firms face working capital crunch on rating downgrade

According to plantation company owners, the default by McLeod Russel India was the trigger, with rating agencies downgrading their overall outlook for the tea industry

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Ther rating downgrade of tea plantation companies is resulting in lower working capital sanctions by the lenders, making it difficult for many companies in Assam and West Bengal to run day-to-day operations.

According to plantation company owners, the default by McLeod Russel India was the trigger, with rating agencies downgrading their overall outlook for the tea industry.

Atul Asthana, managing director and CEO, Goodricke Group, said while wages have gone up 33%, tea prices are down, especially in Dooars and Darjeeling.

"The situation is not good, with many companies not having enough cash flows. In such situation, we have to depend on banks, but none of the lenders are ready to provide working capital to tea companies post rating downgrade," Asthana said, adding that in absence of "allocable surplus", it is not possible to offer a maximum bonus payment of 20% to workers.

Every year, Assam and West Bengal tea plantation companies are supposed to pay an annual bonus to their permanent and casual workers two weeks before the Durga Puja. This year, the bonus payments are to be made by September 20 in Assam.

Despite making profits or losses, as per the Payment of Bonus Act, 1965, a minimum of 8.33% and a maximum of 20% bonus is to be paid annually to the workers.

While the plantation labour unions are demanding bonus payment of no less than 20%, plantation companies, on the other hand, are ready to pay the minimum stipulated provision.

Last year, tea companies operating in Darjeeling and Dooars paid 15% and 19.5% bonus to its workers, respectively, as agreed through a tripartite agreement. In Assam, on the other hand, the bonus component vary from company to company as each plantation owners comes to an agreement on the bonus share through a bipartite discussion with trade unions at company/garden level.

According to Jay Shree Tea and Industries' managing director DP Maheshwari, tea garden owners are defaulting on wage payments of workers in the absence of steady cash flow and the unwillingness of the banks to renew short term working capital requirement of the tea companies.

"How are we going to function? With secured loans, there isn't any problem, but we are facing trouble with unsecured loans. Almost all banks are refusing to extend the credit limit, rather they are reducing it," Maheshwari said, adding that it is creating huge financial difficulties for the plantation companies to run their daily operations.

Tarun Bhatia, managing director and head of South Asia in the business intelligence and investigations practice of Kroll, a division of US-based advisory firm Duff & Phelps said, "Rating actions are cyclical and not very different from the economic environment. A lot of companies which are defaulting are due to slow demand and they don't have the kind of credit line they used to have. Access to credit is tighter."

According to him, earlier those who could go to banks or NBFCs to enhance their limits is either taking time or not happening. Liquidity is the "real commodity" for every business, be it banking, financial services or business enterprises as the entire ecosystem is dependent on credit.

"With credit being tightened, either because banks are not in a position to lend or NBFCs don't want to lend, given they want to protect their own payouts is really going to hurt if not resolved soon, as that can get into a spiral."

The tea industry in northern India (Assam, Dooars and Darjeeling) employs around 2.5-3 million permanent and casual workers.

J Kalyansundaram, secretary general, Calcutta Tea Traders Association (CTTA), however, said average prices of good quality CTC leaves and dust teas at the auction centres are better this year compared to last year.

In sale 35, which was last week (each week of the year represents a sale number), average CTC leaf tea prices were Rs 164.82 per kg against Rs 157.02 per kg same period last year, while CTC dust tea fetched Rs 180.33 per kg against Rs 170.34 per kg in sale 35 of 2018. Orthodox tea prices at the auction are also Rs 10 per kg higher this year in sale 35. However, Darjeeling tea prices are low due to lack of sufficient demand. Against Rs 430.24 per kg at sale 35 last year, this year Darjeeling tea fetched an average of Rs 325.16.

Compared to a total 591 million kg of all categories of teas sold across six auction centres in the country last year, this year 314.36 million kg of all category teas have been sold through auctions centres so far.

In cold water

The default by McLeod Russel India was the trigger, with rating agencies downgrading their overall outlook for the tea industry
While wages of plantation workers have gone up 33%, tea prices are down, especially in Dooars and Darjeeling

 

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