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McLeod Russel may de-risk plantation business, plans new venture

Company might look at venturing into branded tea business and other agriculture commodities; briefed select consultants to throw back ideas

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With plantation business turning risky and acquisition route getting expensive, McLeod Russel, the world's largest tea planter, is planning to diversify into new businesses in a bid to hedge uncertainties and maintain growth momentum.

"We are now thinking what the company should look five years from now. As a company we need to look at diversification. We have thrown the idea to a couple of consultants without telling them what we want.

We want them to come up with ideas that are best fit for us. We have asked ourselves, what if something (adverse) happens to tea 20 years from now. So, what are the alternatives we should look into," managing director Aditya Khaitan said.

While areas to enter are not yet be firmed up, venturing into branded packet tea business and also into other agriculture commodities would be considered. Select consultants have been briefed about McLeod's strengths and have been asked to come up with suggestions.

"Take 3-4 months, study what we have in term of numbers like cash flow and our expertise and then throw back ideas to us. That's what we have told consultants. We haven't appointed anyone as yet. Their ideas would then be thrown to the Board," Khaitan told reporters after the annual general meeting of the company.

Future growth from tea business is increasingly turning uncertain amid steep valuation of estates and growing unpredictability in the weather patterns particularly in Assam where McLeod's domestic operations are concentrated.

''Since March we have lost crop heavily. Considering growing uncertainty in weather, which we see will only get worse, tea crop would continue to be volatile. Again, acquisitions in plantation in coming years would be expensive. Also, we wouldn't be looking at plantations in south India or Darjeeling as we don't have expertise there. Even within Assam, we might not be interested in all gardens which are up for sale," he said.

The Khaitans would be careful taking a plunge into a new business considering its past record. D1 Williamson Magor Biofuel Ltd, a 50:50 joint venture between group company Williamson Magor & Co Ltd and D1 Oil Plc of UK, failed to make a mark mainly due to lack of government's effort to promote bio-diesel forcing the company to even return land acquired for planting jatropha.

"Diversification as a strategy is fine, but we once tried with bio-fuels but that bombed. Acquisition of agriculture land is difficult, and while getting into FMCG is an option, there are issues of valuation as everybody is looking at the same set of data like growing consumption and middle class."

Getting into a new business is the latest in the long-term strategy of McLeod to seek growth that has converted BM Khaitan flagship into world's largest planter.

"'There was a roadmap when we started off in 2004-05, when we felt that this (plantation) was the strength of the company although there were other opportunities. Then we strengthened our position by acquiring tea plantations within India starting with Williamson Tea and DoomDooma (from Unilever). But then cost of acquisitions were getting steep in India and so we shifted overseas where we bought plantations in Vietnam, Uganda and Rwanda. Then, tea estates all over the world became expensive. So, the question arose: how do you now grow as a tea company? We then focused on outgrowers model by starting to add capacity by taking ownership of small growers. This is the current strategy where we would keep on adding more and more outgrowers within our fold."

In all, McLeod owns close to 97,710 acres of tea plantations in India, Vietnam, Rwanda, and Uganda.

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