‘India may face 50-70 million kg shortage in tea’

McLeod Russel, flagship of the BM Khaitan Group, and the largest plantation company in the world is at present fortified with a tea crop portfolio of 80 million kg. It is hungry for more. But the company will stick to plantations, and not enter the packet tea business, managing director Aditya Khaitan tells DNA, while fielding questions on the company’s plans, challenges and the industry picture. Excerpts:

Your profits for first quarter have increased over four times to Rs 31 crore. Is this largely on account of price increases of tea?
Yes. Actually, last year, we had a lower profit of around Rs 7 crore and that too included some other income component. This time, it is a clear cash gain on higher prices of tea. We fetched an average of around Rs 30-35 per kg of tea, which propped up profits. Sales volumes were lower, however, by 6 lakh kg because of lower production up to May.

For the last few years, your strategy has been to grow through acquisitions…Williamson Tea Assam, Doom Dooma, Moran and Phu Bhen Tea in Vietnam. Any plan this year?
We have always been on the lookout for good acquisitions. The acquisition of the controlling stake of Phu Ben Tea Company will prove highly beneficial to Borelli and McLeod Russel. The acquisition has given us a presence in Vietnam, which could lead to possible expansion of production in future. We propose to have 1,000 hectares in Vietnam.

Talking of acquisitions in general, I should say prices of tea gardens are expensive and good quality assets don’t come easily. We are further assessing the Vietnam scene. We are now at 5 million kg of tea in Vietnam with the new company which we acquired. We hope to double this in 3-5 years. Also in the next 5 years, about 30-40% of our exposure should be outside India. With  a vast experience in tea production, manufacture and marketing, we hope to improve the quality of tea being produced by Phu Ben Tea and consequently achieve a higher price realisation. We are also scouting for properties in Africa.

What cash accretion can be expected from your company? And what is your turnover target?
Tea prices have been rising in recent times, but are still lower than what they should be. As far as McLeod is concerned, if the current price trend continues, there could be an approximate cash accretion of around Rs 150 crore, perhaps on account of higher prices of tea. We are looking at a turnover of around Rs 1,000 crore this year.

What do you plan to do with the extra cash and profits this year?
Retiring debt and growing the company. Our net outstanding debt is at Rs 385 crore. Working capital is around Rs 125 crore, while the balance is term debt. We hope to repay about Rs 100 crore this year.

Any capital expenditure this year?
We normally spend Rs 35-40 crore every year as capex for expansion purposes. We have 55 factories in India and 3 in Vietnam at present. We also reinvest in uprooting and replanting, which is 1-1.5% of the bushes every year.

Any plan to enter the packet tea business?
No, our expertise is in the plantation business and we command a position in the global market. There are big players like Tata Tea and Levers in the packet tea business. Our core expertise is in investment in plantations, and we will continue to do that.

What are your biggest challenges?
We are saddled with security costs. Social costs, which are borne by the company, are Rs 7 per kg of tea. In a year, we spend almost Rs 8 crore towards social and security costs. We are talking to the government to share 50% of the industry’s social costs.

As chairman of the Indian Tea Association, do you think it would be a buoyant time for the tea industry over the next few months at least?
Well, adverse weather conditions till May 2009 in almost all tea producing countries affected production substantially and the global shortfall up to May is estimated to be over 84 million kg as compared to last year. In India, the weather condition has improved, although it continued to be unfavourable in Sri Lanka and Kenya. Indian tea production is estimated to be lower by almost 24 million kg upto May 2009. July production is also not too good. Most of the tea is produced in the second and third quarter of the year.

Calendar year 2009 started off with poor pipeline stocks. Do you see the same trend continuing in calendar 2010 given the low production?
As far as tea production in north India is concerned, from mid-March to June, about 20% of the annual production takes place. Huge volumes come in post June. But still, on a conservative estimate, we foresee a 50-70 million kg pipeline shortage in India next year. Kenya has not been able to return to its production level of earlier years and Sri Lanka also has its own problems. There may be more enquiries for Indian tea. In India, consumption is growing at 3.5%